Paul L. Caron

Wednesday, July 14, 2021

Bird-Pollan: Taxing The Ivory Tower — Evaluating The Excise Tax On University Endowments

Jennifer Bird-Pollan (Kentucky; Google Scholar), Taxing the Ivory Tower: Evaluating the Excise Tax on University Endowments, 48 Pepp. L. Rev. 101 (2021):

The Tax Cuts and Jobs Act of 2017 introduced the first ever excise tax imposed on the investment income of university endowments. While it is a relatively small tax, this new law is a first step towards the exploration of taxing non-profit entities on the vast sums of wealth they hold in their endowments. In this Essay I take the new tax as a starting place for investigating the justification for tax exemption for universities and thinking through the consequences of changing our approach, both in the form of the new excise tax and possible alternatives. There remain reasons to be skeptical both about the design of the current tax and its ability to withstand the political efforts of the powerful set of universities who will be subject to it. Nonetheless, this new tax opens the door to a discussion of whether it is time to treat universities’ endowments more like the private equity funds they increasingly resemble.

Much of the attention paid to the so-called Tax Cuts and Jobs Act (TCJA) focused on the significant cut in the tax rate assessed to corporations, the creation of a deduction for non-corporate business income under the new § 199A, the elimination of a variety of tax benefits aimed at relatively lower income taxpayers, and the changes to the international tax regime. However, one change to the tax code created under this bill focused in another direction entirely, attempting, for the first time, to tax university endowments.

The justification for this new excise tax stems from a claim that the increasing size of these endowments, and the growing disconnect between the endowment itself and the charitable purpose of the institution (namely, the education of students and the promotion and support of research and service), requires finding ways to encourage universities to think differently about their endowments. The original justifications for allowing non-profit entities, including universities, to earn income, including investment income, without subjecting those earnings to federal income taxation, lose some of their weight in the face of hundred-billion-dollar endowments. Indeed, many lawmakers and scholars believe that the growing concentration of wealth in the hands of the richest universities demands a response.

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