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Harvard to Pay 'Unprecedented' Endowment Tax

UPDATED: December 21 at 11:22 a.m.

Harvard will likely pay tens of millions annually in added federal taxes after congressional Republicans passed a $1.5 trillion tax bill Wednesday that included a tax on returns from large university endowments.

University President Drew G. Faust called the new endowment tax “unprecedented” in an emailed statement to The Crimson Wednesday, adding it will constrain the University’s finances and limit its capacity to fund certain programs.

“I am deeply concerned that the adoption of an unprecedented excise tax on charitable organizations that targets certain colleges and universities will weaken our ability to support students and research,” Faust wrote in the statement.

Faust and Harvard’s D.C.-based federal relations team have lobbied lawmakers to preserve the University’s tax-exempt status for years. Faust sent a public letter to members of Congress in April 2016 detailing how the University uses its endowment—now totaling $37.1 billion—to advance its educational mission. Over the course of several visits to Washington last winter and spring, Faust personally defended the tax-free endowment to lawmakers on Capitol Hill. And since Republicans unveiled their plan to overhaul the federal tax system in November, she said she mobilized alumni in red states and placed calls to lawmakers to urge Republicans to reconsider a provision taxing endowment returns.

Those pleas appear to have fallen on deaf ears. The final bill Congress passed Wednesday levies a 1.4 percent excise tax on the returns of university endowments that amount to more than $500,000 per student. Harvard falls into this category, and administrators estimated such a tax would have cost the University $43 million if it had taken effect during fiscal year 2017.

Faust specifically raised concerns Wednesday that the new tax will impact the University’s ability to fund financial aid programs.

“The provision will constrain the resources that enable us to provide the financial aid that makes college more affordable and accessible and to undertake the inquiries that yield discoveries, cures, innovation and economic growth,” Faust wrote.

In an interview in November, Faust called the endowment tax “a blow at the strength of American higher education” and said she was disappointed with Republican lawmakers she had viewed as allies.

[What exactly is the endowment, and how does it work? Read our explainer here.]

Tax law specialist Howard E. Abrams, a visiting professor at Harvard Law School, said he thinks provisions in the tax bill targeting colleges and universities stem from both a need to raise funds and, more broadly, from Republican disillusionment with higher education.

“They need all the revenue they can get,” Abrams said. “I think there are more people in the Republican party than in the Democratic party who believe that higher education is failing the public—that it’s full of liberals teaching things that are irrelevant to getting a job. So the value of higher education seems less significant to many Republicans than to many Democrats.”

The final version of the bill, a reconciliation of varying House and Senate versions passed across the past weeks, maintains current student loan interest deductions and tax exemptions for graduate student tuition waivers.

The student loan interest deduction—eliminated in the original House bill but included in the final version—allows students who borrow money to finance their education to file for tax deductions for the interest on those loans.

Another provision in the original House bill could have treated graduate students’ tuition waivers as taxable income—a proposal that generated alarm among graduate students at Harvard and around the country, many of whom raised concerns that the provision would render graduate school unaffordable. To the relief of students, that provision did not make it into the final bill.

The same provision that exempts the graduate student tuition waivers from taxation also applies to university employees who receive credits or waivers toward tuition for their children at their employing institution. The reconciled version of the bill protects the tax exemption on such financial benefits provided to employers, which Abrams said could have been one of the most financially burdensome aspects of the proposed legislation.

“I am glad to see adjustments in the tax bill, notably the preservation of tax-free tuition remission for graduate students and the student loan interest deduction which will enable undergraduate and graduate students to pursue the life-changing path of higher education without the additional financial burden imposed by previous proposals,” Faust wrote in her statement Wednesday.

With an endowment tax set to become reality, though, Faust wrote that Harvard’s tax-related advocacy efforts are far from over.

“We will assess the damaging impacts of this tax legislation moving forward, and we will continue to engage policymakers in substantive conversations on higher education finance to ensure a deeper understanding of the role college and university endowments play in making higher education accessible to students from across the country,” she wrote.

—Staff writer Jamie D. Halper can be reached at jamie.halper@thecrimson.com. Follow her on Twitter @jamiedhalper.

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