Endowment Excise Taxes: Strategies to Help with Proposed Tax Hikes

The financial future of colleges and universities could be dramatically altered by new and proposed federal policies, notably proposed changes to the endowment excise tax.

The endowment excise tax, under Internal Revenue Code (IRC) 4968, is a federal tax imposed on private colleges and universities with substantial endowment funds. Established in 2017 under the Tax Cuts and Jobs Act, the tax is aimed at institutions possessing endowments exceeding a certain threshold.

Current state of the endowment excise tax

Presently, the endowment excise tax requires private colleges and universities with more than 500 tuition-paying students and assets in excess of $500,000 per student (excluding assets used in carrying out the institutions exempt purpose), to pay a 1.4% excise tax on their net investment income. This tax currently impacts approximately 50 to 60 institutions nationwide and primarily impacts wealthier schools such as Ivy League universities and other elite institutions with large endowments.

Proposed changes to the endowment excise taxes

Recent legislative proposals seek to expand the tax scope and modify its rate. This expanded scope would increase the number of institutions subject to the tax.

Proposed Change	Description
Tax rate modification	Altering the tax rate from 1.4% to a higher percentage or implementing a graduated tax rate system based on endowment size. Proposed rates range from 10 – 21%.
Lower eligibility threshold	Reducing the threshold from $500,000 per student to $200,000 per student would impact more than 100 colleges and universities.

Impacts on colleges and universities

The endowment excise tax and its proposed changes present significant implications for colleges and universities across four areas:

1. Financial management

For institutions subject to the endowment excise tax, having to pay a portion of investment income reduces funds available for other purposes. This necessitates careful financial planning and may compel you to reconsider investment strategies to mitigate the tax impact. Proposed changes expanding the tax’s scope or rate could further strain your financial resources.

2. Resource allocation

Allocating funds for tax payments may affect your ability to support scholarships, faculty salaries, research initiatives, and campus improvements. Institutions may need to balance financial commitments to comply with the tax while maintaining educational missions and priorities. Proposed changes could exacerbate these challenges, leading to difficult decisions about resource allocation.

3. Investment decisions

With changes in U.S. tax law brought about by the 2017 tax reform legislation, many higher education institutions analyzed whether using an alternative investment vehicle or corporate blockers should play a part in their overall investment strategy. Unrelated business income is taxed at 21% and the endowment excise tax at 1.4%, so a blocker seemingly may have been a good option.

With proposed changes to the excise tax rate, universities may look to reshape investment holdings and assess whether having unrelated business income from investments or paying excise tax on net investment income produces less tax liability.

4. Institutional priorities

The endowment excise tax prompts institutions to evaluate spending decisions and consider how to use endowment funds to fulfill educational and community responsibilities. Some institutions may increase philanthropic activities — such as expanding financial aid programs or investing in community outreach initiatives — to demonstrate their commitment to public benefit. Proposed changes may intensify this focus, encouraging universities to align financial strategies more closely with societal needs.

How higher education institutions can prepare

You can take several proactive steps to prepare for potential changes:

Financial modeling and scenario planning

• Simulate impacts of tax rate changes (10%, 14%, 21%)
• Model impact on budgets, long-term growth, and net investment income
• Identify tipping points where cuts or shifts are required

Review endowment spending policies

• Adjust drawdown formulas
• Preserve capital where needed

Analyze student aid structures

• Review student aid mix
• Track tuition-paying student ratios under IRS rules

Strengthen donor communication

• Update donors on implications of endowment excise taxes
• Encourage restricted or program-specific gifts for diversification

Evaluate investment strategy

• Reassess portfolio strategies to reduce tax exposure
• Assess net returns after potential excise taxes and/or unrelated business income

How CLA can help with endowment excise taxes

Proposed changes to the current endowment excise tax could create a major financial shift in for private colleges and universities with substantial endowments. While its current implementation affects a relatively small number of institutions, the proposed changes could broaden its impact, alter the tax rate, or both.

CLA can help you navigate the challenges and opportunities presented. Ask us how we can assist with financial modeling and scenario planning, digital services to streamline and better leverage data, and strategic tax planning.

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