The GOP tax bill signed into law by President Donald Trump on Dec. 22 imposes a new tax on roughly 35 of the nation’s wealthiest private colleges, including Pomona College and Claremont McKenna College.
Specifically, it includes a provision for a 1.4 percent tax on previously untaxed earnings generated by investing endowment funds at colleges with at least 500 students and endowments worth at least $500,000 per student.
Pomona’s endowment, worth $1.3 million per student, easily surpases this threshhold. (Pomona is the fifth wealthiest college in the nation by this measure.) CMC’s endowment, worth $581,000 per student, also surpasses the mark. The per-student endowments of Harvey Mudd College ($372,000), Scripps College ($347,000), and Pitzer College ($129,000) all fall below it, making them exempt from the tax.
Pomona is heavily reliant on the investment earnings from its endowment, which fund 45-50 percent of its operating budget. “The $2 billion is not a checking account,” Pomona Treasurer Karen Sisson said. Sisson suggested that people “think of it as a savings account” in which one spends only the interest so that the savings can grow.
She estimated that the tax could cost the college between $1.5 million and $3 million per year. CMC officials did not provide an estimate, but the college will likely have to pay roughly half as much as Pomona.
The imprecise estimates result from the fact that the tax does not apply to assets “used directly” in carrying out a college’s educational purpose, but the IRS has not yet defined which assets qualify as such. “We would argue that everything we use the endowment for is an educational purpose,” Sisson said.
She said Pomona is well-positioned to weather the impact of the tax in the short term. If it falls on the low end, it could be largely absorbed by the college’s $1 million emergency contingency fund. If it falls on the high end or persists into the longer term, it could require modifications to the college’s operating budget.
However, in that scenario, the college would attempt to make cuts “in areas that do not affect the student experience,” Sisson said.
She emphasized that financial aid was a priority of the college and would not be cut. “There would be a lot of other places that the college would look before it would touch one penny of financial aid,” she said.
Faculty and staff salaries are also most likely safe, she said. Instead, the budget might be slimmed by, for instance, delaying renovation of aging facilities by a few years.
At CMC, endowment earnings fund around 30 percent of the operating budget.
In lieu of an interview, CMC President Hiram Chodosh wrote an email to TSL. His statement did not address the potential cuts the college might have to make to accommodate the tax. However, Chodosh did write that the tax “punishes vital contributions that endowments make to our students and their families, including direct support for financial aid, faculty and academic programs, and student-facing services.”
A CMC spokesperson also referenced an opinion column by CMC Trustee Harry McMahon published in The Wall Street Journal, in which McMahon warned that the tax could discourage donations, restrict financial aid, and force tuition hikes at many of the affected colleges.
Chodosh referenced the same ambiguity Sisson identified as to which parts of the endowment were taxable. He wrote that the law “violates tax-exempt principles” that have traditionally shielded educational institutions.
Both Chodosh and Sisson attributed the motivation behind the tax to resentment among the general public against the perceived elitism of wealthy colleges. Karin Johns, a tax policy lobbyist for an association of private colleges that includes all 5Cs, told Politico “it’s really just more of a punishment because they don’t like our sector.”
Pomona’s president, G. Gabrielle Starr, expressed similar views in a statement emailed to students Dec. 1. “I find this seeming devaluation of higher education deeply, deeply troubling,” she wrote. She warned that the tax puts the “ability of colleges as institutions to support our students, faculty, and staff … at risk.”
Former Pomona President David Oxtoby argued against taxing college endowments in a September 2016 column for The Hill. “College endowments are good and necessary investment vehicles that benefit students and the broader public,” he wrote.
Harvey Mudd and Scripps would have been taxed as well under an earlier version of the tax bill that targeted all colleges with endowments above $250,000 per student, but they were spared when the cutoff threshold was raised in the final version. A controversial separate provision taxing tuition waivers for graduate students was also dropped.