What the New Tax Plan Means for Harvard

The tax bill Congress passed Wednesday represents the biggest change to the United States tax code in 30 years—and it likely means a major financial hit for Harvard.

The plan introduces taxes on the University’s previously tax-exempt endowment returns, potentially costing Harvard around tens of millions in added federal taxes every year.

Since Republicans first proposed the tax overhaul in November, administrators and graduate students have spoken out against certain provisions included in various iterations of the bill. Lawmakers scrapped some of those proposals, but others—like the endowment tax—made it into the final version.

After the tax plan passed Wednesday, University President Drew G. Faust issued a statement condemning the legislation, writing she was “deeply concerned” by the bill.

“We will assess the damaging impacts of this tax legislation moving forward,” Faust wrote.

The tax plan is now headed to President Donald Trump’s desk to await his all-but-certain signature. As Harvard affiliates—from top administrators in Massachusetts Hall to graduate students in Dudley House—work to understand and respond to the tax plan, here’s a brief explanation of what the bill entails and how it could affect Harvard.

Which provisions of the tax bill apply to Harvard?

The provision likely to have the biggest impact on Harvard is the new tax on private colleges with endowments over $500,000 per full time student. Harvard is one of 35 institutions that falls into this category, meaning it will have to pay a 1.4 percent tax on its endowment returns every year.

Faust previously estimated that, if the plan had taken effect in fiscal year 2017, the University would have had to pay nearly $43 million to the federal government.

A second provision with potentially large consequences for Harvard, however, did not make it into the final version of the bill. The tax plan Congress passed Wednesday does not repeal a tax exemption for “qualified tuition deductions” for graduate students, meaning graduate students will not have to pay significant additional taxes under the new plan.

How will the new tax on endowment returns affect Harvard?

Faust said in November that federal taxes on university endowments would be a “blow at the strength of American higher education” and would diminish Harvard’s ability to provide research funding and financial aid.

The new tax on Harvard’s endowment returns comes at a time when the University posted 8.1 percent endowment growth in fiscal year 2017, the lowest rate of growth among Ivy League schools.

Brad R. Balter, a managing partner of Balter Capital Management, said he thinks it will be difficult for Harvard to find loopholes around the new tax on endowment returns without facing public backlash. As a result, Harvard’s investment strategy is likely to change, he said.

A spokesperson from Harvard Management Company, which stewards Harvard’s endowment, declined to comment for this story.

What does the bill mean for Harvard's graduate students?

The bill is unlikely to significantly affect Harvard’s graduate students in any way.

The bill originally contained a provision that suggested treating graduate students’ tuition wavers as taxable income. This proposal—which generated alarm on Harvard’s campus and across the country—could have quadrupled taxes for graduate students.

That provision did not make it into the plan passed Wednesday, however. In wake of the bill’s passing, several graduate students said they felt relieved by the final version of the tax plan.

How have Harvard administrators responded to the bill?

In a statement soon after the bill passed Wednesday, Faust wrote she was “deeply concerned” by the new legislation—in particular, by the new tax on endowment returns.

“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.

She added, though, that she was glad to see “adjustments” in the final tax bill, in part referencing the preservation of tax-free tuition for graduate students.

Prior to the bill’s passage, administrators criticized the legislation and argued students’ tuition waivers should not be counted as taxable income. In an email sent to students in November, University Provost Alan M. Garber ’77 warned the bill would “broadly reduce benefits that support higher education.” He called the “tax burden” the bill would impose on graduate students “grossly disproportionate” to their stipends and sharply criticized the endowment tax.

Faust, too, took up the fight, making several trips to Washington to personally defend Harvard’s tax-free endowment, meeting with legislators like Senate Majority Leader Mitch McConnell and Senate Minority Leader Chuck Schumer to urge them to oppose the plan.

But her efforts bore little fruit. On Wednesday, Faust wrote the University will closely monitor the impact of the tax plan going forward.

When will the new plan take effect?

It's unclear when the bill will become law, since Trump may delay signing the bill until the start of 2018 in order to buy time for Congress to address automatic spending cuts the bill would trigger.

Regardless of whether he signs the bill in the final days of this year or the first days of the next, the plan will take effect for the 2018 fiscal year.

—Staff writer Caroline S. Engelmayer can be reached at caroline.engelmayer@thecrimson.com. Follow her on Twitter @cengelmayer13.

—Staff writer William L. Wang can be reached at william.wang@thecrimson.com. Follow him on Twitter @wlwang20.