Endowment Tax Provision: Counting Students Is No Easy Feat
After the House of Representatives and Senate passed two versions of a GOP bill to overhaul the tax code, a conference committee released a near-final version last Friday that was passed by the House on Tuesday. The Senate then passed a bill with slight tweaks on Wednesday, necessitating a House re-vote. The House is expected to pass the bill midday Wednesday and the President is expected to sign within the coming days. While some of the controversial measures that would directly impact higher education (like taxing tuition waivers as income) were removed, a 1.4% tax on net investment income at the wealthiest private colleges and universities remains in the conference version of the bill.
The bill explains this tax on endowments tersely. In summary, private higher education institutions are subject to the tax if:
- They have “at least 500 students during the preceding taxable year”
- “More than 50 percent of the students of which are located in the United States”
- Their “aggregate fair market value of the assets of which at the end of the preceding taxable year (other than those assets which are used directly in carrying out the institution’s exempt purpose) is at least $500,000 per student of the institution”
Reading the tax provision, we were immediately struck by its ambiguity and hypothesized that some institutions may or may not qualify for the tax depending on how those responsible for implementing it interpret the definitions of students and assets.
For instance, one way to count the number of students is by using full-time enrollment, which does not account for part-time students. The Chronicle of Higher Education used this measure in its analysis and found 27 institutions that would qualify for the tax. However, the bill offers additional guidance on how to count students: “the number of students of an institution shall be based on the daily average number of full-time students attending such institution (with part-time students taken into account on a full-time student equivalent basis).” This is known as full-time equivalent enrollment (FTE).
Following the guidelines of the provision closely, we conducted our own analysis using the most recent year of data on 12-month FTE (2015-16) and the value of endowment assets at the end of the preceding fiscal year (FY 2015, which covers the 2014-15 academic year; the Chronicle used the value of endowment assets at the beginning of FY 2015), both of which can be found on the IPEDS Data Center. We found in our analysis 28 institutions that would qualify for the tax regardless of the student enrollment measure used. Notably, we found five institutions that qualify if full-time enrollment is used and are included in the Chronicle’s list but do not qualify if FTE is used. These institutions are:
|Endowment||Full-time Enrollment (Fall 2015)||12-Month FTE (2015-16)||Endowment/Full-Time Enrollment||Endowment/12-Month FTE|
|Bryn Mawr College||$867,728,000||1,616||1,748||$536,960.4||$496,411.9|
|University of Chicago||$6,553,570,933||12,980||14,492||$504,897.6||$452,219.9|
|Washington University in St Louis||$6,889,230,000||12,664||14,353||$544,001.1||$479,985.4|
As you can see from the table above, for each of these five schools, FTE is larger than full-time enrollment, therefore lowering their endowment per student under the $500,000 threshold.
Even if we are to assume that FTE should be used to count the number of students, questions remain. First of all, FTE may be different based on when in a school year an institution reports. IPEDS collects both fall FTE and 12-month FTE, but it’s unclear which method the provision recommends. Secondly, of the 28 institutions that would qualify for the tax regardless of the student enrollment measure used, five enroll only graduate students: Baylor School of Medicine, Icahn School of Medicine at Mount Sinai, Medical College of Wisconsin, Princeton Theological Seminary, and Weill Cornell Medical College. While IPEDS defines them as institutions distinct from their main campuses, they may not consider themselves as such. Indeed, as Inside Higher Ed pointed out earlier this week, Cornell University has already argued that “units in New York City including the medical college count toward the university’s single endowment,” making them ineligible for the tax as a separate entity.
There are also schools that are on the margins of having 500 students per year. For example, Principia College had 476 FTE students in 2015-16 and an endowment per student well above the threshold, meaning that an additional 24 FTE students would qualify them for the tax. Some fear that this may incentivize institutions below the threshold to not increase enrollment, or incentivize those above the threshold to decrease their enrollment. As for the clause about 50 percent of students being located in the United States, it is unclear what may have motivated this inclusion, as no potentially eligible institution even comes close to being exempt for this reason.
The text of the bill related to asset measures also sparks numerous questions that would be important to understand in advance of implementation. The 1.4 percent tax is on net investment income, commonly returned to as the “endowment return.” While institutions are reporting strong returns for fiscal year 2017, many institutions had negative returns in fiscal year 2016, such as Harvard (-1.9%) and Swarthmore (-1.6%). Other institutions, while not posting negative returns, posted very small returns, such as Princeton (0.8%) and MIT (0.8%). Institutions are typically only able to spend their endowment income each year, while the initial principal remains untouched. Eligibility for the tax is not tied to endowment performance, begging the question of how an institution will be treated when it doesn’t have a positive net return.
It is also worth noting that the House initially passed this bill with an additional stipulation in the above provision: an institution must have at least 500 students that are “tuition-paying.” But, after review of the bill, the Senate parliamentarian determined that “tuition-paying” violates the Byrd Rule, and so it was struck from the bill. As noted by Cappy Hill, managing director of Ithaka S+R, “tuition-paying” was included, at least in part, to exempt Berea College from the tax, which meets the other criteria laid out by the bill (its endowment per student is well above $600,000 and its enrollment is more than 1,500 students) but does not charge tuition. Now that “tuition-paying” is not specified, Berea College, a school that primarily serves low-income students, will be subject to the tax.
Beyond these issues related to students and net investment income, there is also room for varied interpretation regarding what an institution might include when measuring its assets and what time period the tax refers to, both of which can impact whether an institution qualifies for the tax. The nuance of something as small as defining a student highlights the need to leave ample time to review and to engage all relevant stakeholders and experts. If the bill does pass, the discussion above is a starting point for the illumination needed surrounding this tax provision.
 Amherst College, Baylor College of Medicine, Berea College, Bowdoin College, California Institute of Technology, Claremont McKenna College, Copper Union for the Advancement of Science and Art, Dartmouth College, Grinnell College, Harvard University, Icahn School of Medicine at Mount Sinai, Massachusetts Institute of Technology, Medical College of Wisconsin, Pomona College, Princeton Theological Seminary, Princeton University, Rice University, Smith College, Stanford University, Swarthmore College, The Julliard School, University of Notre Dame, University of Richmond, Washington and Lee University, Weill Cornell Medical College, Wellesley College, Williams College, and Yale University.
 These five institutions are not included in the Chronicle’s list.