Proposals Target University Endowments for Tax Revenue

Universities and their endowments have historically been exempt from federal income taxation under section 501(c)(3) of the Code subject to certain exceptions (most notably in respect of income unrelated to their tax-exempt purpose (so called “unrelated business taxable income” or “UBTI”)).¹ However, the Tax Cuts and Jobs Act of 2017 introduced a new 1.4% excise tax (the “Endowment Tax”) on the endowments of applicable private universities that have at least 500 tuition-paying students, more than 50% of whom are located in the United States, and assets with a fair market value of US$500,000 or greater per student. The Endowment Tax is imposed on the “net investment income” of the university endowment, generally consisting of interest, dividends, rents, royalties and gains from the sale of assets, net of certain deductions. The Endowment Tax raised approximately US$380 million from 56 universities in 2023.²

Several members of Congress have recently proposed dramatically increasing the Endowment Tax with the stated purpose of generating additional revenue to offset tax cuts elsewhere in the anticipated comprehensive tax bill.³ House Ways and Means Chair Jason Smith (R-MO) recently discussed the idea during a tax-focused breakout session during a meeting among House Republicans and two competing proposals have been formally introduced.

• On January 15, 2025, Representative Troy Nehls (R-TX) introduced the Endowment Tax Fairness Act, which would raise the Endowment Tax rate from 1.4% to 21%. As drafted, the revenue derived from the Endowment Tax Fairness Act would be deposited in the general fund of the Treasury and used to reduce the national deficit. If enacted, the increase would purportedly raise approximately US$112 billion over 10 years.⁴

• On February 7, 2025, Representative Mike Lawler (R-NY) introduced the Endowment Accountability Act, which would increase the Endowment Tax rate from 1.4% to 10%. More notably, this proposal would lower the per-student endowment threshold from US$500,000 to US$200,000, dramatically expanding the scope of private universities that would be subject to the Endowment Tax.

It is unclear whether either of these proposals (or an alternative) has sufficient support in Congress to become law, but the current administration has demonstrated a willingness to target institutions of higher education based on the recent freezes and reductions in federal research funding. If passed, we expect any increase in the Endowment Tax would have a significant impact on private universities and their ability to support financial aid, research, hiring of faculty and their operations. We will continue to monitor developments and are available to assist with any questions regarding the Endowment Tax.

¹ Unless otherwise indicated, all references to “Section” herein refer to the Internal Revenue Code of 1986 (the “Code”).

² See https://www.nonprofitissues.com/article/university-endowment-tax-receipts-rise-again and https://taxfoundation.org/blog/taxing-endowments-revenue-analysis/ (“Tax Foundation Analysis”)

³ The House Republican Budget Committee’s “pay-for menu” listing potential revenue raisers / cost cutters includes the option of increasing the Endowment Tax rate to 14%, estimated to generate US$10 billion in 10 years.

⁴ See Tax Foundation Analysis.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Alexander Anderson, an O’Melveny partner licensed to practice law in New York; Luc Moritz, an O’Melveny partner licensed to practice law in California; Billy Abbott, an O’Melveny partner licensed to practice law in California and New York; Jennifer B. Sokoler, an O’Melveny partner licensed to practice law in New York; Dawn Lim, an O’Melveny counsel licensed to practice law in New York; and Arsalan Memon, an O’Melveny associate licensed to practice law in California, New Jersey, and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

© 2025 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, 1301 Avenue of the Americas, Suite 1700, New York, NY, 10019, T: +1 212 326 2000.