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Former Congressman Dr. Phil Gingrey provides public policy and government relations counsel to clients on a variety of issues. Here at Phil on the Hill, Phil draws upon his long career in public service to provide perspective and context on policy topics such as health care, the federal budget, annual appropriations, regulatory reform, and life sciences.

Excise Tax on Universities Bad for Health Care Research

Wednesday, December 06, 2017

The House passed its tax overhaul bill in November on a party-line vote and the Senate recently passed its version. As a Republican, I hope a final tax bill will be sent to the president’s desk for signing soon. We need a simpler, fairer tax system that rewards investment in job-creating businesses over loopholes. 

Officially titled the Tax Cuts and Jobs Act of 2017, the bill has set off a predictable firestorm of claims about singling out and unfair treatment. One part of the tax bill truly does stand out as unnecessary and potentially damaging to the long-term interests of our country.

Under the bill, the federal government would begin assessing a 1.4 percent excise tax on the investment earnings from about 70 universities with the largest endowments. On the surface, I can see why this seems like a popular move. 

There is no denying that universities control more money than a lot of big hedge funds. Harvard has long held the title of “biggest endowment,” with just over $37 billion. Institutions like Yale and Stanford come next, with endowments of over $25 billion each. These schools have become major players in finance, real estate and other sectors, and it is easy to see why the government wants its share.

But this move is a short-sighted cash grab that will ultimately stifle innovation and harm students. 

Much of the leading-edge medical research has come out of America’s biggest and best universities, from novel chemotherapies to effective HIV “cocktail” treatments to many modern vaccines. When a major university funds dozens of medical labs, centers and organizations dedicated to life-saving research on diseases ranging from cancer to Ebola, it is easy to see how this proposal could become a tax on human health. 

It is also a bad idea for another reason. Tuition costs have skyrocketed in recent years, and universities are not exempt from blame in that regard. However, when these costs show no sign of abating, endowments provide an invaluable way to help low-income students attend college.

For instance, many of the nation’s top colleges practice what is called “need-blind” admission. Large endowments allow schools to ignore the financial backgrounds of applicants and focus on merit while remaining confident that tuition costs will be met. In real terms, this means that over 60 percent of students at Princeton receive financial assistance. At Harvard, one in five students have their tuition paid out of the endowment. 

These vulnerable, often first-generation, college students will be the first ones harmed by the new excise tax. It will not be the wealthy students who suffer or even the ones relying on large student loans, but rather these low-income students who rely on the money that those endowments earn every year just to attend. 

This is a case where the reward is not worth the cost. Is endangering America’s best universities worth raising about $3 billion over the next 10 years? Even The National Review thinks it’s a bad idea.

This is not to say that universities should be totally left out of the tax bill — should skyboxes in college stadiums be tax-exempt? However, Congress should think carefully about the cost to innovation and vulnerable students before moving ahead with the excise tax. It should become obvious that this is one part of the tax plan that must go.