Republicans Craft Tax Hike for Harvard and Yale

The GOP should be thinking up ways to cut taxes, not raise them.

House Republicans are plotting a $1.7 billion tax increase aimed at America's most elite colleges and universities.

The tax increase is buried on page 879 of Rep. Dave Camp's (R-Mich.) 979-page tax reform bill. The bill is considered unlikely to become law, but Camp is chairman of the powerful, tax-writing Ways and Means Committee, and his draft legislation is likely to provide a road map for tax reformers in years ahead.

The tax, as outlined in Section 5206 of the legislation, is called an "excise tax based on investment income of private colleges and universities." It begins, "there is hereby imposed on each applicable institution for the taxable year an excise tax equal to 1 percent of the net investment income of such institution for the taxable year."

The draft legislation goes on to make clear that the proposed new tax would apply only to private colleges and universities, not state colleges or universities. So Harvard's $32 billion endowment would be fair game for the tax collector, but the University of Texas's $20 billion endowment would remain tax exempt. The proposed tax would also only applies to the richest of the private colleges — those with endowments of at least $100,000 per full time student. That would exempt private colleges such as Georgetown or George Washington University, which are reportedly not as well endowed on a per student basis.

Even with those carve-outs, however, the tax adds up. The Joint Committee on Taxation estimates that the tax would raise $1.7 billion over the decade from 2014 to 2023. Harvard alone would pay roughly $30 million in tax for a single year in which a $30 billion endowment earned a ten percent return. Yale would pay a $20 million federal tax for a year in which its roughly $20 billion endowment earned a 10 percent return.

The colleges, naturally, don't like the idea. The vice president for federal relations at the Association of American Universities, M. Matthew Owens, told InsideHigherEd.com that the provisions were "concerning" and "troubling."

Camp, for his part, makes the case that he's just giving the college endowments the same treatment as big private foundations such as the Ford or Gates Foundations. Those foundations have to pay a two percent excise tax on their endowment income that can be reduced to one percent if they make grants above a certain minimum threshold.

Even so, it's easy to think of motives here beyond policy consistency. If policy consistency were the only motive, after all, Republicans would be trying to reduce taxes rather than dreaming up new ones.

Might it have just something to do with the overwhelmingly Democratic-leaning party registration and political contributions on these sorts of college campuses, or the fact that they exist largely in Democrat-leaning states? Camp represents Michigan and is a graduate of Albion College and of the University of San Diego School of Law.

The idea of a tax on university endowments has attracted support from a variety of somewhat surprising quarters. A senior fellow at the center-right Manhattan Institute, James Manzi, has written supportively about the proposal for National Review Online: "Viewed purely in terms of economics, Harvard is really a $40 billion tax-free hedge fund with a very large marketing and PR arm called Harvard University that has the job of raising the investment capital and protecting the fund's preferential tax treatment." The left-leaning Reuters blogger Felix Salmon has also written positively about the idea.

I'd prefer the politicians in Washington spend their time figuring out taxes to repeal, rather than inventing new ones to impose. I also cringe at the idea of a tax designed to punish a party's political opponents. But for conservatives who are tired of hearing President Obama drone on about how he just wants to "ask" the "rich" to pay a little more to help fund food stamps, ObamaCare, universal pre-school, or whatever the under-attack help-the-poor program of the day is, one can understand the attractiveness of coming back with a proposal to tax Harvard, Yale, and Princeton.

With his bill, Camp is making the point that the higher education sector has its own one percent, and turnabout is fair play. Nice endowment you've got there, the Republicans seem to be saying: It'd be too bad if we have to redistribute it.