The 2018-19 fiscal year marks the first time that colleges will be subject to a tax on endowment returns as a result of a provision in the 2017 Tax Cuts and Jobs Act.
This provision applies a 1.4 percent excise tax on the net investment income of college endowments greater than $500,000 per student. The tax is expected to provide the government with about $1.8 billion in revenue over the next ten years as part of the $1.5 trillion tax reform bill.
“It’s unprecedented. I never would have thought in my career that I would see something like this where endowments are taxed,” said Matt Orlando, senior vice president for finance and administration and treasurer of the College. “Everyone who has given to the College for the past 200 years was under the assumption that their gift to the College would grow tax-free. Now that assumption has changed.”
With an endowment valued at over $1.74 billion—approximately $900,000 per student—Bowdoin will be one of over 40 private colleges and universities impacted by the tax. For the fiscal year 2018-19, this means around a $700,000 tax on the net returns.
The College typically allocates four to five percent of the endowment’s 12-quarter moving average to fund almost 40 percent of Bowdoin’s operating budget. This 12-quarter moving average is calculated by taking the average value of the endowment over the past three years, which means that the short-term impact of the law on the College’s budget will be relatively minimal.
However, the excise tax will have a significant impact on the long term.
“There is a cumulative effect over the long-term, and so every dollar that’s spent on this tax is a lost opportunity for that dollar to grow, accumulate earnings and distribute income to support the College,” said Orlando.
A little less than half of the endowment, or about 46 percent, is restricted to student aid. Although the tax is not expected to affect student aid this year, it is still unclear if there will be an impact on student aid in the future.
Correction 11/15/2019, 10:00 a.m.: An earlier version and headline of this article misstated the potential cost of that the endowment tax for Bowdoin. The previous version also stated that 70 schools will be impacted by the tax, when the actual number is 40. The article has been updated to correct these errors.