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The GOP’s proposed college endowment tax is bad news for Minnesota’s Carleton and Macalester

Northfield’s Carleton College has an endowment valued at around $800 million, or $397,000 per student, which means it would be subjected to the proposed endowment tax.

Plenty of groups are unhappy with congressional Republicans’ plan to overhaul the tax code: state and local governments, homebuilders, retailers, electric car manufacturers, and others stand to lose out under the GOP legislation, which seeks to eliminate tax provisions that benefit them.

One influential group is giving the tax package a resounding “F” grade: colleges and universities. There are several elements of the legislation that could harm institutions of higher education, but one that’s getting special attention is a proposal to place a tax on the money some of them earn each year through investing their endowment funds.

Colleges and universities, particularly private ones, consider their endowments essential to their everyday functions — like paying faculty and offering student financial aid — and as safeguards that preserve the long-term financial viability of their institutions.

Recently, the endowments of certain institutions have exploded in value: Harvard University’s endowment is estimated at over $36 billion, while five others — all private schools — boast endowments of over $10 billion.

Currently, colleges and universities pay no taxes on the annual returns they reap from investing this money. The Republican plan would change that, and its advocates claim it would put schools’ tax obligations on the same footing as private foundations. Beyond that, the GOP frames the endowment tax as necessary to pay for a tax code overhaul they say will benefit everyone.

Colleges, meanwhile — such as Minnesota’s Carleton College, which would be hit hard by the change — argue that Republicans are picking on successful institutions by raiding their savings to pay for tax cuts elsewhere, and limiting their ability to pay for student financial aid and quality faculty.

Ending a ‘carve-out’

There are thousands of colleges and universities in the U.S., and the GOP’s endowment tax would only affect about 70 of them. Legislation from Republicans in both the Senate and the House of Representatives propose placing a 1.4 percent tax on annual investment revenue on the private colleges with the largest endowments — $250,000 per student.

That threshold draws in some of the country’s wealthiest and most prestigious large universities, like Harvard, Stanford, Princeton, and Columbia. But it would also subject to taxation several liberal arts colleges with fewer students and relatively large endowments, including two in Minnesota: Carleton College, in Northfield, and Macalester College, in St. Paul.

The University of Minnesota system — which has an estimated endowment of $3.2 billion that is invested in private equity and bonds, among other things — would be exempt from the new tax, since it is a public institution.

Endowment values fluctuate, but Carleton’s is currently valued at around $800 million, and Macalester’s was valued at $748 million earlier this year. That works out to about a $397,000 and $348,000 share of the endowment per student at these small colleges, respectively. (Carleton has about 2,000 students, and Macalester has around 2,140.)

Colleges aim to safeguard their endowments for the very long term, so they only withdraw a small percentage of the total each year. Carleton, for example, spends about four percent of its endowment total annually — about $32 million.

Endowment funds can bankroll a significant portion of an institution’s annual budget, but for most colleges, tuition and donations finance the bulk of what they do. Macalester says that endowment revenue funds “less than 40 percent” of the school’s operating expenses.

By taxing these institutions’ endowments, Republican tax-writers aim to raise about $3 billion in new revenue over the course of the next decade. That contributes revenue for a plan that would slash taxes for corporations and many individual filers, but still raise the federal debt by $1.5 trillion in the next decade.

Republican Rep. Jason Lewis, whose 2nd Congressional District is home to Carleton, made the case that the tax raises much-needed revenue from a group of institutions that have benefited greatly from what he called a “carve-out” in the tax code. He also said it would place these institutions’ tax burden on a similar level as private nonprofit foundations.

“It’s kind of funny,” Lewis told MinnPost, “the people who are complaining the loudest are the people who have the most money… If you’ve got an endowment of $250,000 [per student], you’re probably in pretty good shape when it comes to higher education.”

“These are wealthy institutions,” he added. “It’s not like we’re going after the poorest of the poor here… It’s people that are getting a carve-out not wanting to lose it. At some point, to get lower rates, you’ve got to find the pay-fors.”

Raiding the piggybank

To hear some in the higher education world tell it, the GOP plan does go after the poor: low-income students who could be denied scholarship opportunities if college endowments take a hit.

Steven Poskanzer, the president of Carleton, told MinnPost that his college stands to lose $500,000 every year due to the endowment tax; the average financial aid award at Carleton is $48,000.

