Paul L. Caron

Wednesday, October 5, 2022

WSJ: Tax On University Endowments Brought In Only One-Third Of Projected Revenue

Wall Street Journal, Endowment Tax on Wealthiest Universities Netted a Fraction of Predictions in 2021:

Wealthy colleges argued for years that a federal tax on their endowment income would limit their ability to provide financial aid—and represent a dangerous government overreach. 

Internal Revenue Service figures show the actual impact of such a tax has so far been minimal: Last year, 33 schools paid a total of just $68 million, far short of the schools’ dire projections and the government’s official estimate, according to data recently published by the agency.

This is the first year the IRS broke out any details on payments of the tax, which was created in 2017 as politicians criticized wealthy schools for raising tuition while their endowments ballooned. It generally went into effect for the 2018-2019 school year.

The figures represent tax returns processed in calendar 2021 for schools including Princeton University, the University of Notre Dame, Duke University and Grinnell College. They are mainly based on schools’ tax returns for fiscal years that ended in mid-2020, which included poor market performance during the first few months of the pandemic that may have lowered collections.

“It’s a rounding error for the schools, a rounding error for the government, and really just a thumb in the eye more than anything,” Alex Reid, a tax lawyer and partner at BakerHostetler who represents nonprofit groups, said of the amount of taxes collected.

When Congress created the tax, the Joint Committee on Taxation estimated that it would generate about $200 million annually, but subsequent IRS guidance allowed for significant carve-outs.

Schools are subject to the 1.4% levy on net investment income if they have at least 500 tuition-paying students, more than half of whom are in the U.S., and their endowment is at least $500,000 per student.

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