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How the tax bill could change the way colleges operate

How the tax bill could change the way colleges operate
Data: House Ways and Means Committee; Chart: Axios VisualsThe current version of President Trump's tax bill could profoundly transform the world of university endowments, and incentivizes some deep structural changes.Why it matters: Those changes would not necessarily achieve the bill's stated aim of holding "woke, elite universities" accountable for purportedly abusing their nonprofit status — but they could significantly reduce the degree to which the provisions raise extra tax revenue. The big picture: One of the driving forces behind the bill is the argument that if large universities behave like hedge funds with educational institutions attached, then they should start being taxed more like hedge funds and less like educational nonprofits. How it works: The chosen metric is endowment per student, with richer colleges on that basis facing higher taxes. On its face, that incentivizes universities with bigger endowments to enroll more students — although there's also an incentive for smaller colleges to enroll fewer students, since institutions with fewer than 500 students are exempt. The denominator also now excludes foreign students, which is likely to push some schools up a tax bracket, per a TIFF analysis — the University of Pennsylvania being one example. Crucially, these aren't marginal tax rates, either. Counting UPenn's full roster of 24,219 students, its $1.1 billion of investment income would face a tax bill of $77 million. Because only its 17,316 domestic students are counted, however, that bill doubles to $154 million — enough to pay full tuition for 2,500 individuals. Between the lines: Recent high-profile philanthropic gifts have been designed to create a tuition-free experience for all students, in the longstanding tradition of colleges like Curtis Institute of Music, Rockefeller University, Scripps Research Institute, and the Webb Institute. The Albert Einstein College of Medicine in the Bronx has now joined those ranks, thanks to a gift from Ruth Gottesman, joining two medical schools associated with NYU. The Craig Newmark Graduate School of Journalism at CUNY plans to become fully tuition-free in 2026, while Cooper Union is eyeing 2028 to do the same thing. Because the endowment tax only applies to schools with more than 500 tuition-paying students, even schools like Cooper Union that still charge some students should find themselves exempt. Smaller schools therefore now have a big tax incentive to use their endowment to bring the number of tuition-paying students below 500, rather than reducing tuition across the board. Where it stands: When an endowment pays no tax, it can invest wherever it thinks it can achieve the highest long-term return. When investment income is taxed, however, that creates an incentive to move away from income-generating assets. Instead, endowments might shift their asset allocation to assets that don't throw off income, writes Anne Duggan of TIFF Investment Management. Alternative assets like private equity, as well as stocks like Berkshire Hathaway and many ETFs, don't pay dividends and therefore wouldn't be taxable under the new regime.The bottom line: The big question facing universities is how permanent they consider these tax-code changes to be. If they think a future Congress will reverse them, they might just pay the tax for a year or two before making big structural changes. If they think the taxes are here for the medium term, however, then the tax code could end up causing significant changes to how they operate.

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