TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, January 22, 2018

WSJ: Small Colleges Take Big Hit From New Endowment Tax

WSJ 2Wall Street Journal, Which Colleges Will Have to Pay Taxes on Their Endowment? Your Guess Might Not Be Right:

The Juilliard School, New York’s magnet for aspiring artists, is bracing for a 1.4% tax on income from its $1 billion endowment. Three miles away, Columbia University and its $10 billion endowment will remain untouched for now.

A college-endowment tax, enacted in December in the Tax Cuts and Jobs Act signed by President Donald Trump, is causing confusion and frustration at schools across the country, which rely on the previously tax free-earnings when setting their budgets.

Small liberal arts colleges will likely be hit disproportionately because many have sizable endowments but limited enrollment. The tax applies only to private schools with at least 500 students and at least $500,000 of investments per student. ...

The wealthiest schools, such as Harvard and Princeton University, will definitely pay, while the smallest and least wealthy schools won’t.

Some wealthy universities will probably avoid the tax in the near-term. Columbia, New York University, the University of Southern California, Vanderbilt University and Johns Hopkins University all have endowments over $3 billion. But their endowments fall below the $500,000-per-student threshold because they have so many students, federal data show. ...

But small liberal arts colleges like Claremont McKenna College, in Claremont, Calif., Berea College, in Berea, Ky., and Bowdoin College in Brunswick, Maine—all with endowments of about $1.5 billion or less—are likely to pay. ...

Hamilton College, in Clinton, N.Y., where the endowment just hit $1 billion, is likely to just surpass the $500,000 endowment-per-student threshold, the school says. That will trigger a tax bill of about $500,000, out of a $180 million annual budget.

The tax includes no brackets, making it an all-or-nothing proposition for schools on the cusp. That could push colleges like Hamilton, with about 1,865 students, to consider increasing enrollment to stay under that $500,000 threshold. ...

Even if schools can’t stay out of the tax, they will have incentives to minimize their annual investment income and thus their tax bill. That could mean waiting to realize gains, harvesting losses and engaging in other behavior that tax-exempt institutions don’t always concern themselves with.

“One thing that we should probably expect to see is for colleges and universities to act more like other taxpayers,” said Brian Galle, a tax law professor at Georgetown University.

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