In the bustling halls of Congress, Republican lawmakers are mulling over their strategies to generate revenue for an upcoming legislative package in 2025. This comprehensive package is set to address a multitude of pressing issues, including the imminent expiration of the Tax Cuts and Jobs Act (TCJA) individual tax provisions by the year’s end.
Exploring one of the potential avenues, there’s talk of increasing the tax rate on university endowments, a provision established back in 2017 as part of the TCJA. As things stand, a 1.4 percent tax is levied on university endowment income if a university boasts a minimum of 500 students and endowment assets surpass $500,000 per student.
Here’s a breakdown of the key points surrounding this proposal:
- In 2023, a total of 33 universities shelled out approximately $380 million under the endowment tax, a substantial surge from the $68 million paid in 2021, surpassing the prior $200 million annual forecast from the Joint Committee on Taxation (JCT) in 2017.
- Recently, Rep. Troy Nehls (R-TX) introduced the Endowment Tax Fairness Act, suggesting an increase in the endowment tax rate from 1.4 percent to 21 percent to align with the federal corporate income tax rate.
- The House Ways & Means Committee seems keen on this idea as well, with Chair Jason Smith (R-MO) discussing the proposal with members earlier this month.
The following points dive deeper into the potential implications of this proposed increase:
- If the endowment tax were to be hiked from 1.4 percent to 21 percent, the added revenue accumulation would rely heavily on the size of future endowment investment returns.
- A tax rate increase of this magnitude could potentially draw in about $69.8 billion over a decade, assuming a modest 7.5 percent average annual return, or up to $112.3 billion under a 10 percent average annual return.
- The raising of the endowment tax rate to 14 percent could generate $10 billion in additional revenue over 10 years, according to a House Ways & Means Committee document that outlined numerous potential policies for reconciliation.
The potential changes to the endowment tax rate raise crucial questions regarding its impact on universities and donors:
- While a higher tax rate might decrease after-tax returns for universities, it remains uncertain whether it would influence their investment behavior or donor decisions.
- The rationale behind the tax hike revolves around the tax-exempt status of nonprofit universities and the broader societal benefits they provide through research and education.
As discussions continue, it’s imperative to scrutinize the design and implications of the proposed endowment tax increase:
- The existing tax is narrowly applied to larger endowments, potentially encouraging a spend-down of funds, but this narrow approach may not align with objectives to treat endowment funds like other forms of earned income in the tax code.
- An alternative approach could involve a more broadly applied endowment tax at a lower rate compared to the corporate income tax, promoting a neutral and efficient tax base.
In conclusion, the ongoing debate surrounding the endowment tax sparks critical reflections on the intricacies of tax policies and their broader implications. As lawmakers navigate these discussions, it’s essential to consider the nuanced effects of potential tax reforms on universities, donors, and the overall tax landscape.
