Gaming the Endowment Tax

Abstract

The 2017 law known as the Tax Cuts and Jobs Act (TCJA) enacted a tax on private, non-profit college and university endowments for the first time. Institutions with at least 500 tuition-paying students and endowments of $500,000 or greater per student now have to pay a 1.4% tax on their endowments. But like all taxpayers, colleges and universities may be tax averse or seek reductions in their tax burdens. That is, colleges and universities may try to avoid the tax through taking action to ensure they do not meet the threshold. Such actions include increasing the size of their student bodies, increasing student aid to ensure a small number of tuition-paying students, and spending down their endowments. Colleges may also attempt to offset taxed revenue by increasing other revenue streams. Examples of such behavior include increasing revenue from auxiliary services, admitting more “ full-pay” students who do not need financial aid, reducing financial aid for tuition-paying students (perhaps even while increasing the number of students who receive enough aid to become non-tuition paying), and admitting fewer low-income students. All of this would be economically rational behavior, but it could produce negative effects for higher-education stakeholder groups, such as students and their families.

In this Article, we assess the ramifications of the TCJA’s endowment tax for college and university revenue-seeking behavior. We use a national-level dataset and a quasi-experimental statistical model known as the “Synthetic Control Method,” which is underutilized in legal research, to examine institutional behaviors in the wake of the TCJA’s passage. We find that individual institutions—such as Northwestern University, Duke University and Vassar College, among others—may have changed their admissions, enrollment and revenue-generating behaviors to reduce their overall tax burden, offset losses in revenue or avoid the tax. We suspect that this is evidence of firm behavior to game the endowment tax imposed by the TCJA.