Stanford University’s $27.7 billion endowment will have to pay $42.9 million to satisfy the so-called endowment tax, a 1.4% excise tax that was included in the Tax Cuts and Jobs Act of 2017. It is the first year the tax has been collected, and the university said it will hurt the school’s financial aid.
“Over time, the tax will reduce funds available from the endowment to support financial aid and other essential support for our core academic mission,” Stanford University spokesperson Dee Mostofi wrote in a statement to The Stanford Daily.
“Stanford strongly opposes the tax and is actively working on efforts to repeal or limit the tax.”
The endowment tax, which was introduced into the tax code with the passing of the Tax Cuts and Jobs Act of 2017 levies a 1.4% excise tax on capital gains made by universities with more than 500 students and endowments that have more than $500,000 in assets per student. Stanford is one of an estimated 25 to 30 schools that are expected to have to pay the tax.
Mostofi said Stanford will only pay a portion of its endowment tax bill this July, as the current year tax is only applied to realized capital gains, which are made when the university sells its investments.
“The difference between the $42.9 million and current-year tax will be paid when the unrealized capital gains are eventually realized in future years,” Mostofi said.
Proponents of the tax have said it could encourage universities to direct more money toward making college more affordable for low-income students. However, Mostofi said that “while hampering the charitable mission of higher education institutions, the legislation does not help our country’s students and their families.”
Harvard University, which has an endowment worth approximately $40.9 billion, reported in October that it estimated that it will have to pay nearly $50 million to satisfy the excise tax for fiscal year 2019.
“Less money is now available for the university to maintain financial aid, which totaled $193 million for undergraduates this year,” wrote Thomas Hollister and Paul Finnegan, Harvard’s vice president for finance and treasurer respectively, in Harvard’s annual financial report.
“Uncertainty in federal research funding and the damaging tax on college and university endowments in the Tax Cuts and Jobs Act also have the potential to hinder Harvard’s ability to grow investments in financial aid, teaching, and research across campus,” Harvard University President Lawrence Bacow also wrote in the financial report.
According to think tank the Tax Policy Center, the endowment tax is only expected to generate about $200 million a year, which it said is not a significant amount of revenue for the federal government, but could set a precedent for imposing further taxes on university endowments.