“This is the financial aid of 10 kids who I can’t afford to give financial aid at Carleton anymore, because these dollars are going to pay for someone’s tax cuts somewhere in Washington,” Poskanzer said. “This is literally taking money away from poor students.”

Poskanzer also argued that institutions of higher education are not the same as private foundations: colleges use their assets to provide nonprofit services directly, while most foundations distribute their assets to fund other entities that provide services.

Taxing colleges and universities the same as foundations, Poskanzer said, sets “a terrible precedent.”

He added that the tax’s exclusion of public institutions — which invest money in similar fashion to private ones — betrayed its arbitrary, political nature. He cited the University of Texas and Texas A&M University, which both have large endowments supported by substantial investments in fossil fuels.

“Why would you tax little Carleton College and not tax much, much wealthier Texas A&M?” he asked. “This is an effort to try to find money where they can.”

Congressional Democrats echoed Poskanzer’s argument. Fourth District DFL Rep. Betty McCollum, called the GOP tax plan an “attack on higher education.”

“Without the resources endowments provide, a lot of families in my district and all across the country wouldn’t have the opportunity to attend these great universities," she said.

In a statement, Sen. Al Franken said “I don’t think our students and our state’s educational institutions should be the piggy bank raided to give an even bigger tax cut to the richest people in the world.”

Forcing tougher choices

If the endowment tax were to become law, experts say that affected institutions may not all respond in the same way — like cutting back on financial aid, for example, as Poskanzer said.

According to Kim Dancy, a senior policy analyst at the New America Foundation think tank, there are a variety of ways an institution could respond to the new tax. Cutting back on financial aid is an option, either by granting fewer awards or making the awards students receive less generous. Schools might also admit fewer students that require need-based financial aid, and admit more students who can pay the sticker price of a college education.

“There’s as many approaches to this as there are universities that’d be subject to these rules,” Dancy explains. “There’s a lot of different things you can do, but it would create a different situation, in which you have to make tougher choices about how you spend your money.”

Dancy anticipates that the schools with multi-billion dollar endowments will probably be fine under the plan. But for schools like Carleton and Macalester that hover closer to the $250,000 in endowment money per student threshold, she says there is a strong incentive to try to make changes to avoid taxation.

“I think what you would probably see for schools right around that line is either an increase in enrollment or spending down endowment earnings such that you are going to aim to be right below the line of taxation,” she says.

There appears to be agreement on all sides that colleges and universities can do more to make themselves more affordable. As endowments have grown, so too have tuition costs, and their growth has outpaced that of inflation. At both Carleton and Macalester, tuition costs have increased by 15 and 14 percent, respectively, since 2012.

Dancy says that colleges and universities might perhaps be open to some tax on their endowments, and it is not the first time that lawmakers, particularly Republicans, have discussed it.

But there are other pieces of the GOP’s tax legislation that have the higher education world alarmed: it contains a proposal to eliminate the ability of student loan borrowers to deduct their interest payments from their tax liability, and it also would subject to taxation certain benefits that institutions give out, such as tuition assistance for employees.

Colleges and universities are mobilizing, and have begun aggressively lobbying Congress on these elements of the plan. The American Council on Education, an umbrella group that represents 1,800 U.S. institutions of higher education, is pushing hard in D.C. to kill the provisions. Already, Republican tax-writers have been forced to make changes: the initial version of the legislation set out a $100,000 threshold student share of endowment, which was later raised to $250,000.

Carleton’s Poskanzer says his school has been communicating with the entire Minnesota delegation. The House of Representatives could vote on the tax bill as early as next week, and the Senate will consider its version in committee then, too.

“We need our elected leaders to step back for a second,” he said. “Let’s get it done right, and let’s not get it done in punitive, thoughtless fashion. Right now, that’s what this legislation is.”

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Comments (20)

Don Trump Said

That he "loves the uneducated".

So should we be surprised when he goes after college endowments and the tax deduction of student loan interest? The GOP tax plan has many elements that target blue states, and blue states have more citizens with bachelors degrees.

