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Forbes
10-06-2025
- Business
- Forbes
Rethinking The Endowment Tax: Could Higher Ed Play By NBA-Style Rules?
The NBA Finals is a contest between two of the most frugal spenders It's easy to be against a bad idea. What's harder—and more useful—is to ask what truth that bad idea may be pointing toward. By most expert accounts, the endowment tax is a bad idea. For example, Douglas Holtz-Eaken, an economist who worked for George W. Bush and John McCain, made the case in an article last November that it will hurt universities and their students. The idea's origin is widely understood to be ideological: a targeted penalty imposed on elite universities perceived as culturally liberal, framed as populist retribution rather than fiscal strategy. The policy applies only to the wealthiest private institutions—those with more than $500,000 in endowment per domestic student. The newest proposal, included in the 'Big Beautiful Bill', replaces the current 1.4% flat rate paid on investment returns with a tiered system that tops out at 21% for schools exceeding $2 million per student in endowment resources. Leaders from across higher education have rightly noted its bluntness. Colleges and universities, as summarized by a recent article in Higher Ed Dive, believe the tax complicates long-term financial planning, threatens the research mission that distinguishes many of these institutions, and disincentivizes donors. But for all its faults, the tax does something elite higher education has struggled to do for itself in recent decades: it makes the cost structure morally visible. That's because, behind the legalese and legislative motives, there lies a deeper and more uncomfortable question—one that goes well beyond party politics: Why are America's wealthiest colleges still charging tuition? At the liberal arts college in western Michigan where I serve, we've been working toward a goal of funding our education, not through tuition, but through a pay-it-forward model. Somehow, the proposal got the attention of Malcolm Gladwell, who featured us in an episode of his Revisionist History podcast. The episode didn't just highlight what we are attempting to do, but also pointed out what the Ivy League schools are doing wrong, by comparing them to our model. It was a contrast deliberately drawn: the multibillion-dollar endowments of elite institutions alongside a small Christian school attempting the very thing those elites could afford to do with relative ease. The numbers are not hypothetical. Multiple elite colleges and universities in the U.S. possess endowments large enough to support full-tuition scholarships for every undergraduate student—indefinitely—without drawing down principal. Instead, many have chosen to expand campuses, grow research budgets, and continue charging high tuition while aggressively fundraising. That choice—not the political vendettas behind the endowment tax—is what deserves scrutiny. Rather than defending the tax as written or rejecting the entire concept out of institutional self-interest, higher education leaders might consider a more productive proposal: tie tax liability to whether funds are being used to directly support students. Under such a model, any endowment spending used for the direct education of current students would remain tax-exempt. Tuition support, academic services, mental health care, library access, career preparation, student life programs—all shielded from taxation. But non-essential expenditures? Luxury facilities, non-teaching research ventures, speculative real estate holdings—those could justifiably be subject to tax. In other words, tax what functions like private wealth; protect what functions like public trust. Such a shift wouldn't penalize success. It would encourage alignment. The question would no longer be 'How much money does this institution have?' but rather, 'What is that money doing for students—right now?' Professional sports have long understood that unchecked financial power distorts competition. Major League Baseball, with no robust salary cap, sees powerhouse franchises like the Yankees and Dodgers dominate year after year, leaving smaller teams struggling for relevance. By contrast, both the NBA and NFL introduced caps and revenue-sharing measures designed to level the playing field. The result? Greater parity, more upsets, and sustained fan engagement. This year's NBA Finals is a match-up between two of the league's lowest spending teams: the Pacers (ranked 18th in payroll) and the Thunder (ranked 25th). The rules didn't suppress excellence; they ensured that financial muscle alone doesn't dictate outcomes. The same idea animates copyright and patent law. Creators are granted exclusive rights, but only for a time. Eventually, that work enters the commons. Why? Because a permanent monopoly would suffocate innovation and consolidate power. The aim is to reward excellence without allowing it to calcify into dominance. Endowments could be treated similarly: protected while advancing the public good, regulated when they drift too far from that mandate. None of this conversation would be necessary had elite institutions chosen a different path. Several of the nation's most well-endowed colleges and universities could have eliminated tuition decades ago. They had the financial capacity. They had models of success available to emulate. They had the moral justification. But instead of leading with generosity, many chose insulation. Instead of modeling bold reforms, they pursued institutional advantage. In doing so, they helped create the very cultural backlash now threatening them. What is playing out now—through the endowment tax and other policy battles—is not just a struggle over money. It is a contest over legitimacy. And legitimacy is not inherited. It is earned—through trust, through transparency, and through service. The public is asking: Why are these institutions so rich, and yet so inaccessible? Why do they hoard wealth while charging more than ever? Why do they receive federal subsidies while behaving, in key respects, like private investment firms? Those are not partisan questions. They are civic ones. And the longer they go unanswered, the more justified future interventions will appear, however misguided their intent. Among the public, there is a growing recognition that the old model is failing. The business of higher education has become disjointed from its purpose. And according to Gallup, public confidence in higher education is at an all-time low. For college administrators, the temptation is to deflect—to focus on the attacker rather than the vulnerability being exposed. But moral leadership requires more than defensiveness. It requires self-examination—and reform. If elite institutions had cut ties with federal loan systems years ago, and redirected their immense resources toward tuition-free models, the current crisis might never have emerged. If their endowments had functioned more like public trusts than private stockpiles, their moral authority might still be intact. It is not too late to course-correct. A reimagined endowment tax could function like the NBA's salary cap—not to punish excellence, but to protect fairness. Like copyright law, it could reward success without permitting indefinite accumulation. Like the tax code itself, it could incentivize behavior through carefully targeted exemptions, while still holding institutions accountable. This is neither central planning nor deregulation. It is capitalism with rules. Competition with conscience. A reminder that systems work best when everyone remembers the purpose of the game. The higher education sector can lead this shift. But that will require more than lobbying for exemption. It will require asking what these institutions owe—not to donors or rankings, but to students. And answering with action. Generosity offered voluntarily is always preferable to redistribution by force. But when institutions with billions in reserve continue to charge full freight while spending lavishly on everything except tuition relief, they invite exactly the kind of backlash now unfolding. The better path is still open. The question is whether institutions will take it—before the public demands it for them.
