In March 2020, the CARES Act allocated funding for colleges and universities through the CARES Act Higher Education Emergency Relief Fund. These funds were used by many schools to support new learning environments and to implement health measures needed to ensure student, faculty, and staff safety. Although all schools had increased expenses, many of the wealthiest colleges and universities were criticized for potentially accepting funds, and some schools chose to forgo funding that they were eligible for. Click here and here for more information.
In the most recent COVID-19 relief bill, additional funding was included for the Higher Education Emergency Relief Fund. However, rather than allowing for schools to decide voluntarily whether to accept the funding, the bill specifically limits what the funds can be used for and reduces the allocation of funds by 50% to schools that were liable for the net investment income tax of section 4968 of the Internal Revenue Code. Section 4968 was added to the Code by the Tax Cuts and Jobs Act, and imposes a 1.4% excise tax on the net investment income of private colleges and universities that have assets of more than $500,000 per student. Colloquially called the endowment tax, the Department of Treasury expects the tax to affect approximately 40 schools, but because the amounts are not indexed for inflation additional schools are expected to be subject to the tax in the coming years.
Many of the schools subject to the tax under section 4968 may not be significantly affected by the reduced availability of additional funding to address COVID; however, the use of the section 4968 tax as a determining factor for funding is a potential concern. Higher education institutions receive various forms of funding and additional reductions of funding tied to the excise tax could have broader implications in the future.
Managing Director, Government Affairs & Public Policy