Endowment tax update

Senate modifies rates, structure is here to stay

The US Senate Finance Committee is working on its version of the Endowment tax for “rich” universities that passed the House version of President Trump’s Big, Beautiful Bill (BBB). A quick review of the history of the endowment tax, before discussing the details of the current debate and what it means for the future of higher education.

The 2017 Tax Cuts and Jobs Act (TCJA) created a 1.4% tax on the annual gain of endowment investments for universities with endowment values of $500,00 per student and above. During the Biden Administration’s Build Back Better industrial policy discussion, then Senator JD Vance proposed an increase in the tax rate on endowment income to 35% for institutions whose assets were greater than $10 Billion (this was introducing a second rate). That went nowhere, but neither was the initial endowment tax rescinded during budget reconciliation when the Democratic party controlled all three branches in Washington DC as the Republicans do now. The Dems could have easily repealed this tax and did not do so. There is likely more bipartisan acceptance or even preference for such an endowment tax on “rich universities” or “elite higher education” than many in higher education assume. I take this as a marker of a broad sentiment that “all is not well” in elite higher education.

We should listen.

The current endowment tax structure (one rate) in force since the 2021 tax year seems virtually certain to be replaced by a tiered structure that passed the House, with the only discussion being the House and Senate working out a compromise set of rates to apply to this basic structure. Duke’s endowment per pupil is around the cut point between the first and second rate bands but there are many ways the calculation of endowment per pupil could change, thus changing the rate applied.

Note that this progressive structure is not like the progressive federal income tax whereby everyone’s first $11,925 is taxed at 10%, from $11,926 to $48,475 at 12% and so on. The endowment per pupil puts you in a band that determines the rate applied to the gain, hence there are some massive implied marginal tax rates around the cut points.

In basic public policy terms, once a provision such as this is passed, and then refined or reformed, it is on its way to becoming a basic part of the policy backdrop of elite higher education and the federal budget. Higher education pushed against the original tax in 2017, did not manage to get it undone during the Biden Administration, and continues to push hard against this expansion of it. However, it is notable that the rate structure from the House survived into the Senate’s original offering making the focus of negotiation the rates. An endowment tax is therefore likely here to stay.

Let’s take a step back and discuss the endowment tax via the lens of public policy analysis to better understand what is going on and what options there are for the future.

Four Reasons to Levy a Tax

Basic tax/public policy 101 is that there are two basic reasons that you levy a tax. First, is that you want less of something, because anything you tax will be reduced because you have altered the incentive structure in some way. Think, cigarette taxes. Second, you want to raise money to redistribute via government action for a purpose that markets will not produce. Military spending is a good example, as is funding for public education in K-12. Both of these are typically viewed as public goods, which means that benefits accrue broadly even for persons not understanding or wanting what they provide, and given the broad benefits, markets will under produce them. Hence, government taxes and redistributes money toward these purposes.

There is at least one other public policy reason to impose a tax that is more obtuse. A tax that is designed to be avoided by inducing private action that would not otherwise occur. An example is the Obamacare tax on high-cost premium health insurance plans that was designed to get employers to reduce benefit packages below the tax amount, thus shifting some employee compensation at the margin from untaxed benefits (because of the tax exclusion of employer provided health insurance), to taxable wages. Some tariffs may also fit this bill, especially if they are designed only/primarily as a negotiating tactic as may be the case in the Trump Administration 2.0.

There may be a fourth reason for a tax that we don’t typically teach in Introduction to Public Policy at Duke, and that is pay back or revenge, a motivation that you could ascribe to the endowment tax. For example, Senator Tom Cotton introduced the Woke Endowment Security Tax Act of 2025 into the US Senate in March, 2025 and this provision would have levied a 6% tax on the December 31st value of the endowment each year for universities with endowments above $11.9 Billion. This was a wealth tax on the value of the endowment that did not have much of a chance of becoming law, however, it provided a rhetorical strategy for those who typically oppose tax increases to support one in this case because it was levied on those who are “woke.” Woke is a powerful symbol because it is not defined, hence, individuals and groups can map their understanding of what is objectionable at universities onto the policy by using such language. This messaging has stuck, and when I gave an interview to public radio recently, the station referred to the endowment tax passed by the House as a “woke tax” in spite of its very different structure from what Senator Cotton proposed.

There may even be a fifth reason for a tax, which could be stated as “trying to roughly achieve in practice what is politically impossible” to do (similar to motivation #3 above). President Trump said in early May, 2025 that he would revoke Harvard’s non-profit status because of their ideological biases, and well, because he wanted to do so. This is a bit of a stretch though there is an (in)famous case in which a university did lose its non profit tax status due to non-enforcement of civil rights laws. The House passed version of the BBB setting of the top tax rate for richest endowments near the common corporate tax rate of 21% could be viewed as a back-door way of removing tax exempt status from a few elite universities. The 21% rate did not survive the Senate, but the negotiation is not finished.

Why There May Be More Broad Support of an Endowment Tax

It is important for us inside of elite higher education to correctly define reality, and I believe that there is likely more bipartisan support for the idea of an endowment tax on rich universities, even if individuals have divergent motivations for supporting the measure. That is not uncommon, and indeed is how public policy gets worked out via coalitions all the time. Let’s review the reasons that elected officials of all stripes and their constituents might support an endowment tax even if they do not do so loudly.

