Last week, President Donald Trump’s major domestic policy bill, the “One Big Beautiful Bill Act,” was passed by the U.S. House of Representatives. The bill includes a proposed hike to the federal tax on university endowments to a 14% tax rate — up from 1.4% — on Dartmouth’s endowment returns, according to The New York Times.
While returns on the endowment depend on the performance of Dartmouth’s holdings and the economy in any given year, Wellesley College economics professor Phillip Levine estimated the 14% tax would cost Dartmouth $89 million in an “average” year with 7.5% return, according to the Chronicle of Higher Education.
The proposed 14% rate is based on the value of Dartmouth’s endowment per full-time equivalent student — a measure that combines both part-time and full-time students — which works out to about $1.5 million per student, according to the New York Times. Universities with a higher endowment per student, like Harvard and Yale, would be taxed at 21% under the bill.
According to Dartmouth economics professor Bruce Sacerdote, the brackets in the current proposal do not adjust for inflation. With current inflation rates, he estimated Dartmouth could move from the 14% to the 21% bracket in the next two to four years.
Dartmouth’s endowment consists of funds, largely from donors, that are invested and managed by the College. According to economics professor Eric Zitzewitz, the endowment is intended to fund the College “in perpetuity.”
If signed into law, the proposed tax would affect both day-to-day and long term operations at the College, including financial aid, research and infrastructure projects, according to a new page on the Office of Communications’s website. The College believes the tax rate would “likely” jump to 21%.
“Nearly $2.2 billion of our endowment supports financial aid, making Dartmouth the most affordable college option for families earning up to $125,000,” the webpage reads. “This tax would put that access at risk.”
Another 25% of the endowment funds capital initiatives and infrastructure, providing a “substantial source” of jobs in northern New England. Dartmouth and Dartmouth Health combined have nearly 20,000 employees, according to the webpage.
Educational institutions have historically not paid taxes under the 501(c)(3) nonprofit exemption. In a 2017 spending bill sponsored by Trump, Congress passed a tax on the net investment income of colleges and universities at 1.4%. Dartmouth currently pays around $9 million in federal taxes, in addition to over $8 million to the town of Hanover each year, making it the largest taxpayer in town, according to the College webpage.
“A typical approach these days is to assume your endowment is going to make roughly an 8% return,” Zitzewitz said. “That allows you to withdraw 5% of the endowment each year and still have it rise by a 3% inflation rate.”
Sacerdote said that taxing the return at such a high rate could mean “the endowment will grow less quickly or quite possibly even shrink” if the current spending is maintained.
He added that the tax could be harder to fight in court than other executive-backed actions, like cutting federal grants appropriated by Congress.
“Congress has the right to impose taxes,” he said.
