Universities worry about new federal tax on endowments

Dec 2, 2017

It's expected that the tax reform bill approved by the U.S. Senate early Saturday morning will contain a provision that has upset some officials at the nation’s larger universities.

It calls for a 1.4 percent excise tax for colleges that have larger endowments.  Congressman Tom Reed, a Southern Tier Republican, has been a proponent of the tax.

His district includes Cornell University, and its president opposes the tax which she says would reduce their ability to help economically disadvantaged students and conduct research for the public good.

But Reed contends that some of the larger college endowments are spent without a lot of oversight and he’s hoping this tax will focus attention on how that money is distributed.

“This is tax preferred dollars, this is tax free investments and contributions that people are getting, so where that money goes is a legitimate question that needs to be asked, and I’ll tell you, as we uncover more and more sunlight on this, hopefully we can work together to get the money going to where I believe it needs to go, working class families and tuition reduction for them,” Reed said.

Reed says assuming the tax reform legislation is approved, the next step would be to sit down with some of the officials at the affected universities, and maybe even consider asking Congress to suspend the tax if the colleges do a better job on how they handle their endowments.

“Maybe they’re going to have to start asking the hard questions of reducing salaries, reducing expenditures on some of these resort type of extravagant type of investments and focus on what they should be focusing on : providing a good quality education and redirecting whatever money they lose into that effort,” Reed told WXXI News.

At the University of Rochester, which has a $2.3 billion endowment, President Joel Seligman says this provision in the tax bill will hurt students by impacting money that is used to reduce the overall cost of tuition.

He also notes that there are restrictions on how endowments can be spent. 

“Donors often restrict funds for specific purposes, sometimes for students, to be sure, sometimes for faculty members, sometimes for particular buildings, sometimes for specific programs,” Seligman told WXXI News.

Seligman says he is also concerned that once a tax on endowments begins, it will be easier to increase it in the future.

The Association of American Universities criticized the legislation which it says will harm students and their families, since endowments support student aid and other programs.

Seligman echoes those concerns, saying that the tax bill will hurt students by impacting funds that are used to reduce the overall cost of tuition. 

“A very large percentage of the sticker price of the public starting tuition number is reduced, sometimes as high as 50 percent, at our university and others.”

Seligman says he welcomes scrutiny of the way the university handles its endowment, but he says they already are required to follow stringent audit guidelines.