Republican lawmakers are pushing to increase endowment taxes for U.S. universities, proposing a new tiered system that could cost elite colleges hundreds of millions of dollars each year.
But the proposal includes language carving out exceptions for most religious schools, exempting them from the higher costs.
The tax increases are part of President Donald Trump’s larger tax reconciliation package making its way through Congress. The package, officially the “One Big Beautiful Bill,” would implement policies ranging from border security to energy production.
It would also incorporate major tax provisions, including a tax increase on college endowments intended to crack down on “woke, elite universities” that Republicans claim “abuse generous benefits provided through the tax code.”
What are endowments and how would this bill affect colleges?
The tax portion of Trump’s “big beautiful bill” would establish a tiered system implementing new taxes based on schools’ student-adjusted endowments.
Endowment funds are made up of donations to support a college or university and generate financial returns. The funds are typically managed by the school so they can dole out portions of the endowment in annual payments.
Endowments, which are considered investment income, go toward financial aid and scholarships, faculty salaries, research funding, academic programs, and more. The funds can be restricted by donors who want the money to go toward specific projects, or colleges can have unrestricted endowments to be used for any purpose.
Endowment taxes are primarily applied to private colleges and universities with an enrollment of at least 500 students and exceeding $500,000 per student. Under current law, those schools are subject to a 1.4% tax on their investment income.
However, the new system would implement different tax amounts for schools based on their student-adjusted endowment, meaning the monetary amount per student.
For schools with endowment values of $500,000 to $749,000 per student, the university would maintain the current rate of 1.4%. But for schools with endowment values of $750,000 to $1,249,999 per student, schools would face a 7% tax rate.
Schools with endowment values of $1.25 million to $1.9 million would face a 14% tax rate, and schools above $2 million per student would face a 21% tax rate.
Endowment taxes would exempt religious schools
The new system has a number of exceptions to determine which schools would be subject to the tax increases, laying out guidelines based on religious affiliations as well as international student populations.
The biggest carveout tucked into the tax package is for religious universities, leaving them mostly exempt from the tax increase. However, those schools must meet certain criteria to apply.
The package outlines specific requirements to be considered a religious university, noting the school must have been “established or in association with and has continuously maintained an affiliation” with a recognized religious organization and must maintain “a published institutional mission that is approved by the governing body of such institution and that includes, refers to, or is predicated upon religious tenets, beliefs, or teachings.”
The bill also states that colleges and universities are exempt from the endowment taxes if they were founded after July 4, 1776, and meet “certain requirements related to being a qualified religious institution.”
The founding date requirement targets only a handful of schools that were founded before the American Revolution such as Harvard, Columbia and Yale. Trump has repeatedly gone after Ivy League Schools since being reelected, most recently attempting to halt all federal funding to Harvard.
Republicans have largely backed these efforts, arguing the new endowment tax system would prevent schools from operating “like major corporations and other tax-exempt entities.”
Are all religious universities exempt?
While the package carves out exemptions for religious colleges and universities, some schools have expressed concerns the specific requirements could disqualify their institutions.
Most religious schools founded after the required date have a tie to a specific denomination. However, for those that are considered nondenominational, questions arise about whether they will be subject to the higher taxes.
For example, Hillsdale College in Michigan is officially considered a nondenominational university despite being founded by the Freewill Baptists in 1844. While the school has long declined to accept federal money, it utilizes endowments to pay for scholarships and faculty salaries funded by private donors.
The school has not said whether it believes it will be exempt from the increased taxes. But top college officials have warned the new system penalizes schools, such as Hillsdale, for operating independently from the federal government while leaving public universities funded by taxpayer dollars largely untouched.
“This is not merely bad policy. It is a profound inversion of the American idea,” Larry P. Arnn, president of Hillsdale College, wrote in an opinion piece for the City Journal. “The resources entrusted to Hillsdale College are not drawn from the public treasury. They are given freely by those who believe in our mission. To tax these gifts is to tax philanthropy itself — to burden those who would lift burdens. It is to weaken those who do good precisely because they are free to do it.”
Tax system could face legal challenges
Aside from challenges about what constitutes a religious university, other legal challenges could arise from the proposed tax increases.
Some opponents have argued the exemption shows favor for religious institutions over those that are secular, violating the Supreme Court’s 1982 ruling in Larson v. Valente that certain denominations cannot be “officially preferred” over others.
Others have expressed concerns with the founding date requirement, arguing it unfairly discriminates against older organizations.