Universities thrown into turmoil by Trump administration funding cuts are now facing a new and possibly larger threat in the form of tax hikes from the Republican congressional majorities.
Republicans are weighing a major increase in the tax on big university endowments, as well as a raft of other measures to raise revenues from higher education.
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The GOP is motivated to raise taxes on universities because it needs to find revenues to offset the major tax cuts it aims to enact in a sweeping fiscal overhaul. However, higher education is also a prime target because Republicans view it as overrun by left-wing radicalism.
“I love it. We should do it,” Rep. Troy Nehls (R-TX) told the Washington Examiner when asked about raising taxes on college endowments.
The 2017 Tax Cuts and Jobs Act, also known as the Trump tax cuts, imposed an excise tax of 1.4% on the investment income of universities and colleges with endowment assets exceeding $500,000 per student.
Nehls has authored a bill to raise the tax from 1.4% to 21%. He is advocating the measure to be added to the tax bill that Republicans aim to pass through reconciliation, a legislative process that allows bills to bypass the filibuster and pass with only a simple majority in the Senate.
Nehls said raising the tax rate to 21% would bring it in line with the rate paid by for-profit corporations, which was set at 21% by the Trump tax overhaul. The change would raise about $70 billion over the next decade, according to the Tax Foundation, a nonprofit think tank. In its current form, the tax, which hits about 60 schools, has not raised even a billion dollars.
Yet the endowment tax is just one of many threats to universities.
One major possible reform would be to overhaul the treatment of municipal bonds, which are bonds issued by local or state governments. Under current law, interest on municipal bonds is excluded from taxable income, allowing cities and public entities to borrow cheaply.
Institutions of higher education also borrow using municipal bonds and private activity bonds, which can go toward private projects.
A list of options for raising revenues circulated earlier this year by House Budget Committee Chairman Jodey Arrington (R-TX) included ending the exclusion for munis, the shorthand for municipal bonds. That proposal set off alarms among higher education finance professionals.
Liz Clark, the vice president for policy and research for the National Association of College and University Business Officers, said eliminating the exclusion “takes away an arrow in the quiver when you think about the strategic tools that colleges and universities use to keep costs low.”
Higher education institutions issued $34.1 billion in muni bonds in 2024, according to the Municipal Securities Rulemaking Board. They’ve been relying more on debt to finance projects, such as dorms and labs, over the years.
Universities may be able to borrow at rates below 5% by tapping into municipal markets. If they’re earning a higher rate on their endowment earnings, it makes sense for them to borrow rather than take money out of their endowments, said Scott Hodge, a tax expert at Arnold Ventures.
“There is a moral hazard in having a situation where universities can borrow at a very low rate and not be forced to tap into their endowments,” he said. He noted a recent study that found that the average university paid approximately $1,000 per student in interest expenses in 2020, raising costs without improving education.
Tom Reed, a former Republican congressman who was on the Ways and Means Committee in 2017 when the law was drafted, said lawmakers would be looking afresh at all existing tax benefits to find ways to pay for the breaks they want to implement.
“You start looking under that hood — you got some hard explaining to do, like, why are you getting a tax benefit? Because every tax benefit that you get comes out of someone else,” he said.
There are other tax breaks Republicans could limit. For example, the 2017 tax law included two other small tax hikes on universities. One limited tax deduction allowed donors to buy tickets to college sports events. Another placed an excise tax on the salaries of nonprofit employees earning above a million dollars — many of whom are college coaches.
Any number of similar tweaks could raise revenues to offset tax cuts elsewhere prioritized by Republicans, such as making the individual Trump tax cuts permanent or cutting taxes on tips, as President Donald Trump promised.
Beyond any tax policy justification, such reforms would also please Republicans eager to see the power and influence of universities diminished.
For example, Vice President JD Vance has harshly condemned the leftward tilt of higher education. While running for Senate in 2021, he laid out the case against universities in a speech at the National Conservatism Conference.
“There is a wisdom in what Richard Nixon said approximately 40, 50 years ago,” Vance said. “He said, and I quote, ‘The professors are the enemy.’”
The administration’s early actions have reflected that mindset. It has already forced major changes throughout higher education by threatening federal funding that many schools rely on. Most prominently, it has said it would withhold $400 million from Columbia University, accusing the school of facilitating antisemitism. It has paused $175 million in grants to the University of Pennsylvania over its transgender policies. It has also terminated $800 million in U.S. Agency for International Development grants to Johns Hopkins University. That cut resulted in the school announcing 2,000 layoffs.
The cuts and threat of further cuts have sent a chill throughout the industry. Hiring freezes have been implemented at Harvard, MIT, Notre Dame, Penn, Pitt, Emory, the University of Vermont, and the University of California San Diego.
Columbia has scrambled to try to accede to Trump’s requests. Other schools have moved away from liberal policies — the University of California system, for example, stopped requiring the use of diversity statements in hiring.
Christopher Rufo, a Republican activist who encouraged the administration to target diversity, equity, and inclusion programs, as well as gender ideology in higher education, applauded the Trump team’s early actions and encouraged them to do more.
“I voted for dismantling left-wing government agencies and laying siege to left-wing universities,” he wrote on X this month in response to the administration’s actions against Columbia.
Some Republicans, though, are wary about taxing higher education.
“I’ve got a lot of questions about the endowment tax,” Sen. John Kennedy (R-LA) told the Washington Examiner. “How much? Is it on everybody — are we going to punish the bad actors as well as the good actors and the good actors as well as the bad actors? I want to proceed very cautiously on that.”
Clark noted that while the administration has aggressively cut grants to universities, it has steered clear of cutting Pell Grants, which are a major aid to higher education. That is a sign of hope for the sector. Still, she said, “We are in a period of deep uncertainty.”
Reed, in his time, sought to write the law so that colleges could avoid excise taxes by ensuring that a certain share of their earnings went to keeping tuition low. Public opinion has turned against schools, he said, in part because of a sense that they have nickeled and dimed students.
“It’s a reckoning,” Reed said.
