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The $14.6 Billion Question: How a Massachusetts Endowment Tax Could Reshape Higher Education

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The $14.6 Billion Question: How a Massachusetts Endowment Tax Could Reshape Higher Education

The Massachusetts state legislature is currently deliberating on a bill that could have far-reaching consequences for the state's academic institutions, including heavy-hitters like Harvard University and the Massachusetts Institute of Technology (MIT). Titled "An Act to Support Educational Opportunity for All," the proposed legislation targets private universities in Massachusetts with endowments exceeding $1 billion. If passed, the bill would impose an annual 2.5 percent tax on all assets under management.

For context, Harvard’s endowment was valued at approximately $49.444 billion on June 30, 2022.

One of the primary concerns surrounding this bill is its potential impact on the financial stability and competitiveness of prestigious institutions including Harvard, Amherst, and MIT. A recent analysis by Harvard publication, The Crimson, projected that the Ivy League school could lose a staggering $14.6 billion over the next decade if the tax is implemented. This significant loss would erode a substantial portion of Harvard's endowment, thus potentially hindering its ability to maintain its status as a leading academic institution in the United States.

Per The Crimson’s report, former Harvard President Lawrence H. Summers has voiced strong opposition to the proposed bill, arguing that it could severely undermine Massachusetts' higher education sector. 

“Massachusetts derives much of its distinctive strength from great universities and this tax proposal would cripple the ability of Massachusetts universities to compete going forward,” he said.

“It would be an entirely unreasonable attack on the concept of a nonprofit institution to levy anything like a two-and-a-half percent tax,” Summers continued. “That would represent about half the operating income that can be derived from the endowment.”

Despite these concerns, the bill's co-sponsors, Democratic State Representatives Christine P. Barber and Natalie M. Higgins, have defended their legislation, framing it as a means to improve public education in Massachusetts. They assert that the funds raised by the tax would be used to address educational inequality and provide greater access to college education for residents across the state.

However, critics of the bill agree with Summers, arguing that it would be detrimental to Massachusetts' academic institutions, particularly Harvard and MIT. Jonathan H. Gruber, chair of MIT's Economics Department, questioned the rationale behind singling out specific institutions based on their endowment size, describing it as “nonsensical”.

Robert McCarron, president and CEO of the Association of Independent Colleges and Universities in Massachusetts, warned that the bill would wreak havoc on Harvard and MIT specifically, likely undermining the schools’ ability to compete with peer institutions. 

He told The Crimson, “That [spending endowment dollars on taxes] just means Massachusetts loses because those donations mean jobs, spin-off companies, patents, and further research.” 

McCarron went on to say that philanthropists who currently support Massachusetts institutes of higher learning are likely to turn to competitors like Connecticut’s Yale or California-based Stanford instead.

Liz Clark, vice president of research and policy analysis for the National Association of College and University Business Officers, echoed this sentiment in a statement emailed to Chief Investment Officer. She noted that her organization is “opposed to excise taxes on higher education institutions that steer funds away from the nonprofit, educational purposes of colleges and universities. These taxes ultimately mean fewer dollars institutions have to spend on their students, faculty, and missions.”

The Massachusetts Statehouse's consideration of this endowment tax bill is not without precedent. In 2017, Republican lawmakers passed similar tax reform legislation targeting the investment income of elite universities like Harvard. However, the proposed bill represents a more extreme measure, surpassing the federal endowment tax imposed by Republican members of Congress in 2017.

While the fate of the Massachusetts university endowment tax bill remains uncertain, its potential implications for Harvard, MIT, and other private institutions in the state are profound. If enacted, the bill could reshape the landscape of higher education in Massachusetts – and in other states that ultimately pass similar legislation – and prompt significant changes in how universities manage their finances and attract philanthropic support.

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