[Advocacy Update] Congress Renews Focus on Tax-Exempt Status of College Endowments

Posted by Perry Wasserman on Oct 14, 2016 9:37:35 AM

Key federal lawmakers are continuing to focus their attention on college and university endowments, particularly those endowments exceeding $1 billion in value.  Last month, for example, the Ways & Means Oversight Subcommittee held a hearing which examined rising college costs and how some colleges and universities are using their endowments to fulfill their charitable missions. 

At this most recent hearing, however, some witnesses took issue with the tax-exempt status of college and university endowments given rising tuition costs.  One such witness, Dr. Mark Schneider of the American Institutes for Research, said “Congress has granted tax-exempt status to these endowments to serve the public interest, but because so much wealth is now concentrated in so few hands [at the universities with the biggest endowments], there are questions about the extent to which the public interest is in fact being served by the distribution of these endowments.”  Dr. Schneider presented researched that purports to show the endowment tax exemption does not necessarily ensure taxpayer dollars are going toward the students most in need: “The unequal distribution of endowment wealth and the unequal enrollment of Pell Grant recipients leads to a pattern where more affluent students attending richer universities get far more money from the taxpayer than the students attending public institutions.”  Dr. Schneider called for more transparency in tax forms filled out by colleges and a tax of up to two percent on the richest school endowments.

Several members on the Subcommittee echoed Dr. Schneider’s concerns and vowed to continue to examine the tax-exempt status of colleges and university endowments in the next Congressional session.  One of these members, Representative Tom Reed (R-NY), has indicated he will introduce legislation that would require certain endowments to spend a fixed percentage of investment earnings on financial aid as a condition of tax-exempt status.  Representative Reed has also said he’s interested in exploring what he terms “abusive practices” related to college endowments, such as donors receiving benefits like preferential treatment of seats at sporting events. 

This latest hearing, and several others like it, come on the heels of a joint inquiry from the Senate Finance and House Ways & Means Committees to the wealthiest 56 private colleges about their endowments.  This inquiry included questions about financial aid, donations, investment returns, and the cost to manage the funds.  Colleges that received these letters from the two tax-writing committees largely defended their endowments, explaining that they must abide by gift agreements with donors and are unable to redirect funds.

Congressional interest in the area of college endowments is nothing new.  Last year, Dave Camp, former chairman of the House Ways & Means Committee, proposed a one percent excise tax on the net investment income of universities with endowments that have at least $100,000 per student.  Even as early as 2007, Senator Charles Grassley (R-IA), former chairman of the Senate Finance Committee, expressed concern with growing endowments and raised the idea of a mandatory five percent annual payout requirement.

Topics: Advocacy