The Curious Tax Increase in the Republican Tax Plans

The Senate has released provisions of its own version of the tax reform proposal, which it will now have to reconcile with the House version of the bill if it wants to get tax legislation successfully through Congress and to the White House. The Senate proposal diverges from the House's framework in many ways, keeping seven tax brackets, delaying corporate tax cuts until 2019, and keeping some key deductions including those for student loan interest payments and medical expenses.

Yet one of the most curious things about the Senate tax plan is how it matches up with the House version in implementing a tax increase. The new tax would affect a very small portion of the overall economy, but those paying it would include some of the most renowned institutions in the nation. While the idea has some policy merits, it marks a major shift in one key area of tax law.

Hitting colleges and universities where it hurts

The Senate and House proposals would both create a new excise tax that would apply to certain educational institutions. Under current law, most colleges and universities qualify as nonprofits, largely avoiding federal income tax. The new provision would impose a 1.4% excise tax on investment income that private educational institutions earn on their endowments, if they exceed a certain amount relative to the size of their student base. The initial proposal would have set the threshold at $100,000 times the number of full-time students a college or university has, but subsequent changes raised that number to $250,000 per student.

In its current form, the tax won't have a particularly large base, with policymakers estimating that fewer than 100 private schools would be subject to the excise tax provision if it's based on a $250,000 per student number. Among them, though, would be some of the largest educational institutions in the nation, including the Ivy League's Harvard, Yale, and Princeton, along with Stanford and other major private universities. Top liberal arts colleges such as Williams, Amherst, and Middlebury, would also be subject to the provision.

Why go over after education?

It's rare for Republicans to favor tax increases, but the excise tax on educational institutions is an idea that has been discussed in Republican circles for years. The primary policy objection is that nonprofit educational institutions have been able to amass substantial amounts of wealth on a tax-free basis, and the size of endowments has gone up dramatically even as tuition rates continue a steep climb. Harvard, Yale, and Stanford all have endowments of $25 billion or more, and many of the other colleges that the excise tax would hit have $1 billion or more set aside.

Educational institutions have argued that the use of endowment funds is largely defined by the donors who give them money. Many donors want to create legacies that will last generations after they've passed on, and that lends itself to long-term spending from gifts that prevents colleges and universities from matching up current spending with the amount of donations they bring in. Colleges also say that if endowments shrink as a result of a tax, then it will only put more of the burden to fund educational costs on student tuition payments.

A more cynical explanation could stem from politics. Many prominent institutions of higher education are seen as having a liberal bent in their viewpoints, and some politicians have complained about attempts to restrict controversial speakers from speaking at college campuses as being politically motivated rather than being done to prevent hate speech. A tax on those educational institutions comes at a convenient time in that context.

Watch to see where the colleges and university excise tax ends up

There's still plenty more wrangling that will need to happen before a final reconciliation of the House and Senate versions of tax reform proposals will get hammered out, and there's still no guarantee that Republicans will be able to come to a consensus on the package as a whole. Nevertheless, the fact that lawmakers do agree at least on this one provision attacking the endowments of wealthier private colleges and universities suggests that something like the current excise tax could well make it into the final bill. If that happens, it will mark a curious tax increase for a party that has aimed to make this bill all about cutting taxes.

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