By Sabiq Shahidullah

U.S. lawmakers have introduced several bills aimed at increasing excise taxes on large university endowments, moves that may prompt endowments to devote a larger slice of their portfolios to illiquid investments to meet anticipated spending needs, industry players said.

"Every endowment is trying to generate a real rate of return that's in excess of their management costs, and now in excess of extra taxation as well," Debashis Chowdhury, president at Canterbury Consulting. "You need to come up with a way to generate slightly higher returns, which is usually through more risk or more illiquidity."

Currently, a federal excise tax of 1.4% applies to the net investment income of private universities with 500 tuition-paying students and an endowment value of $500,000 per student. This tax was established by the Tax Cuts and Jobs Act of 2017, with amendments from the Bipartisan Budget Act of 2018.

In 2022, the endowment tax generated $244 million from 58 eligible schools, according to data from the Internal Revenue Service.

Multiple tax provisions are set to expire in 2025, opening opportunities for legislators to revise endowment-tax laws. The extent of these changes will depend on the outcomes of the presidential and congressional elections.

Higher endowment taxes could prompt some donors to reconsider gifts to universities, said Chowdhury. "If I'm a donor, my intention was to only support my alma mater, maybe your children and grandchildren's alma mater, and the objectives of the school," he said. "The donor puts dollars in, those dollars grow, but then potentially some of those dollars come out in the form of this taxation – that might be counter to the donor's intention.

Endowments are already contending with fewer donations. In 2023, universities received $13.3 billion in gifts, down 10% from 2022, according to the study by NACUBO and Commonfund.

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