HARTFORD, Conn. — Some of the most prominent American universities are assailing a proposal to tax their endowments, which have climbed in some cases into the tens of billions of dollars under tax protections envied by other fundraising institutions.
The tax plan released this week by Republicans in the U.S. House of Representatives comes amid growing legislative scrutiny of the finances of higher education. It calls for a 1.4 percent tax on endowment income at the wealthiest private universities.
For many colleges and universities, the proposal is a bid to raid resources used to provide financial aid, support teaching and research and carry out community service.
“It is disappointing that the legislation relies so heavily on colleges and universities, and especially the universities with some of the strongest records on financial aid, to raise revenue to enable tax cuts,” said Tom Conroy, a spokesman for Yale University, which has an endowment of $27.2 billion.
Bob Durkee, a Princeton University vice president, said U.S. tax policy has long encouraged excellence in higher education by allowing for endowment income to support teaching and research. “This proposal would overturn that time-tested policy solely to add revenues to the federal treasury,” he said.
University endowments are currently exempt from most taxes and face relatively little federal regulation. Private foundations, for example, are required to spend at least 5 percent of their assets each year and pay a 2 percent excise tax on investment earnings. Colleges face no spending rules and aren’t taxed on earnings.
But the richest colleges were put on notice last year when Republican leaders of two Congressional committees sent a letter to 56 of the wealthiest schools seeking details on their endowment investments and spending. “Despite these large and growing endowments, many colleges and universities have raised tuition far in excess of inflation,” the lawmakers, led by Sen. Orrin Hatch of Utah, said in the letter.
Soon after, Republican Rep. Tom Reed of New York separately proposed a plan that would have forced schools with $1 billion or more to spend at least a quarter of their profits on financial aid every year.
Under the proposal introduced Thursday by House Republicans, the excise tax on endowment investment income would be applied to schools with over 500 students and assets of at least $100,000 per student.
About 150 of the most prosperous schools would be affected by the tax, according to an estimate by New America Foundation.
Harvard University has the nation’s largest endowment, at $37.1 billion. In its annual financial report last week, Harvard said it made total investment income of nearly $2 billion in the year ending June 30. Taxed at the proposed 1.4 percent, that would amount to more than $27 million.
Harvard officials declined to comment on the latest proposal, but last year President Drew Faust defended the school’s endowment investments in response to the letter from Congress. “It is a dedicated and permanent source of funding that maintains the teaching and research mission of the university,” Faust wrote of the endowment.
At Cornell University, which has a $6.8 billion endowment, President Martha Pollack said the tax proposal has no clear policy objective beyond raising revenue.
“Moreover, it would likely have the perverse effect of making colleges and universities like Cornell more expensive while reducing our ability to provide quality education for economically disadvantaged students, conduct research for the public good, and undertake public engagement services that are critical to our mission,” Pollock said.
Binkley reported from Boston.