All those private colleges

All those private colleges are bastions of liberal thoughts which include an idea that the wealthy must pay a fair share (read: pay more). But now, when it is their turn to pay more taxes, they are suddenly against that…

Endowments are used to provide

Educations for bright students who don’t have the means to pay for great education. Using that money to help lower the corporate income tax is complete proof how stupid the republicans have become. Better students - no; more billions for the rich a-ok. BTW doubt that it impacts the commenter.

Not to be too picky here, but...

...Carleton's president, in arguing against any new tax levies, chose to mention only one of the targets for their endowment proceeds: poor students. It would be natural for someone to assume that he is being truthful and accurate when he says the only effect will be to harm poor students by eliminating scholarships.

But according to Carleton's own endowment office, this endowment's proceeds are spent in multiple ways, not only on scholarships:

"Each year, money from endowment earnings is used to support the College's annual operating budget—dramatically affecting the amount of financial aid available to students, the quality of our academic programs and facilities, and faculty salaries."

Now, taking money away from a college's endowment is bound to affect the college's operations some way or other, but it would appear untrue in this specific case that it would only affect poor students' financial aid - unless, of course, that was the college's policy !!

I don't think I like this tax, either, and it would appear to raise little money in the grand scheme of things, but let's not swallow what we read whole-hog !!

Of Course Kim Dancy Hasn't TALKED to Any of These Institutions

but is just blowing smoke in speculating how they might deal with the damage this tax increase would do.

Like MOST conservative financial theorists, his ideas are based entirely on what OTHER people OUGHT to do,...

but which those conservatives would NEVER trouble themSELVES to do.

If Dancy's taxes, or those of the "New America (make the rich richer, keep labor as cheap as possible and the public as uneducated and compliant as possible) Foundation" were being increased in this (or ANY) way, we'd be able to hear the screams all across the globe.

Just the same same from the GOP

The whole point of the Republican Party is to enhance the wealth and power of those who are *already* wealthy and powerful. College students, faculty and administrators thus are not Republican clients. They are therefore to be attacked by any and all means, along with anyone affiliated with the public schools, as part of the continuing Republican War on Education.

Taking from poor students to fund the ultra rich

The primary beneficiaries of the Republican tax cuts are the ultra rich. The Trump's stand to save a billion in estate taxes and perhaps $25-50 million annually in special relief due to elimination of the alternative minimum tax and continued breaks for real estate investment. These special tax breaks allowed Trump not to pay federal income taxes for almost 20 years, "smart" but patently unfair.

So how do colleges get endowments? Gifts from alumni and friends. Money people have saved and decided to invest in the future by subsidizing the leaders of tomorrow. If colleges lose their endowments, they will be not be as able to afford to support bright minds from low to moderate incomes. Their places being filled by the students with less ability but more family money. Call this what it is - affirmative action for the super privileged.

There really are no good arguments for tax cuts for people who don't need the money, but want it only to leave even larger estates to their children. To take away access to college for households with low to average income to subsidize this idea really is all Republicans ever are doing, whether it be education, healthcare or the safety net. We have seen the impact of wealthy but unworthy leaders. We need to learn from our mistakes, not repeat them.

Tax cuts for the ultra-rich paid for by families with kids

Just to emphasize what Joel said:

1) The Republicans hope to raise $3 billion over ten years with this tax
2) They hope to drop all estate taxes which will cost $269 billion over ten years
3) Estate taxes affect only the richest of the rich - 2 out of every 1000 estates
4) An estate of $12 million for a couple (with bad tax advice) would be taxed on $200,000 of that estate. The other $11.98 million would go to their heirs tax free.
5) If an estate has unrealized capital gains, which most large estates do, those profits have never been taxed.

For more details, see:

https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-abou...

Oh for Pete's sake

This is just more "tax the rich" and it is refreshing to see that the GOP has joined the Democrats in going to the same well over and over. Check out the annual tuition to Carleton and Macalester before you claim this fake news.

apparently you read neither the article...

...nor the comments. But thanks for playing.

land's sake

What is more of an issue than the endowment is the amount of land owned by institutions. In St. Paul, the total amount of land owned by colleges and campuses is extensive, and that hurts the city financially. Saving on law enforcement by having campus police raises other problems.

We're not poor by any means.

Our daughter is a sophomore at Carleton--yes, and exposed to liberal, free-thinking concepts, and I say,"more!" There's nothing wrong with liberal thoughts @Ilya Gutman, nor conservative thoughts.
They're just different from each other. Room for both in this world.

