Middlebury Dodges GOP Bill’s Endowment Tax


On Dec. 22, President Donald Trump signed into law a significant and controversial overhaul of the nation’s tax system, featuring large cuts for corporations and wealthy taxpayers. The legislation was passed by the Republican-controlled Congress despite opposition from large universities and small colleges alike, due to provisions that may significantly disadvantage some institutions of higher education.

Most glaring among the clauses affecting colleges is a 1.4 percent excise tax on endowment returns at private colleges which enroll at least 500 students, and whose endowment assets are valued at $500,000 per full time student. The endowment threshold initially sat at $100,000, encompassing scores of colleges, before being revised to $250,000 and finally bumped up to its current state in the final bill. As it stands, about 35 schools are likely to be affected by the endowment tax in 2018.

Middlebury, whose endowment per student averages $330,000-340,000, narrowly escapes the margin of taxability. However, given its current $1.073 billion endowment and a 10-year annualized return rate of 6.3 percent Middlebury may become subject to the tax within the next three years if its total enrollment remains around 2,500.

College treasurer David Provost estimates that if the tax had been levied against Middlebury in 2017, it would have reduced Middlebury’s annual investment income by up to $600,000. 

The colleges expected to be newly taxed in 2018 range from Ivy League schools like Harvard and Princeton to NESCAC colleges including Amherst and Bowdoin. The new endowment tax may prove to be damaging to college initiatives such as research funding and financial aid. Harvard, for example, estimates that if the reforms had been law in 2017, it would have been required to pay $43 million to the federal government.

Large research institutions are not the only victims of the new tax. Some small colleges are especially disadvantaged, as much of their endowment revenue is funneled toward financial aid. Debby Kuenstner, the Chief Investment Officer at Wellesley, stated in 2009 that that a third of Wellesley’s endowment income goes toward scholarships.

Berea College, a small liberal arts college in Kentucky, is dealt a particularly devastating blow in regard to their financial aid program. Every year, 1,600 students receive a tuition-free education from Berea, whose $1 billion endowment covers all costs. However, with the new tax in place, Berea could face a significant financial obstacle, challenging its tuition-free system. 

Although Middlebury will not face this new tax in 2018, other provisions in the GOP tax plan may harm the college’s finances. According to Provost, Middlebury previously took advantage of advance refunding of tax exempt debt, which saved the college millions of dollars in past years as a result of lower interest rates.  This option will no longer be available to Middlebury. 

In addition, changes to personal deductions may lower taxpayers’ incentive to make charitable donations. “Less people will itemize their deductions with the increase in the personal exemption. We are unsure if this will impact charitable giving to the college, but it could,” Provost said. “Time will tell.”