Senate Twist on New Endowment Tax Could Spare Some U.S. Schools

(Bloomberg) -- A few dozen private college endowments could dodge a bullet with the sweeping tax bill approved by the Senate early Saturday morning after a last-minute amendment.

A tweak to the tax overhaul introduced Friday night doubled the threshold for applying a new levy of 1.4 percent on colleges' annual investment income. Under the House version of the bill, U.S. schools with funds of more than $250,000 per student would be affected, but the Senate proposal raised that to $500,000.

That means roughly 30 schools would take the hit instead of about 70, based on data from the National Association of College and University Business Officers. Some large research universities including Brown and Vanderbilt universities are among those that would likely fall below the half-million-dollar mark, as well as smaller schools like Earlham College in Richmond, Indiana.

“While it is a relief that Earlham may no longer be subject to the tax, it doesn't change the arbitrary nature of the formula and how it is applied,” said Phil Morgan, chief investment officer at the liberal arts college, which has about 1,100 students and a $425 million fund.

Endowments ‘Different'

“It doesn't consider the overall budget and operations of an institution, and there is no consideration as to how the endowments may be using their funds to increase access to higher education,” Morgan said. “College endowments are quite different than private foundations and shouldn't be taxed in a similar manner.”

The endowments could be affected under the House version of the bill, but it gets a break if the higher Senate limit becomes law. The tax overhaul still needs to be reconciled in Congress, a process that may start as soon as Monday. Before Friday, the House and Senate versions virtually mirrored each other on the endowment tax.

Congress has been eyeing the $500 billion held by about 800 colleges. School for years have lobbied against the government imposing restrictions on their endowments, which have grown from investments and fund-raising campaigns. Many university and college endowments reached new record-high values in the most recent fiscal year because of sustained gains in global equities.

‘Highly Dependent'

Endowment values change from year to year depending on annual returns. In the 2016 fiscal year most endowment values dropped because of investment losses.

Lawmakers' interest in endowments previously focused on the richest schools and spending more from the funds on school-related expenses. Now that the tax may be close to becoming law, college officials have been outspoken against it.

Earlham, for one, is “highly dependent upon its endowment,” Morgan said. Its earnings support student scholarships, financial aid and the operating budget. The school estimates it could have paid at least $200,000 in tax, based on its 13.9 percent investment return for the latest fiscal year.

Denison University, a private liberal arts college in Granville, Ohio, estimates it would have paid some $532,000 in taxes from its earnings in the last fiscal year, when it posted a 13.1 percent return, had the tax proposal not been tweaked. With about $370,000 per student in the most recent year, it wouldn't be subject to the tax under the new provision.

Future Generations

“This change to the tax bill will allow the college to continue to use our endowment to provide financial aid to students from lower- and middle-class backgrounds and other mission critical educational activities,” said Adam Weinberg, president of Denison, which has an $812 million endowment and about 2,200 students.

Weinberg said the university's fund had been accumulated over generations by gifts from individuals whose lives were changed by the college and who wanted to ensure that future generations would have access to a great education.

Some of the richest schools, including Ivy League universities Princeton, Harvard and Yale, don't appear likely to escape the tax because their endowment-per-student ratios are well over $1 million.

With more than $1 million per student, Amherst College is also squarely in the cross-hairs of the new tax. The Massachusetts liberal-arts school, which has an endowment valued at $2 billion, estimates it could pay as much as $3 million in taxes in a typical year, depending on investment earnings.

“It makes no sense for mission-driven institutions to forfeit mission-critical funds when other measures in the bill work against, not for access to higher education for low- and middle-income families,” Amherst President Biddy Martin said in a statement in November.

Also cut in the final hours of debate over the Senate bill was a provision that Democrats said may have exempted from taxes one institution -- private Hillsdale College in Michigan, which is closely associated with Education Secretary Betsy DeVos.

To contact the reporter on this story: Janet Lorin in New York at jlorin@bloomberg.net.

To contact the editors responsible for this story: Mary Romano at mromano6@bloomberg.net, Josh Friedman, Ros Krasny

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