The tax applies to any private college or university that has at least 500 full-time tuition-paying students (more than half of whom are located in the U.S.) and that has assets other than those used in its charitable activities worth at least $500,000 per student. An estimated 40 or fewer institutions are affected.
For affected institutions, the guidance clarifies how to determine net investment income, including how to include the net investment income of related organizations and how to determine an institution’s basis in property.
These proposed regulations incorporate the interim guidance provided in Notice 2018-55, that for property held by an institution at the end of 2017, generally allows the educational institution to use the property’s fair market value at the end of 2017 as its basis for figuring the tax on any resulting gain.
Related: . Ivy League payments and entitlements cost taxpayers $41.59 billion over a six-year period (FY2010-FY2015). This is equivalent to $120,000 in government monies, subsidies, & special tax treatment per undergraduate student, or $6.93 billion per year.
This paper argues that the legislation as enacted is politically motivated and fatally flawed. The “assets per student” ratio that triggers the tax is both over and under-inclusive, and irrelevant and arbitrary as a guide to excessive endowment accumulation. The legislation serves to exempt multi-billion dollar endowments of many universities yet ensnare smaller colleges that may have more limited resources, but the endowment to student ration exceeds $500,000.
The growing income inequality in American society is reflected in the inequality of access to elite schools with billion dollar endowments. While large endowment schools have increased financial aid, the percentage of students from lower income families has remained the same. A student whose parents come from the top one percent of income distribution is 77 times more likely to attend an Ivy League college than one from the bottom income quintile. Among “Ivy League Plus” colleges (the eight Ivy League colleges plus Chicago, Stanford, MIT and Duke), more students come from families in the top 1% of income distribution (14.5%) than the bottom half of the income distribution (13.5%).
Recommended is that the investment income tax be triggered for all billion dollar endowment institutions when the endowment earns $75 million in net investment income ($150 million for public school billion dollar endowments). The endowment per student ratio should be jettisoned. Schools could offset the net income investment tax on a one dollar to one dollar basis by increasing financial assistance to the student body. If the school increases the admission of students from underrepresented constituencies, the tax offset would be two dollars for each dollar spent in expanding the number of such students.