The 21 Percent Endowment Tax: How Princeton Avoided the Hit

Princetonians for Free Speech has long warned that Princeton and other universities were likely to be hit with a big increase in the 1.4% tax on endowment income. When the threat materialized during the 2025 legislative session, it sent shockwaves through higher education.

During the drafting of the 2025 Budget Reconciliation bill—a.k.a. the “One Big Beautiful Bill”—the House Ways & Means Committee voted to report out its portion of the legislation. This massive bill contained numerous tax provisions, including a large increase in the tax rate on endowment income. The bill created a tiered tax rate based on an institution’s “student-adjusted” endowment. There were four rates: 1.4%, 7%, 14%, and 21%. The 21% rate applied to schools with an endowment of at least $2 million per student. It is the same as the corporate tax rate.

Initially, Princeton appeared to qualify for the 21%. According to reports at the time, others qualifying for the highest rate were Harvard, Yale, Stanford, and MIT. (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 exact cost to Princeton of such taxes for several reasons, including: the fact that the bill added 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, institutions adjust their investments and the way income is recognized over time to minimize the tax. A very simplistic figure could be generated by taking the University’s endowment, assuming just for this purpose an income of 6 percent, and applying the 21% tax rate. Based on an estimated $34 billion endowment, that would have resulted in an income of $2.04 billion and a tax of $428.4 million.

The anticipated pain to Princeton was 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.

Ultimately, however, Princeton avoided the financial blow. On May 8, 2025, The Daily Princetonian reported that Princeton would not have to pay any net investment income tax on returns from its $36.4 billion endowment. A strategic expansion of its undergraduate financial aid program left the University below the 3,000 tuition-paying student threshold required to qualify for taxation.

Despite Princeton finding a way to navigate the threshold, the legislative battle demonstrated the severe risks facing elite institutions. The Ways & Means bill was combined with equivalent bills from other House committees raising revenue and making budget cuts into the final Reconciliation package. Because it was a Budget Reconciliation bill, it was not subject to a filibuster in the Senate and could pass with just fifty votes (plus the Vice-President). Despite political potholes, material differences between chambers, and fierce negotiations, pressure from President Trump ultimately pushed the legislation forward.

Unlike the case with some other issues, there was virtually no push-back among Republicans on the tax on endowment income. The endowment tax was included as a significant revenue raiser to contribute to offsetting the costs of the Trump tax agenda.

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 primary target has historically been Harvard, with the Administration continuing to threaten to put even more penalties on the school. For example, the head of the Equal Employment Opportunity Commission previously stated the Commission would investigate Harvard for discrimination in the hiring of faculty. These Administration attacks continue to spread to other universities, and we fear Princeton has put itself near the top of the target list.

Politically, the genesis of this tax is the need to raise revenue to offset tax cuts and, most importantly, the general antipathy of politicians and, indeed, much of the public toward universities and particularly the “elite” universities. The higher tax on endowment income was based solely on the endowment size per student; it made no differentiation between schools based on the specific issues the Trump Administration had been raising. Some of these universities lobbied against this tax for months and made no progress.

Anticipating these ongoing financial pressures, Princeton had already been planning to cut its budget. The Princeton administration even 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 political and financial attacks on elite universities, including Princeton, will continue, with significant consequences.

Note: On May 8, 2025 The Daily Princetonian reported that Princeton will not have to pay any net investment income tax on returns from its $36.4 billion endowment, after a recent expansion of its undergraduate financial aid program left the University below a 3,000 tuition-paying student threshold to qualify for taxation.

This article is an updated version of the observations and arguments made by Princetonians for Free Speech in a response to that report.