There is no way we could send our daughter there without the generous aid package she was given. It would cost us out of pocket, TWICE, to send her locally to the University of Washington, who does not give need-based aid. Hmmm, and their endowment is huge. I suppose if she were a boy, AND a star athlete, she'd get aid there.

Financial aid is not just for the "poor"! And how boring these institutions of higher learning would be if the little liberals running around were all wealthy. There are still lots of middle to upper-middle class folks who need help getting their children educated at the best schools.

“There's nothing wrong with

“There's nothing wrong with liberal thoughts @Ilya Gutman, nor conservative thoughts.
They're just different from each other. Room for both in this world” Absolutely, so is your daughter exposed to any conservative thoughts in Carlton?

“Financial aid is not just for the "poor"!” Again, totally agree. That is why they have merit based scholarships.

All a shell game...

To fully blow up the deficit to unprecedented levels. And then the real mission of Paul Ryan and the GOP may be implemented: A full on gutting of every social safety net ever implemented by the D's: Sociual Security, Medicare, the ACA and so on and so forth.

"The deficit is skyrocketing, the economy is lethargic, we sure can't tax the job creators, time to cut spending..."

Simply the most sinister and evil plan ever presented and Lewis and Paulsen are promoting it despite the loss of state tax deductions and property tax deductions and other items targeting blue states over red states. Note to Lewis and Paulsen: we live in Minnesota not Mississippi...

Sharing the Pain

It's not just fancy-pants bastions of liberal thought that are going to get hit. Individual students, especially those from lower and middle class backgrounds are going to take a hit. The tax plan as it now stands removes the deduction for student loan interest. It also would include employer tuition reimbursement as taxable income.

I taught for several years at a local career college. Students there were learning marketable skills, not your elitist English literature or higher mathematics. Virtually all of them had to borrow what I regarded as staggering amounts of money for a 2 or 4-year program. The interest they pay on their loans would no longer be deductible. Several lucky students worked full-time and went to school part-time, getting at least some of their tuition paid for by their employers. That tuition was not taxed, but now it would be.

So the Republicans aren't just going after bastions of liberal thought (why that is appropriate in a democracy, I don't know). Students who have to pay for post-secondary education--whether they are learning to be poets or truck drivers on the Range--will be targeted. The effect will be to choke off one of the few avenues left for upward mobility in this country.

But hey, that inheritance tax!

“Virtually all of them had to

“Virtually all of them had to borrow what I regarded as staggering amounts of money for a 2 or 4-year program.” Was it a public college? How much did they have to borrow?

Was it a Public College?

No, it was not. It was a proprietary career college.

"How much did they have to borrow?" It was not my place to ask, but I believe the average debt (private and government loans) is north of $60,000 for a four-year program.

I assume that a career

I assume that a career college is practically the same as a vocational school which, I thought, is two year programs and which are mostly public which means that they cannot be that expensive… If I am wrong and they are 4 year programs, who would choose them over public colleges which are much less expensive (and where people can get merit scholarships)?

The Republicans in Congress

The Republicans in Congress are having a hell of a time finding ways to make huge cuts to the taxes of the wealthy individuals (NOT businesses that would generate jobs, in their fantasy world economics) and huge multinational corporations. They're hitting people in the lower 90% of the population to do it. In so many ways.

But, I have to point out here that by taxing college endowments (their accumulated "wealth") on an annual basis, the GOP's leaders are setting a precedent for something that would indeed be helpful in eliminating the gap between the tiny portion of us with gigantic incomes and wealth at the top, and all the rest of us: taxing wealth, per se, every year. Individual wealth, family wealth, taxed at, say, 1.5% every year.

Now, THAT would bring taxes in, cut our deficit, eliminate gradually the wealth gap between the rich and the ultra-poor, etc. Check out Thomas Picketty's book on how to do that, and its benefits.

Let's talk to Jason Lewis and Tom Emmer and Erik Paulsen about finally establishing an annual individual wealth tax!

Way to go, GOP!

“by taxing college endowments

“by taxing college endowments (their accumulated "wealth") on an annual basis,” The article specifically explains this as “a proposal to place a tax on the money some of them earn each year through investing their endowment funds.” So only the earnings will be taxed, not the main money.