• Raise revenue. The House passed endowment tax in the BBB would raise $6.7 Billion over 10 years, assuming a 7.5% annual return for endowments. The is obviously a big number while also being a relatively small part of a bill that would increase the deficit by $2.8 Trillion over the same 10 years (CBO revised its estimate up by $400 Billion yesterday). However, to address a budget deficit and create a sustainable budget will take many steps and some politicians and constituencies may therefore support such a tax as a part of a fiscal solution.

• Create leverage for non-financial reforms. If this is viewed as a “woke tax” then perhaps some may favor it because they think it will give the Department of Education a way to bring about changes on campus that make it less woke, reduce DEI, address antisemitism and so on. You might say that is quite a spread of issues, and the answer remains that a key part of building a coalition to levy a tax is letting divergent views map their understanding of what is going on to the policy. There is a broad spread of ideological perspectives who view elite higher education as in need of reform and the endowment tax may simply be seen as a marker of that.

• Change the student body. The House passed BBB and now the Senate version calculates the endowment per pupil using domestic students only (more specifically, excluding international students). Incentives around the rate inflection points may lead to changes in the student body. If you assume the proportion of the students that are international is fixed, as is the overall student body, you could view this as not harming universities that desire to continue admitting international students. Alternatively, if you view the student body size as fixed but its makeup as fungible, this could provide incentive for a university to reduce international students to push its tax into a lower rate. This would mean more US citizens get spots at elite universities, an idea that fits the populist mood and that has bubbled beneath the surface for some time. Finally, elite private universities are sometimes criticized for investing too much into a small number of students, and the endowment tax provides an incentive to expand the size of the domestic student body over its current size, in order to avoid the tax. This would only make sense financially if the per pupil expenditure at the University drops (that is way above the full freight cost of attendance; at Duke it is hard to calculate but likely 50% more than cost of attendance that is $92,000 for next year) and could thus be seen as reducing the unit cost per degree. The breadth of support of the endowment tax argues that many are not buying that what we produce from the extra spending is worth it.

• I do not think the goal is less investment return, or reducing profit from endowments, but the endowment tax could at the margin be seen as pushing endowments toward less risky investments whose risk/reward tradeoff provides for the potential of large rates of long-term growth. This might especially be true for universities whose endowment per student is right around the cut points where there is an implied marginal tax rate of several hundred percent.

Endowment Tax as a Marker for Needed Changes

I think that we should interpret to survival of the endowment tax through the Biden Administration and the current escalation as a bipartisan and multifaceted shout from the mountaintop that elite higher education is no longer viewed as clearly worth it. With “it” being all the treasure that we have and have had over the past few decades. Many in society do not feel like they are getting their monies worth from the past and current public investment in private universities. We do need to do a better job of making the case for the good that we do, however, we first and foremost need to make sure that we are actually worth all the investment and have plans to put our treasure to its best use moving forward.

This is a super difficult time to undertake the parsing of blatant partisan attacks and grievance from legitimate questions about higher education. It is not easy to imagine the future in the midst of drastic cuts that jeopardize infrastructure created over decades, however, we do not have any choice but to figure it out under fire. Our situation reminds me of one day when I was helping my granddaddy fix a fence on his farm and a fellow carrying a load of corn pulled up and asked directions to a feed mill. My granddaddy told him, “if that was where I wanted to go, I sure would not have come by here first!”

However, you can only start from where you find yourself.

The flashpoint that threw the spark into the tinder was the series of efforts by the Biden Administration to forgive student loans, especially after courts judged the President to be overstepping his power. Yet, he kept looking for new ways to achieve the goal of student debt relief and the policy was viewed as deeply unfair to those who paid back loans as well as those who did not attend college. The desire to forgive student debt without a comprehensive look at the source(s) of the problem(s) that created the system producing people with debt that they could not service was bad public policy. And terrible politics.

Perhaps concerns about student debt and the looming endowment tax expansion could lead to a productive discussion. Universities might demonstrate our belief in the degrees we offer by providing low income guarantees to our graduates whereby we will make their loan payments based if their income is below some standard. There is a new proposal in the BBB to create one low-income student loan subsidy program, and maybe universities owing an endowment tax could pilot new models. This certainly does not mean that the only value of an education is the salary that a student will some day earn, but that is certainly part of the point of going to college. In fact, universities would be demonstrating our belief that salary is not only valuable aspect of our education by providing such a backstop.

Lessons from such a test of models could diffuse more broadly in the higher education sector, and the process would help us better connect with our students and their families. We might decide that some degrees and programs are not worth it when we have to look at the cost of the loan guarantee. Or that they are simply not the best use of finite resources. There are some professional degree programs in some universities that typically have high paying job opportunities and maintain an income and not for profit employment loan repayment programs. We could experiment with our undergraduate students and graduate programs alike while we work out the relative importance to our mission of different types of programs. Faculty from across the campus would have to be involved. I do not have a plan to offer, but a conversation that we need to start, first by listening to what the popularity of the endowment tax is telling us. And then by working with the federal government to improve the higher education sector, which is at once the envy of the World, and in great jeopardy of being torn asunder if we cannot figure out how to work together.