An Endowment Tax Alternative
Estimating the Impact of a Five Percent Spend Policy
Currently, a set of the country’s wealthiest colleges and universities is subject to a 1.4 percent tax on net investment earnings. Over the past few months, several legislative proposals have taken aim at significantly increasing this tax, known colloquially as the “endowment tax.” The latest version, which was included in the reconciliation bill passed by the House in late May, includes a graduated rate structure that goes up to a 21 percent tax, depending on the size of the endowment (adjusted for the number of students).
Since the initial tax was passed in 2017, many colleges and universities subject to it have lobbied Congress to reduce or eliminate the burden. With renewed vigor given the new proposal, a set of these institutions, known as the Learn Alliance, is now pushing for a plan that, in lieu of the dramatic tax increases, would require them to spend 5 percent of their endowment’s value each year.
As we’ve written about previously, given that the stated goal of the tax is to encourage institutions to lower their prices and offer more generous financial aid, policy alternatives like a spending requirement would be better suited to changing institutional behavior in line with the stated goals. Earlier this month, The Wall Street Journal asked if we could estimate how much more money a 5 percent minimum endowment spend would represent. To estimate, we took a look at 12 undergraduate-serving institutions with the highest endowments per student.[1]
We used “Form 990, Schedule D” data, which are public record and include financial details like revenues, expenses, and assets, for our estimate.[2] The latest data available are from the fiscal year ending June 2023 (FY 2023), so we focused on that year but also looked at five additional prior years for comparison. We divide reported endowment-source spending on grants and scholarships, facilities, programs, and administrative expenses by the value of the endowment at the beginning of the fiscal year to calculate a spending rate.[3]
What did we find? In most years, most institutions distribute less than 5 percent of their endowment. In FY 2023, the average calculated spend was 4.55 percent (range: 3.7 percent to 5.73 percent). These endowments are incredibly large in value, so even a small percentage increase in spending represents a lot of money. If the institutions spending less than 5 percent in FY 2023 raised their spending to 5 percent, overall spending by these 12 institutions would have been nearly $1.5 billion higher.
Endowment spend rates do vary year to year, partially in response to the endowment’s investment return and to the broader financial context of the institution. For example, the average spend rate in FY 2021 was 5.16 percent (range: 4.19 percent to 6.88 percent), likely attributable to the impacts of Covid on institutional finances. This year-to-year variation is by design, as institutions look to smooth their spending to protect operating budgets from financial market variability.
We also did our calculations using the three year average of an institution’s endowment and similarly found that institutions were not spending 5 percent, although were closer (average spend 4.8 percent, $950 million in additional spending). All in all, it’s likely that this policy would have a sizable impact on institutional spending, help to counter the narrative that institutions unnecessarily stockpile assets, and ensure that more dollars are directed toward students.
Table 1: Summary Information
| Institution | FY23 Spend Rate | Additional Spend if 5 Percent |
|---|---|---|
| Amherst | 5.41% | $ (15,383,860) |
| Caltech | 5.73% | $ (24,889,850) |
| Grinnell | 3.85% | $ 28,603,031 |
| Harvard | 3.70% | $ 642,557,500 |
| Juilliard | 4.98% | $ 322,312 |
| MIT | 4.63% | $ 90,716,100 |
| Pomona | 3.88% | $ 30,834,061 |
| Princeton | 4.59% | $ 143,754,850 |
| Stanford | 4.78% | $ 80,593,700 |
| Swarthmore | 4.36% | $ 17,376,900 |
| Williams | 4.72% | $ 9,295,394 |
| Yale | 3.93% | $ 443,763,214 |
| Average = 4.55% | Total Additional: $1,487,817,062 |
You can click here to download our full dataset in Excel format.
[1] The 12 institutions included in our analysis are: Amherst College, California Institute of Technology, Grinnell College, Harvard University, The Juilliard School, Massachusetts Institute of Technology, Pomona College, Princeton University, Stanford University, Swarthmore College, Williams College, and Yale University. These institutions were identified based on analysis published by the Chronicle of Higher Education.
[2] Source: ProPublica Nonprofit Explorer, https://projects.propublica.org/nonprofits/organizations.
[3] There are other possible methodologies for calculating percentage spend. For example, the required spending rate could be calculated using an average balance over one or more years or may be lagged to earlier fiscal years.