Princeton Faces 21 Percent Tax on its Endowment Income

Since the beginning of the year, Princetonians for Free Speech has been warning that Princeton and other universities were likely to be hit with a big increase in the current 1.4 % tax on endowment income. Now it is happening.

In the early hours of yesterday morning, the House Ways & Means Committee voted to report out its part of the Reconciliation bill – a.k.a. the “One Big Beautiful Bill.” This massive bill contains numerous tax provisions, including a large increase in the tax rate, now 1.4%, on endowment income. The bill creates a tiered tax rate based on an institution’s “student-adjusted” endowment. There are four rates: 1.4%, 7%, 14%, and 21%. The 21% rate applies to schools with an endowment of at least $2 million per student. It is the same as the corporate tax rate. Princeton qualifies for the 21%. According to one article, others qualifying for the highest rate are Harvard, Yale, Stanford, and MIT. Here is a list of the largest endowments. Princeton is listed at $34 billion. Note that Texas, which has a large endowment, is not covered by the endowment tax because it is a public university.

It is impossible for outsiders to estimate with any accuracy the cost to Princeton of this new tax for several reasons, including: the fact that the bill adds extraneous items (“student loan interest income and certain royalty income”) into the definition of endowment income; investment income can vary considerably year-to-year; and presumably Princeton will adjust its investments and the way income is recognized over time to minimize the tax. A very simplistic figure can be generated by taking the $34 billion endowment, assuming just for this purpose an income of 6 percent, and applying the 21% tax rate. That would result in income of $2.04 billion and a tax of $428.4 million.

The pain to Princeton will be considerable. According to an article explaining the management of the endowment on the Princeton website, earnings from the endowment provide about two-thirds of Princeton’s annual operating revenue.

This Ways & Means bill will be combined with equivalent bills from other House committees raising revenue and making budget cuts into the Reconciliation package. The House hopes to pass that by Memorial Day and finish the conference with the Senate by July 4. However, there are still many big political potholes along the way, and there will be changes. The bill could even fall apart. No Democrat is likely to vote for the package, and therefore, with the narrow Republican majorities in the House and Senate, it would only take a few Republicans in opposition to bring the package down. At this point, the House leadership does not have the votes for passage, but there will be furious negotiations in the coming days to try to bring opponents into the fold.

Because this is the Budget Reconciliation bill, it is not subject to a filibuster in the Senate and can pass with just fifty votes (plus the Vice-President). Assuming a bill can pass the Senate, changes will be made there to the House bill, and those changes will have to be negotiated in a conference between the House and Senate, with the conference report then having to pass both chambers. At this point there seem to be material differences between House and Senate Republicans on what should be in the package.

Therefore, it is indeed possible this Republican effort will fail. However, many political analysts believe the political consequences of failure would be so negative that, with pressure from President Trump, the bill will eventually pass.

Unlike the case with some other issues, there has been no push-back among Republicans on the tax on endowment income, and so if a Reconciliation bill is enacted, this tax is likely to survive in some form, with a big hit to Princeton. Even if the bill fails, the Congress will have to address taxes later this year or the tax cuts from the first Trump Administration will expire, resulting in a massive tax increase. The endowment tax would likely be included in that tax package as it is a significant revenue raiser, which will contribute to offsetting the costs of the Trump tax agenda. However, more time might give universities a chance to mount a more effective lobbying effort to at least lower the tax.

Princetonians for Free Speech has written several articles about the growing target on Princeton’s back for investigations, lawsuits, and further funding cuts from the Trump Administration. Of course, the current major target has been Harvard, and the Administration continues to threaten to put even more penalties on Harvard. For example, recently the head of the Equal Employment Opportunity Commission said the Commission would be investigating Harvard for discrimination in the hiring of faculty. These Administration attacks will spread to other universities, and we fear Princeton has put itself near to top of the target list.

However, this higher tax on endowment income is based solely on the endowment size per student. It makes no differentiation between schools based on the issues the Trump Administration has been raising. Politically, the genesis of this tax is the need to raise revenue to offset tax cuts and most importantly, the general antipathy of Republican politicians and, indeed, much of the public toward universities and particularly the “elite” universities. Some of these universities have been lobbying against this tax for months and made no progress.

Princeton is already planning to cut its budget. The Princeton administration recently sent out a memo asking all its departments and units to plan for budget cuts of up to 10% to be phased in over three years.

While Harvard and others bringing lawsuits to stop some of the Trump Administration’s efforts may have some success in the courts, there is every reason to think the attacks on elite universities, including Princeton, will continue, with significant consequences.