Endowment Tax Hits Harvard's Investment Strategy
Dean says university will refrain from making long-term commitments due to 1.4% excise tax.
The new endowment tax that was included as part of the Tax Cuts and Jobs Act is already cutting into Harvard’s long-term investment strategy, said the university’s dean of the faculty of arts and sciences.
“It will have an impact on us,” said Michael Smith, according to The Harvard Crimson. “It is taking money we could’ve used for academic programs, could’ve used for financial aid, could’ve used for a bunch of other things we try to accomplish here.”
The 1.4% excise tax is being levied on the net investment income of private colleges and universities with an endowment greater than $500,000 per student. Harvard’s administrators estimated that the tax would have cost the university $43 million if it had applied to fiscal year 2017.
“I just don’t know how big of an impact this is going to be and how badly it’s going to hit us,” said Smith. “So we’re trying to do things in the short term to continue to innovate and push our programs forward. If you came in and asked me to commit a whole bunch of money for the next 10 years, I’d say, ‘come back and talk to me in six months.’”
In December, Harvard University President Drew Faust said the tax “will constrain the resources that enable us to provide the financial aid that makes college more affordable and accessible.”
Harvard isn’t as fortunate as Kentucky’s Berea College, which had also been subject to the endowment tax. Berea is a liberal arts work college, with an endowment over $1 billion, and 1,600 undergraduates who don’t pay tuition, but work on campus to help pay their way. The school would have had to pay approximately $1 million a year, until US Senate Majority Leader Mitch McConnell of Kentucky came to its rescue. McConnell was successful in securing a provision to protect Berea College in the Bipartisan Budget Act.
The provision states that the excise tax on investment income of private colleges and universities is limited to institutions with at least 500 tuition-paying students. Because Berea’s students don’t pay tuition, the school is no longer subject to the tax.