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

The two Minnesota liberal arts schools have relatively large endowments and relatively few students, putting them in a tough position vis a vis the proposed 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.

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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.

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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.

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“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.

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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.”