Proposed Endowment Tax Hikes Would Further Complicate University Investment Strategies

President Donald Trump and Republicans in the House of Representatives have signaled their intent to overhaul higher education financing, taking direct aim at private universities.

Trump has repeatedly threatened to revoke Harvard University’s tax-exempt status, which it and other universities receive under the Internal Revenue Code for their contributions to education and research.

“We are going to be taking away Harvard’s Tax-Exempt Status. It’s what they deserve!” Trump wrote on May 1 on his social media platform, Truth Social.

But legal experts say the president and other agencies lack the authority to unliterally strip a university’s tax-exempt status. 

“Neither the President, the Justice Department, the Treasury Department, the U.S. Attorney for the District of Columbia, nor the IRS have the ability to revoke the federal tax-exempt status of any entity through Executive Order or with the mere stroke of a pen,” wrote Jeffrey S. Tenenbaum, managing partner in the Tenenbaum Law Group, in a recent legal explainer.

While revoking tax-exempt status could be a legal impossibility, private universities face a more immediate tax threat: Several legislative proposals in Congress would dramatically raise the college endowment tax, which was created in 2017 as part of the 2017 Tax Cuts and Jobs Act. The levy is imposed on the net investment income from the endowments’ investments.

That threat has emerged because Republicans, aiming to extend and expand the 2017 tax cuts through the reconciliation process, are under pressure to find new revenue sources. Targeting private university endowments would not need support from Democrats. Although raising the endowment tax would not raise revenue significant enough to offset other tax cuts.

“I’ve never seen the endowment tax as a revenue–raising effort. It can’t really be a serious one,” says Steven Bloom, a government relations specialist at the American Council on Education and the chair of the Higher Education Association’s tax working group. “Ultimately, an increase in the endowment tax is fundamentally a scholarship tax, because it’s going to take money away from scholarship aid.”

Still, a higher endowment tax would compound pressures that private universities already face on their finances and investment strategies, including federal funding cuts. The tax would reduce net investment returns at a time when endowments are already under pressure to deliver high-single–digit or even double-digit returns. It also raises the likelihood that universities may need to adjust their asset allocations to protect their portfolios from mounting financial risks—a shift some institutions have seemingly begun to explore.

The Proposed Legislation

Several House bills would raise the endowment tax rate to as high 21%, matching the corporate tax rate. In the previous Congress, Vice President J.D. Vance—then a senator representing Ohio, proposed legislation that would have raised the endowment tax to 35%.

In January, the House Committee on Ways and Means estimated that raising the endowment tax to 14% from its current 1.4% would generate $10 billion over the next 10 years.

Currently, the 1.4% tax applies to net investment income at private institutions enrolling at least 500 students and holding assets of more than $500,000 per student. According to 56 universities paid about $380 million in 2023 under the endowment tax, up from about 33 universities paying $68 million in 2021.

Harvard, which has the country’s largest endowment at more than $53 billion, paid about $44 million in taxes and other fees in fiscal 2024, according to its most recent financial report.

Even if the lowest proposed new rate—10%—is included in the budget resolution, the tax increase could reduce endowment managers’ appetite for investments in assets like fixed income, since they generate taxable interest payments.

“You can’t make the tax zero,” says Anne Duggan, managing director on the client CIO team and co-head of custom asset allocation at TIFF Investment Management, an OCIO solutions firm for nonprofits. “But you can defer it, or you can try to reduce it by shifting away from assets that incur ongoing income, and you can also change your approach to where you have more capital appreciation that takes longer to realize.”

Universities, however, already have limited stakes in fixed income. In fiscal 2024, fixed income comprised 10.2% of universities’ assets, down from 11% one year prior, according to the 2024 NACUBO-Commonfund Study of Endowments. Other asset classes more affected by the tax, like U.S. equities, comprised 13% of universities’ assets in fiscal 2024.

In the case of equities, however, private universities could, in theory, opt to not sell the assets to avoid the tax.

The combination of challenges has already prompted recent changes to universities’ asset allocations.

“Each university’s going to have to figure out how to fill the gaps of the endowment tax and federal funding cuts,” says Tim Yates, the president and CEO of Commonfund OCIO, the outsourced CIO of asset manager Commonfund. “More spending, more risk, more fundraising—those are the three main levers that they have to try and pull or some combination of them.”

Universities’ Recent Moves

The most significant recent change was Yale University’s reported sale of up to $6 billion of its private equity portfolio on the secondary market.

However, a spokesperson for the university disputed the reported figure in a statement to CIO and indicated that the sale will only transact if pricing is attractive.

“The University is exploring a sale of private equity fund interests and is being advised by Evercore in a process that has been in the works for many months,” the spokesperson wrote in an email. “We remain committed to private equity investments as a major part of our investment program and continue to make new commitments to funds raised by our current investment managers. In addition, we continue to actively seek new relationships with private equity firms in the Endowment.”

TIFF’s Duggan says the move could likely have been a measure to raise liquidity in response to the threat of federal funding cuts or, at the very least, a decision to sell the assets and reinvest in offerings that could offer stronger returns.

“It feels like this is an opportunity to clean up their portfolio, but also, they may feel they need more liquidity and more flexibility to help the school in its time of need,” she says.

 “When they’re looking to sell these assets, it’s because they’ve made the determination that the forward-looking expected return of whatever it is they’re putting up for sale is not as good as what they could do with fresh capital.”

Nonetheless, the move followed Harvard’s plan to issue $750 million in taxable bonds in April, following a $450 million bond sale in March. Princeton University issued a $320 million taxable bond offering to support general operations. Brown University secured a $300 million loan in April at a 4.86% interest rate, maturing in 2032, 

Though private universities seem to already be shifting their investment strategies to stave off the effects of the federal funding cuts, if Congress raises the endowment tax rate, those same universities could try to blunt the impact by shifting their portfolios.

Since the tax applies only to interest, dividends and realized gains, universities might increase allocations to more illiquid assets, like private equity and venture capital, which generate less taxable income in the short term—the catch being they would have even less liquidity, and most private university portfolios already consist mostly of such assets.

“I said in my testimony about the 2017 endowment tax that although wealthy schools weren’t making the best use of their endowments, and that an endowment tax was the stupidest policy that you could adopt in response to that problem,” says Brian Galle, a tax policy professor at the Georgetown University Law Center. “It continues to be the case today.”

Tags: Endowment, higher education