Republican lawmakers passed the Tax Cuts and Jobs Act in December, with one provision requiring private colleges with an endowment greater than $500,000 per student to pay a 1.4 percent tax on annual endowment returns. Harvard is one of 35 institutions nationwide affected by the act. Administrators have estimated the University would have had to pay $44 million in taxes if the legislation had applied in fiscal year 2017.
Smith confirmed the new legislation will affect the budget of the Faculty of Arts and Sciences, which receives almost half of its income from the endowment.
“It will have an impact on us,” Smith said. “It is taking money we could’ve used for academic programs, could've used for financial aid, could've used for a bunch of other things we try to accomplish here.”
According to Smith, administrators are still working to understand the bill’s impacts in detail. In the meantime, Smith said he plans to refrain from making “long-term commitments.”
“I just don't know how big of an impact this is going to be and how badly it's going to hit us. So we're trying to do things in the short term to continue to innovate and push our programs forward,” Smith said. “If you came in and asked me to commit a whole bunch of money for the next ten years, I'd say, 'Come back and talk to me in six months.'”
Other top administrators have spoken out against the bill. At a Faculty meeting on Tuesday, University President Drew G. Faust called the bill a cause for concern. She also wrote that the tax would affect the University’s ability to fund financial aid in a December emailed statement.
“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.
Provost Alan M. Garber ’76 wrote in a November email to Harvard affiliates that an earlier version of the bill “would broadly reduce benefits that support higher education.”
The Faculty of Arts and Sciences funds several major endeavors, like an ongoing effort to renovate the College’s upperclassmen Houses, and also provides resources for Harvard's financial aid program. Recent lackluster endowment returns have constrained the division’s budgets.
According to last year’s FAS fiscal report, the endowment created a “larger than budgeted deficit once again.” This financial shortfall was one reason FAS has decided to slow down the House Renewal Project, Smith wrote in the report.
Smith did say on Wednesday, though, that the faculty is working to ensure that current ongoing projects like House renewal won’t be impacted.
“We’re committed to doing House renewal,” Smith said. “We're trying to figure out the best ways to make it work without doing something completely crazy that cuts into the financial aid system.”
--Staff writer Angela N. Fu can be reached at firstname.lastname@example.org. Follow her on Twitter @angelanfu.
—Staff writer Lucy Wang can be reached at email@example.com. Follow her on Twitter @lucyyloo22.