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In November 2017, Drew G. Faust, Harvard University’s carefully-spoken president, offered a dire warning: A Republican tax proposal that was pending in the U.S. House, she said, would be “a blow at the strength of American higher education.”

The bill, which was signed into law later that year, included a provision that required dozens of schools — including Harvard and four other Ivy League schools at the time — to pay taxes on their multi-billion dollar endowments, a requirement they had dodged for years.

Universities had spent millions of dollars lobbying to kill proposals that would require them to pay taxes on their investment earnings. But with a changing political tide in Washington, they were unable to fend off the 2017 tax bill, which imposed a 1.4 percent excise tax on investment returns for private colleges and universities whose endowments exceed $500,000 per student.

Supporters say the legislation makes rich universities pay their fair share. But higher education leaders insist it has placed an undue burden on institutions that exist to promote the public good.

“Taxing charitable resources away from higher education institutions does not make them more affordable — it has exactly the opposite effect,” Harvard President Lawrence S. Bacow said in May, a week after a lobbying trip to Washington. “It makes for bad public policy.”

The tax is a drop in the bucket for Harvard’s $53.2 billion endowment. The University’s annual financial report for fiscal year 2019 estimated it would have to pay an additional $37.7 million in federal taxes due to the provision.

Some worry the legislation is more about making a political statement than it is fiscal policy — and that it could turn elite schools into more of a partisan punching bag than they already are.

Thomas D. Parker ’64, an expert on higher education and nonprofit management, said concerns with the bill extend well beyond tax policy.

“This is about Republican enmity toward what they believe are hotbeds of progressive activism,” he said.

Not ‘Rainy Day Funds’

Harvard has argued the excise tax is a blow to initiatives like financial aid that promote student welfare.

Harvard’s endowment is a complex aggregate of thousands of different funds — approximately 80 percent of which individual donors have earmarked for specific uses. The excise tax passed in 2017 requires endowments to hand over a small portion of each fund’s investment returns to the federal government. As a result, Harvard says, the tax reduces its capacity to invest in important initiatives.

Higher education experts say lawmakers fail to recognize the reality of how university endowments operate.

“They just think that you have these wealthy institutions that have this enormous pile of money, and they think of them like a savings account,” said Steven M. Bloom, assistant vice president for government relations at the American Council on Education. “They aren’t, and the complexity of it, I think, escapes people.”

Like many private universities, Harvard hires external investment firms to oversee the vast majority of its endowment funds, meaning the University does not have direct access to most of its assets. Each year, the endowment disperses a small fraction of its value — usually around 5 percent — for University operations.

Even for the portion of their endowments that universities can spend on a discretionary basis, there are better uses for the money than sending it to Washington, said former Vassar College President Catharine B. Hill.

“When institutions have to pay this tax, it means they have that much less money to spend on other priorities or other objectives,” she said. “To the extent that it’s spread across the institution, it’ll affect different spending lines in a budget.”

Far from “rainy day funds,” endowments are designed to be investment tools that plan years into the future, said Liz Clark, vice president for policy and research for the National Association of College and University Business Officers.

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“Endowments are unique in that they are created to provide reliable and growing funds over time,” she said. “It’s a hard concept because a lot of people see these large pools of funds and think that they should all go to the here and now.”

But some experts say Harvard still has wide latitude over where cuts to pay for the tax could come from.

“It’s only keeping the university from spending on scholarships if the university decides that it’s going to take that money out of scholarship,” Vanderbilt Law School professor emeritus Beverly I. Moran said. “The university could take the money out of something else. That’s what a budget is.”

Charlie Eaton, a sociology professor at the University of California, Merced, said Harvard needs to do more to promote the interests of low-income students in order to argue the tax significantly burdens its ability to support student welfare.

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“Harvard enrolls so many fewer students than schools with a fraction of its resources,” he said. “If Harvard really wanted to make the case that equity is compromised by the endowment tax, it would just have to enroll a lot more students from disadvantaged backgrounds than it currently enrolls.”

Harvard spokesperson Jason A. Newton declined to comment for this story.

A ‘Cheap Political Ploy’?

But the debate over the endowment tax is not just about fiscal policy.

Elite schools and their endowments have increasingly become political targets for Republican lawmakers — Harvard especially. In June, Fox News host Pete Hegseth mockingly scribbled “RETURN TO SENDER” on his Harvard Kennedy School degree, saying it should be named “Critical Theory University.”

