These Small Colleges Would Be Hit Hard By Trump's New Endowment Tax

Forbes

02-06-2025

The tax and spending bill passed by the House of Representatives on May 22 would increase the taxes some colleges and universities would have to pay on several sources of university income, most notably endowment earnings.
Much of the attention being paid to this controversial component of the legislation has focused on the impact the new taxes would have on the nation's richest universities like Harvard, Yale, Stanford, Princeton and MIT. Estimates are that some of those schools could see tax increases topping $500 million annually.
However, as the details of the proposed increase are studied more carefully, it's clear that a a substantial number of small, liberal arts colleges would also be hit with huge tax increases as well, sometimes increasing by 10 to 15 times their current rate.
As part of the plan, the tax on the endowment earnings of private colleges and universities would be hiked from 1.4% to as much as 21%. Currently, a few dozen private universities with at least 500 full-time equivalent students and an endowment worth at least $500,000 per student are subject to a 1.4% tax on endowment earnings, a levy that was passed during Trump's first term.
Under the new proposal, the increases would be tiered.
The bill also changes how the number of students is calculated. By excluding foreign and undocumented students from the count, it increases both the number of institutions subject to endowment taxes and the number who would have to pay a larger rate. Religious colleges are exempted from the tax, but what schools qualify as being religious will likely be debated.
Several analysts have estimated the tax burdens generated by the proposed increases. Their calculations vary to some degree because of different assumptions about the average rate of return for endowments, the time frame for quantifying the number of domestic students and the absolute size of each endowment.
I based the numbers below primarily on two sources: calculations by Wellesley College economics professor Phillip Levine, and a May 20 New York Times analysis.
Here are a dozen examples of the increased yearly taxes small liberal arts colleges – those with enrollments of less than 2,500 students — would be forced to pay, based on the provisions in the House-passed bill.
Amherst College (Massachusetts) would see its endowment taxes increase by more than $50 million.
Pomona College (California) and Swarthmore College (Pennsylvania) would both face increases in their tax bills of more than $40 million.
Taxes for Williams College (Massachusetts) would increase from about $3.7 million to more than $37 million.
Wellesley College (Massachusetts) would see a jump from about $3.2 million in annual taxes to $31.7 million.
Grinnell College (Iowa) would see its taxes increase from about $2.8 million to $27.2 million.
Bowdoin College (Maine) would pay an additional nearly $25 million in taxes, going from $2.8 million currently to about $27.5 million under the tiered system.
Smith College (Massachusetts) would increase from a $2.7 million tax obligation to approximately $14.7 million.
Taxes would increase more than fivefold for Washington and Lee University (Virginia), jumping from $2.2 million to $11.9 million.
McPhereson College (Kansas), which has been the recipient of two anonymous $500 million gifts in the past few years, would pay endowment taxes for the first time, estimated at about $8 million annually.
Davidson College (North Carolina) and Claremont-Mckenna College (California) could see their tax bills increase by more than $6 million apiece.
It doesn't stop there. Other small colleges, including Berry College in Georgia, DePauw University in Indiana and Whitman College in Washington might also be subject to endowment taxes for the first time, according to a recent Forbes analysis.
House Ways and Means Committee Chair Jason Smith (R-Missouri) lauded the new tax, claiming that 'private universities with massive endowments and large nonprofits have operated like corporations, all while pushing political agendas and enjoying taxpayer-funded benefits. That ends now."
Here's what else might end if the reconciliation bill becomes law: hundreds of millions of dollars in financial aid for students. According to the 2024 NACUBO-Commonfund Study of Endowments, the largest share of endowment spending — 48.1% — goes to provide financial aid through institutional scholarships and tuition discounts. Should endowment taxes increase, institutions may need to reduce their spending on helping financially needy students be able to attend college.
Colleges are intensifying their lobbying efforts, hoping they can persuade the Senate to lighten up on the tax increases or broaden the application of the religious exemption in the bill, but it now appears likely that a greater number of colleges are going to be paying more taxes as part of what President Trump has championed as his war against 'woke' higher education.
Although conservative politicians have largely applauded the proposed increases, they may change their tune as the total implications of the bill become better known. It's one thing to put the screws to Harvard, Yale and Stanford, but it's a whole different matter when small, beloved colleges in Iowa, Indiana and North Carolina become the targets too.