University of Texas Civitas Institute:  Why Endowments of Educational Institutions Shouldn’t be Taxed, by Erik M. Jensen (Case Western):

In the Tax Cuts and Jobs Act of 2017, Congress enacted the “endowment tax”—a tax on the “net investment income” from the endowments of some private colleges and universities. This essay briefly describes the tax, points out some of its defects, and considers whether Congress could expand the taxation of educational institutions, as the Trump administration has proposed. …

Is the endowment tax the camel’s nose under the tent? Could Congress (with the backing of the administration) go even further and impose a tax on the value of a college’s endowment, not just the net investment income—or the value of a college’s property more generally? Could Congress change the definition of “applicable educational institution” so that more colleges would be subject to the tax? Could Congress dramatically increase the tax rate? The answer to those questions is probably Yes. There is no applicable limiting principle in the Constitution. Congress called the endowment tax an “excise”—correctly, I think—and the Constitution requires only that excises apply to the same base and at the same rate from state to state. The endowment tax meets that uniformity requirement, and so would those possible extensions of the tax.

But there is a serious issue here, one with constitutional overtones: for some officials, the endowment tax has an ideological underpinning. Donald Trump and J.D. Vance have spoken to expand the tax, using it to attack “wokeness” in higher education. The president has proposed the creation of a free online, woke-free “university” to be funded by an expanded tax on university endowments. (Other parts of the president’s agenda are similarly motivated.) In 2023, then-Senator Vance proposed legislation to increase the endowment tax rate from 1.4 percent to 35 percent for private universities with at least $10 billion in investment assets. In introducing his bill, Vance referred to taxpayers’ “mass subsidy . . . that has metastasized into the most corrupt, and one of the most politically hostile organizations in the U.S.—and that is elite colleges.”

The goal of the administration is clear: to attack institutions it views as filled with “Marxist maniacs” (the president’s phrase) and “the enemy” (then-Senator Vance’s characterization).

I defer to no one in my dislike of wokeness, but it’s a bad idea to have the federal government attacking educational institutions for permitting disfavored views. If a college is nothing but a platform for political indoctrination, challenge its tax-exempt status. But despite what you may have read, no elite university is tainted with wokeness from top to bottom. Yes, even departments in the hard sciences and engineering have overdone wokeness in hiring and promotions, but it’s hard to see how a course in physics or a research lab is going to be excessively woke.

In any event, the idea that an institution should be taxed because politicians think it’s too woke should make all who care about academic freedom nervous. (We should be similarly nervous about any proposed federal mandates requiring wokeness.) I’ll leave to First Amendment scholars the question of whether an anti-wokeness motivation for a tax violates the Constitution. But, even if constitutional, it’s not something Congress should do.

Of course, the government can appropriately consider an institution’s disregard of legal requirements—such as those affecting preferences in hiring and promotion—in making awards and imposing penalties. But that doesn’t mean a general animus against wokeness can justify a federal tax.

A final point: The Supreme Court concluded in 2012, in the first Obamacare case, that penalties aren’t taxes. If the endowment “tax” is intended to penalize arguably bad behavior, maybe we should stop using the language of taxation to justify it. Let’s call it what it is and then argue about its legitimacy.

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