The State Legislature Is Considering an Endowment Tax. Experts Say It Could ‘Cripple’ Harvard

Updated April 26, 2024, at 4:06 p.m.

The Massachusetts state legislature is set to report later this month on a university endowment tax bill that some experts described as potentially catastrophic for academic institutions like Harvard and MIT.

The Massachusetts State Joint Committee on Revenue will deliver an update on April 30 regarding the status of the bill, but its chances of becoming law remain slim.

The proposed bill — titled An Act to Support Educational Opportunity for All — targets Massachusetts private universities with endowments over $1 billion, and would impose an annual 2.5 percent tax on the all assets under management.

The Crimson analyzed the proposed state tax's long-term implications for Harvard and projected the future trajectory of endowments for “Ivy Plus” universities. The methodology utilized the most recent endowment figures from each institution and incorporated historical growth data since 2014. All projections were adjusted for inflation using the latest forecasts from the U.S. Federal Reserve.

The Crimson analysis found the proposed tax could cost Harvard $14.6 billion over 10 years and only further exacerbate the University’s underperforming endowment — wiping out nearly a fifth of the endowment and dragging its growth rate down to 3.8 percent.

In comparison, since 2014 the average year-over-year growth rate for the Ivy League has been 9.91 percent.

If the bill is passed, Harvard — which boasts the largest endowment in higher education valued at $50.7 billion — is projected to miss out on $21 billion of potential gains. By 2034, the University’s endowment would be surpassed by its out of state peers including Yale, Princeton, and the University of Texas for the first time since 1986.

Former Harvard President Lawrence H. Summers slammed the proposed bill in an interview with The Crimson, saying that it could irreversibly harm Massachusetts’ higher education institutions.

“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,” Summers 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,” he added. “That would represent about half the operating income that can be derived from the endowment.”

Massachusetts state legislators, however, have shrugged off concerns from endowment experts and higher education leaders that the Democrat-led bill would devastate the endowments of the state’s most prestigious universities.

The bill’s two co-sponsors — Democratic State Representatives Christine P. Barber and Natalie M. Higgins — have defended their legislation and said it is not intended to be “targeting these institutions,” but instead improving public education in Massachusetts.

The funds raised by the tax would be used to mitigate educational inequality through measures such as subsidizing the cost of early education for lower income residents and

“We are really redirecting this money, just to make sure that every single person in the Commonwealth has the opportunity to get a college education,” Higgins said.

Harvard’s endowment has long struggled with lagging investment returns. The tax would hamper the endowment’s growth, significantly reducing its 10-year projected value from $90.13 billion to $69.97 billion, according to an analysis by The Crimson.

Jonathan H. Gruber, chair of MIT’s Economics Department, wrote in a statement that there is “no reason to single out particular institutions based on their endowment.”

“That makes no sense,” Gruber added.

Robert McCarron, the president and CEO of the Association of Independent Colleges and Universities in Massachusetts, said that the bill would simply wreak havoc on Harvard and MIT.

“The damage would just get worse and worse year over year when you're talking about the way this is structured,” he added.

Harvard will see its future growth severely threatened by the tax which would “undermine the unique ecosystem that is higher education,” according to McCarron, as other elite institutions continue to grow their endowments and research capabilities at record pace.

If the endowment tax bill becomes law, Harvard will struggle to compete with its peer universities.

The Crimson’s analysis of the bill’s long-term impact showed that Harvard’s endowment would no longer be the wealthiest academic endowment before the end of the decade.

Yale — who currently boasts a $40.7 billion endowment — is projected to overtake Harvard by 2029 and see its endowment grow to $89.39 billion over a 10-year period.

Princeton would overtake Harvard by 2033 and Stanford by 2035 — despite both endowments currently being worth $34.1 billion and $36.5 billion respectively.

While the proposed tax would stunt the growth of Harvard’s endowment, Summers said that it could harm the University in more ways than one. In particular, he said that donors would stop giving to Massachusetts universities because the money would just be taxed by the state.

“Why would anyone contribute to a university where over time, half of the value of their gift was going to be confiscated by the state?” Summers said.

Harvard, which traditionally receives 45 percent of its annual operating revenue from current and past philanthropy, cannot use most of those funds to directly pay the state tax due to stipulations in the terms of gifts.

As a result, donors would likely decide to turn to other universities like Stanford or Yale, according to McCarron.

“The money has to be spent in furtherance of that donor’s wish and the donor’s instructions. An institution can’t say ‘Oh, sorry, we need to spend it on this tax,’” he said.

“That just means Massachusetts loses because those donations mean jobs, spin off companies, patents, and further research,” McCarron added.

The Massachusetts State House’s latest attempt to tax the endowments of wealthy universities is not a novel idea. In 2017, Republicans passed tax reform legislation that targeted the investment income from the endowments of Harvard and other elite Universities. At the time, Harvard President Drew G. Faust blasted the legislation as “a blow at the strength of American higher education.”

The proposed bill, however, is a rare proposal to see from Democratic lawmakers. It would also be more extreme than the federal endowment tax passed by Republican members of Congress in 2017.

Since then, Harvard has paid roughly $37 million annually to the federal government — a mere fraction of the $1.2 billion the new Massachusetts tax would raise.

“When you compare that to what the federal government did when they imposed the Trump-era tax on the revenue generated by endowments, this is much worse by a huge factor,” McCarron said.

Correction: April 26, 2024

A previous version of this article incorrectly stated that Harvard University’s endowment is the largest in the world. In fact, Harvard’s endowment is the largest endowment in higher education.

Clarification: April 26, 2024

This article has been updated to further clarify The Crimson’s analysis of projecting Harvard’s endowment over 10 years if it is taxed under the proposed Massachusetts state bill.

—Staff writer Sidney K. Lee can be reached at sidney.lee@thecrimson.com. Follow her on X @sidneyklee.

—Staff writer Thomas J. Mete can be reached at thomas.mete@thecrimson.com. Follow him on X @thomasjmete.