Endowment tax

Endowment tax is the taxation of financial endowments in the United States. Previous to 2018, these endowments were not taxed due to their charitable, educational, or religious mission. Endowments can be up to several billion dollars at some universities, some charitable foundations, and some medical foundations. Several institutions have endowment/student ratio of >$1M. It is these endowments that are targeted. Peer universities such as Oxford University and Cambridge University are not subject to endowment taxes, giving them a competitive advantage for student retention and research.

Endowment taxation

Unlike nonprofit corporations classified as a public charity, private foundations in the United States are generally subject to a 1% or 2% excise tax on any net investment income. As enacted in the Tax Cuts and Jobs Act of 2017 and amended by the Bipartisan Budget Act of 2018, an excise tax of 1.4% on endowment income is levied on universities that have at least 500 tuition-paying students and net assets of at least $500,000 per student. The $500,000 is not adjusted for inflation, so the threshold is effectively lowered over time. The 2018 endowment tax impacted the 53 wealthiest schools. It was in line with what most other philanthropic charities pay in excise taxes.

Proposed changes in 2026

The endowment tax will be expanded in 2026. The tax would be more aggressive. Again, it is levied on endowment income plus royalties, etc. The level of taxation will be tiered, based on the endowment/student ratio.

8% rate at schools with ≥$2M/student, which would apply to Harvard, Stanford, Princeton, Yale and MIT.
4% rate for schools with $750,000 to $2M/student, which would apply to Rice University, University of Notre Dame, Dartmouth College, and others
1.4% rate for schools with $500,000 to $750,000/student

The 2026 legislation would apply to private institutions with > 3,000 students. Only U.S. students count. Some of the most strongly affected institutions are:

Institution	Enrollment<	Endowment per student	-
Princeton University	9,079	$3,750,669	-
Yale University	15,269	$2,714,107	-
Stanford University	17,623	$2,135,335	-
Harvard University	24,357	$2,133,974	-
Massachusetts Institute of Technology	11,777	$2,086,500	-
University of Notre Dame	12,785	$1,399,873	-
Dartmouth College	6,700	$1,234,823

The first five institutions each would pay hundreds of millions each in additional taxes according to the 2026 law.

Criticism

The endowment tax provision of the Tax Cuts and Jobs Act was criticized as funding tax breaks for corporations and the wealthy at the expense of education. The more aggressive 2025 tax has been described as a "scholarship tax.” Donald Trump has not mentioned any benefit to the United States educational system from endowment taxes.