Forbes
13-05-2025
- Business
- Forbes
House GOP Tax Bill Targets College Endowments, Royalties And Support From Private Foundations
Under the proposed endowment tax, Harvard University's $53.2 billion fund would be subject to a 21% tax. Republicans who control the House Ways and Means Committee have released the tax portion of President Trump's 'big beautiful bill' and it contains provisions which seek to wring billions from private colleges. A plan to raise the tax on the investment earnings of the richest college endowments from 1.4% to as high as 21% has grabbed headlines, but three other proposals could also hit schools' bottom lines: a change to the way schools' vulnerability to the tax is calculated; a tax on some nonprofit royalty income; and increased taxes on private foundations. As part of their effort to siphon funds from wealthy private colleges, House Republicans want to exclude foreign and undocumented students from the endowment-per-student calculation that the law uses to determine which colleges are subject to the endowment tax. Currently, only schools with at least 500 full-time equivalent, tuition-paying students and an endowment worth at least $500,000 per student are subject to the tax. But the bill seeks to change the way that per student number is calculated by excluding foreign students and undocumented U.S. students from the calculation. That would in turn boost schools' endowment-per-student wealth, ultimately requiring more colleges to pay the tax and some schools to pay the tax at a higher rate. A Forbes analysis last month, based on fiscal 2023 endowment and enrollment totals, identified 11 additional schools, including Trump-targeted Columbia University, that would be roped into paying the tax. Colby College in Maine, DePauw University Indiana, and Whitman College in Washington would also be subject, per Forbes' numbers. In addition, some schools already subject to the tax would see a dramatic increase in the calculation of their per student endowment. For example, the Forbes analysis found, excluding foreign students would raise Harvard University's per capita endowment from $1.6 million to $2.4 million, the California Institute of Technology's per capita endowment from $1.5 to $2.2 million and the Massachusetts Institute of Technology's per capita endowment from $2 million to $3 million. Only colleges with endowments-per-student worth at least $2 million (excluding foreign students), such as MIT, Harvard and Princeton and Yale University, would be required to pay the highest 21% tax rate. Schools with a per-student endowment worth between $500,000 and $750,000 would continue to pay the current 1.4% tax rate. Schools with a per-student endowment worth between $750,000 and $1.25 million would pay a 7% tax on investment income, and schools with between $1.25 million and $2 million in per-student endowment assets would pay tax at a 14% rate. The higher graduated tax rate, combined with the new formula for calculating per-student endowments, which would be effective beginning in calendar year 2026, would raise an additional $6.7 billion in revenue for Uncle Sam through fiscal 2034, the Joint Committee on Taxation estimates. The House Ways and Means Committee on Tuesday began to mark up the tax bill, and House Republicans hope to push the legislation through the entire House before Memorial Day, though internal divisions over issues unrelated to college taxes could interfere with that timetable. Colleges may have more success in lobbying the Senate to soften the changes to the endowment tax, says Steven Bloom, assistant vice president for government relations at the American Council on Education. In 2017, when the endowment tax was first put in place as part of Trump's signature tax cuts, schools successfully lobbied the Senate to bring the endowment-per-student threshold up to $500,000 from a House-passed $250,000 (and proposals for thresholds as low as $100,000). 'It was bad policy when it was enacted in 2017, and they just made it a lot more complicated. Making it more complicated doesn't make it better, it makes it worse,' says Bloom of the endowment tax. 'It's a scholarship tax, and it's going to take money away from the ability of these schools … to provide the robust financial aid packages that they [give].' (According to a National Association of College and University Business Officers-Commonfund study, 48% of endowment spending in fiscal 2024 was for student scholarships.) Also buried in the behemoth tax bill is a proposal to make taxable name and logo royalties at some nonprofits, including colleges and universities. The royalties would be treated as 'unrelated business taxable income' and any school that receives revenue from licensing its name or logo would be taxed. It's not a major source of revenue for schools, but it adds to the 'the big pot of assets that generate some investment income' for colleges, says Bloom. Any chipping away at revenue hurts, especially as colleges' dominant revenue streams—tuition, government grants and endowments—remain under attack by the Trump administration. This proposal, which applies to more than just colleges, would generate an additional $3.8 billion in revenue between fiscal years 2025 and 2034, per the Joint Committee on Taxation. The Ways and Means Committee bill also proposes a tiered tax on private foundations' investment income, rather than the current 1.39% flat tax for all. Foundations with less than $50 million in total assets would continue to pay the 1.39% rate. Foundations with between $50 million and $250 million would pay 2.78%, and foundations with between $250 million and $5 billion in assets would pay 5%. The largest foundations, those with more than $5 billion in assets, would be subject to a 10% tax on investment income. Among the most prominent foundations that would be hit: Bill Gates' foundation, with $77 billion in assets. Gates, 69, has recently made headlines by announcing he will spend all his assets on charity over the next 20 years. During interviews he has criticized Elon Musk's callous shuttering of USAID and blamed him for endangering lives worldwide. The increased taxes would generate $15.9 billion in revenue over the next 10 fiscal years, and result in fewer dollars for private foundations to give to colleges for scholarships, research funding and other support. More From Forbes
