An attempt in Iowa to tax university endowment funds would represent a radical departure from traditional US tax policy, posing an emerging long-term threat not only to philanthropists but to all Americans.
The Tax the Endowments Act goes after existing assets in public and private university endowments. This caught our attention at Philanthropy Roundtable for three reasons. First, it’s a tax on existing assets, not just on growth, which would make it a wealth tax, one of the first in the country. Secondly, the original version of the bill would have indiscriminately taken from both unrestricted and restricted funds, creating a major donor intent problem. Thirdly, the expressed purpose for the tax was to support scholarship funds. The Roundtable estimated that the original version of the bill would have generated over $750 million in the first year alone, far more than any scholarship fund could reasonably justify.
The bill has since gone through extensive revisions that addressed some of our original concerns and decreased its financial impact on colleges and universities. The original version taxed endowment assets above $250 million. Now it’s $500 million. The tax applied to the total amount in the endowment. Now it only applies to unrestricted funds. The tax rate in the original bill was 15%. Now, it’s the highest corporate tax rate, which is 7.1% in Iowa.
It is a relief to see that Iowa lawmakers eventually realized the importance of donor intent and excluded restricted funds from the endowment tax. That one decision removes almost all the fiscal implications of the proposed tax, because most contributions to endowments include donor restrictions. The endowments at Iowa’s three state universities, including the University of Northern Iowa, Iowa State, and the University of Iowa, consist of an average of 96% restricted funds. The amount of unrestricted funds at those schools is less than $200 million combined. That means they would have no tax liability under the current proposal. The only school in Iowa subject to the endowment tax is Grinnell College. Its endowment is $2.85 billion, and only 33% of it is restricted. Under the 7.1% tax rate for assets above $500 million, it would be taxed $9.9 million in the first year. That’s quite the drop from the originally projected $750 million the state was projected to collect.
As mentioned before, this is a wealth tax, a concept long rejected in this country. Unlike a provision in the One Big Beautiful Bill that taxes investment income in endowment accounts, Iowa’s bill would tax existing assets. This is a case of the government arbitrarily deciding that an account holder has too much money and asserting that the government can spend that money better than its owner. University endowments might be the first target, but history has taught us that it almost certainly won’t be the last.
The latest Iowa bill also imposes strict restrictions on how endowment funds can be used. It limits administrative costs to 1% of the endowment’s total value, which might be a reasonable threshold, but it’s concerning that the government feels the need to regulate this at all. More importantly, the bill limits the amount of funds that can be given to outside organizations at 5%. Oftentimes, university endowments include many individual donor-advised funds (DAFs), which generally support the university, but account holders can also ask the university to use those funds to provide grants to other nonprofit organizations. Both the University of Northern Iowa and Iowa State University have DAFs in their endowments. Therefore, the 5% limit becomes another donor intent problem.
Despite efforts to reduce the negative impact of Iowa’s proposed Tax the Endowments Act, the core problems remain. It includes a wealth tax, giving that concept a foothold in American tax policy, it creates unnecessary regulatory burdens, and it limits donor intent.
