Colleges decry Congress’ proposal to tax endowments

  • Amherst College President Biddy Martin.

  • Farah Nabil Rawas celebrates after receiving her diploma during commencement at Mount Holyoke College May 22. Mount Holyoke is one of three private schools in the Five College Consortium to raise concerns about the Republican-backed tax reform proposals in the U.S. House and Senate, along with Amherst and Smith Colleges. Gazette File Photo/Jerrey Roberts

For the Bulletin
Tuesday, December 05, 2017

NORTHAMPTON — While most individuals will get a tax break if the Republicans’ plan becomes law, certain colleges and universities will have to pay an excise tax on endowment income.

Three members of the Five College Consortium — Amherst College, Smith College and Mount Holyoke College — have cited this reason, among others, for their opposition to the bill.

In addition, the University of Massachusetts opposes the bill, although it has yet to release a formal statement about the proposal and, as a public university, is exempt from the excise tax on endowment income.

The Tax Cuts and Jobs Act of 2017, which the House passed on Nov. 16, contains a provision that would establish a 1.4 percent tax on private colleges’ and universities’ endowments. The tax only applies to schools with at least 500 full-time students and an endowment with a sum greater than $250,000 for each full-time student.

Endowments –– large pools of donated money, sometimes in the billions of dollars –– are used to carry out a school’s mission, pay for operating expenses or provide financial aid, for example.

Amherst College President Biddy Martin, in a letter to students, faculty and staff, said the college’s financial aid system benefits 56 percent of Amherst College students, at an average of $50,000 annually per aided student. That system, she said, is a result of Amherst College’s large endowment.

“Amherst’s endowment allows the college to avoid a heavy reliance on tuition revenue and therefore to admit the most promising students regardless of financial considerations,” Martin said.

The endowment was valued at $2.032 billion as of June 30, according to the college’s website.

The letter, sent out on Nov. 7, detailed the college’s objections to the tax bill, and the harm that the endowment tax could cause the college and its students.

In addition to possibly damaging the school’s financial aid program, the endowment tax threatens Amherst College’s financial model: 50 percent of the school’s operating budget is from its endowment.

“The College’s financial model supports an array of significant benefits for our students, including an 8:1 student-faculty ratio, a world-class faculty, a new science center and other academic and residential facilities, and student support services,” Martin said. “None of this is possible without a strong and growing endowment.”

Martin wrote that the school’s early estimates suggest that the financial impact of the proposed endowment tax “could be in the tens of millions of dollars over the next decade.”

However, Amherst College spokeswoman Sandy Genelius said that the school will do all it can to ensure students are not negatively affected if the tax plan is signed into law.

“Our focus is on the students. 56 percent of students receive financial aid, we only do grants –– we don’t do loans,” Genelius said. “We want to maintain our financial aid procedure while following the law.”

Genelius also noted that the Senate has yet to vote on the bill, and that alterations could be made to the tax-system overhaul. The original threshold for schools required to pay the endowment tax was an endowment sum of more than $100,000 per full-time student, and it was later raised to $250,000. Still, Amherst College is imploring people to oppose the plan.

“We’re reaching out to people we can, and we’re asking other people to reach out, call their legislators,” Genelius said. “Amherst College is going to be tracking it closely.”

Smith, Mount Holyoke

Smith College published a statement on the bill’s potential impact on Nov. 8, and set up a web page explaining the details of the tax plan. The web page explains that a third of the school’s operating budget is paid with its endowment, and that the 1.4 percent excise tax could mean a “$1.2 million negative impact on Smith’s annual operating budget.”

“If endowment income is taxed, a Smith education would likely become more expensive, which could make it inaccessible for some, altering the diverse makeup of our student body, and potentially reduce the overall quality of education,” Smith College President Kathleen McCarthy said in a statement.

Smith College’s endowment was valued at $1.807 billion as of March 31, according to information on the college’s website.

For Mount Holyoke College, as well, first on the list of objections is the endowment tax, which could “cost millions of dollars to Mount Holyoke College over the next 3-5 years.”

Mount Holyoke’s endowment stood at $729 million at the end of the last fiscal year, acting President Sonya Stephens said in a Nov. 6 letter to U.S. Rep. Richard Neal, D-Springfield. Stephens expressed the college’s support for him and his opposition to the bill, and outlined the detriments of the proposed endowment tax.

“New annual expenses on this order would inhibit both our ability to provide aid to our students and the ability of our endowment to keep up with inflation,” Stephens wrote. “At the same time the tax would serve as a disincentive to potential donors.”

As with Amherst College, Mount Holyoke College’s spokeswoman Keely Savoie said the college “in all cases will make sure the students don’t bear the brunt of any unfortunate happenings.”

Other objections

While the endowment tax is a common objection among the three private schools, there are other segments of the bill that have generated unease in the Five College Consortium.

“We have concerns about a number of provisions, including one that would eliminate the tax exemption for tuition waivers granted to graduate students, greatly increasing their tax burden,” UMass spokesman Ed Blaguszewski said in an email.

Blaguszewski said a detailed statement on the bill should be expected from UMass in the coming days, and that the university has been speaking with congressional representatives, asking for their opposition to the tax exemption for graduate students’ tuition waivers.

Other objections to the bill concern the elimination of the tax deductibility of student loan interest, the limiting of colleges’ and universities’ access to capital markets and the reduction of the American Opportunity Tax Credit.

Efforts to contact Hampshire College for comment on this story were unsuccessful.

The Tax Cuts and Jobs Act of 2017 passed the House with no Democratic votes, and with 13 Republican dissenters. Republicans need 50 votes in the Senate to pass the bill. There are 52 Republicans in the Senate, several of whom have spoken out against the bill.