Washington and Lee University, home to one of the country’s largest per-student endowments, would see its investment returns taxed under the tax bills passed by the U.S. House and Senate.
Other private college endowments in Virginia, including Hollins University’s, could be taxed too under one or both version of the bills, which impose the 1.4 percent excise tax at different thresholds. Those differences and others will be worked out in conference this month; a joint bill is expected by Christmas.
Higher education officials warn the legislation as written would have dire consequences for students, leading potentially to tuition increases, scholarship decreases and staff cuts. They’ve lobbied to remove the provisions taxing endowments entirely or amend them to blunt the impact.
“Taxing endowments that provide real money to support students is a terrible idea,” Washington and Lee President Will Dudley said. “It hurts students and families.”
College endowments have been targeted for some time by both conservatives and liberals, who have contended that many universities have allowed the money to accumulate rather than using investment income to benefit students.
Dudley and other administrators argue there are better ways Congress could check such practices, such as requiring colleges spend a percentage of investments yearly.
The House tax bill’s initial version proposed taxing private colleges with at least 500 students and endowments valued at $100,000 or more per student, and then raised the threshold to $250,000.
The Chronicle of Higher Education estimated that higher amount could affect about 61 colleges, including four in Virginia: Hollins University, Randolph College, the University of Richmond and Washington and Lee.
The Senate version raised the threshold even higher, to $500,000. In Virginia, only the University of Richmond and Washington and Lee have endowment-to-student ratios high enough to qualify at that level. They’re among an estimated 27 colleges nationwide that would be affected, the Chronicle estimated.
Public college endowments would not be taxed under either proposal.
Hollins officials were encouraged to see its name fall off the list under the Senate version, said Kerry Edmonds, the university’s vice president for finance and administration. However, she said concerns remain that the final bill’s threshold would include them.
Hollins’ endowment was valued at $182.2 million at the end of June and the university has about 800 students, 650 of whom are undergraduates. Neither proposal specifies whether all students or just undergraduates would count toward the per-student calculation.
Just counting undergraduate students, Hollins would surpass the House’s $250,000 threshold. With graduate students included, Hollins wouldn’t meet that threshold, but it would be close.
Under that scenario, Edmonds said, the tax bill would be a disincentive for Hollins to increase its endowment and risk the 1.4 percent tax — estimated at about $300,000, based on its returns this year.
“It puts us right there at the threshold,” Edmonds said.
Randolph College would similarly fall close-to-but-below the threshold, with an endowment valued at $148 million last year and close to 700 students, almost all of whom are undergraduates.
Washington and Lee’s endowment, valued at $1.55 billion as of June, would be taxed under both proposals. Its tax this year would be about $700,000, based on the fund’s most recent returns. W&L has 2,160 students, about 15 percent of whom are graduate students.
“To put that in perspective, that’s 14 full tuition scholarships or six faculty positions or 100 student internships, so it’s a significant hit to the budget,” Dudley said.
The University of Richmond, with about 4,200 students and an endowment valued at $2.4 billion as of June, normally would meet the criteria under both bills to be taxed, also. Yet the university would have avoided a tax this year because its investments posted a loss, according to an auditor’s report.
Such investment losses are hard to anticipate and would make it difficult for colleges to plan budgets, many of which include money spent from endowments, Edmonds said. About 37 percent of Hollins’ budget comes from the endowment; at W&L it’s 40 percent of the university’s budget.
Both Hollins and Washington and Lee have increased their endowments significantly in recent years. The goal, Dudley and Edmonds said, was to make the universities less tuition-dependent. Its large endowment is what allows W&L to offer full tuition scholarships to students whose families have incomes less than $75,000, Dudley said.
“I think there is a misperception that universities with endowments are just irresponsibly sitting on piles of money that we’re actually putting to work to support students,” he said. “They exist to support students not just today but for the next 10, 50, 100 years.”
Most of an endowment’s funds must be left untouched in order to continue seeing returns, but colleges can “responsibly” spend about 5 percent each year, Dudley said.
Washington and Lee spends 5 percent of its endowment each year, while Hollins spends closer to 7 percent. Edmonds said Hollins backs the idea of a required spending percentage, too.
“That’s a better use of those funds than an excise tax,” she said.
Both W&L and Hollins officials have lobbied legislators, including Virginia Sens. Tim Kaine and Mark Warner and 6th District Rep. Bob Goodlatte, a Washington and Lee law graduate whose district includes both universities.
Goodlatte, who voted for the tax bill, said in a statement that he has relayed those concerns to the conference committee.
“Properly done, a tax could incentivize more capital being dedicated to reducing the cost of tuition and the amount of student loans that students have to bear and the federal taxpayers have to guarantee,” Goodlatte said.
Dudley and Edmonds said their lobbying efforts would continue as Congress works to reconcile the two bills. The colleges have asked alumni living in other states to lobby their representatives, too.
Edmonds said she hopes universities can successfully fight the proposal.
“I don’t know that [Congress] fully understood and appreciated the direct impact it was going to have on institutions and being able to meet their mission,” she said.