Lawmakers have also taken aim at Harvard. In June, Senator Marco A. Rubio (R-Fla.) alleged without direct evidence that Harvard officials may have played a part in suppressing theories about the genesis of Covid-19. Later that month, U.S. Representative Gregory F. Murphy (R-N.C.) called on the school to disclose and divest its endowment from any potential holdings in Chinese companies.

Many higher education experts say the tax reflects discontent with a perceived liberal bent at elite universities — rather than economic motivations. An endowment tax, after all, is not cut out from traditional supply-side economic policy, which prioritizes reducing taxes for the wealthy.

“Republican tax policy encourages wealth. Republicans want to cut taxes for wealthy individuals and corporations,” Parker said. “So this completely violates traditional Republican tax law.”

Sandy Baum, a nonresident senior fellow at the Urban Institute, a Washington-based think tank, said there are merits to legislators’ criticisms of rising tuition costs. But political motivations are at play, too, she said.

“It does seem like this whole narrative of, ‘We don’t like these institutions, and we want to stop them from doing whatever they want to do because we see them as left-wing,’” she said.

But the endowment tax isn’t just red meat for the GOP base. Some Democrats have backed similar proposals in recent years — including Massachusetts’ 2018 Democratic gubernatorial nominee, Jay Gonzalez, who campaigned in Harvard Square on a plan that would cost the University more than $500 million.

“We live in a time that I think is a populist era, and you’re seeing attacks against institutions that are perceived as the establishment,” Bloom said. “So it’s not surprising that these affluent institutions and their endowments are subject to attack — it’s sort of a cheap political ploy.”

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It’s that sentiment that concerns some higher education experts, who fret that more taxes could be on the horizon.

“What they’re afraid of is that it’s the camel’s nose under the tent — that this thing could get out of control,” Moran said, “and at some point universities might be subject to the taxes that other companies are subject to.”

‘A Substantial Difficulty’

Since the passage of the 2017 bill, Harvard has helped lead the charge to repeal the endowment tax.

This summer, the University lobbied Congressional Democrats to roll back the tax as part of a budget reconciliation bill that was signed into law in August.

But the final bill, the Inflation Reduction Act, didn’t touch the endowment tax, and schools may face long odds going forward in their effort to get rid of the policy.

“Harvard faces two problems: It faces Republicans who don’t like elite universities in general and Democrats who think that it’s perfectly OK to tax the rich a little more,” Parker said. “So from a lobbying point of view, this is a substantial difficulty.”

But GOP lawmakers may face headwinds of their own if they try to expand the tax the way some universities fear, Moran said.

“You can say the right hates universities — but the right likes Wall Street, and these endowments are very important for Wall Street,” she said. “These hedge funds make a very nice living off of these endowments.”

Several lawmakers have proposed legislation that would repeal or reform the excise tax. The Higher Education Endowment Tax Reform Act, introduced by Rep. Brendan F. Boyle (D-Pa.), would repeal the excise tax for universities that meet a threshold for spending on financial aid. But the discussion is likely dead in the water until after the November midterm elections.

“It’s not a good look to push through a tax cut for Harvard at the same time that you’re going into an election,” Eaton said.

Still, lobbying efforts are likely to continue.

“Issues are never moot in Washington,” Clark said. “All of the institutions that are impacted by this tax here and now — or potentially impacted by it in the foreseeable future — have an interest in talking to policymakers about what it means for their institution.”

No matter whether the tax is repealed or reformed in the near future, Harvard still has a responsibility to continue pursuing the charitable acts that exempt it from most government taxes in the first place, some experts maintain.

Tax requirements aside, Moran said Harvard still has a responsibility to invest in programs like financial aid, which exempt it from most federal taxes in the first place.

“Scholarships aren’t breaking Harvard’s back. It’s a very typical argument that wealthy people make,” Moran said. “‘Oh you’re taking my money in taxes — now I can’t give to charity.’”

“Everybody else pays taxes and gives to charity,” she said.

—Staff writer Isabella B. Cho can be reached at isabella.cho@thecrimson.com. Follow her on Twitter @izbcho.

—Staff writer Eric Yan can be reached at eric.yan@thecrimson.com. Follow him on Twitter @ericyan0.