Personal Finance

Colleges are fighting a new endowment tax. This Kentucky college got a pass

Key Points
  • The president of a small college in Kentucky tried to prevent the endowment tax from hitting his school.
  • He found himself an important ally: Sen. Mitch McConnell.
Berea College
Source: Berea College

Last fall, the president of a small college in Kentucky realized his Christian school might be slapped with a hefty new tax. He was not happy.

Lyle Roelofs reached out to Republican Rep. Andy Barr, whose district includes Berea College, to describe how the 1,600-student school would be affected by the proposed 1.4 percent excise tax on large college endowments.

"We knew from the start this was a concern," Roelofs said. He estimated the lost revenue might force him to admit 30 fewer students a year.

Berea College, founded in 1855, was the first interracial and coed college in the South. None of its students — most of whom come from low-income families and live in Appalachia — pay tuition. "Most of Berea students have this as their only option for coming to college," Roelofs said.

Roelofs soon found a useful ally: the Senate majority leader from Kentucky, Mitch McConnell. "Sen. McConnell, right from the start, was interested in making sure this tax didn't disadvantage Berea," Roelofs said. "I don't think I even really needed to ask him about that. But of course, I did."

Lyle Roelofs, president of Berea College.
Source: Berea College

McConnell offered a solution.

The endowment tax proposal wouldn't apply to schools that educate fewer than 500 students. And so McConnell "inserted the phrase 'tuition paying' right in front of 'students'," Roelofs said.

"Our number of tuition paying students is zero," he said. 

Not everyone would appreciate the move, which exempted only Berea.

Indeed, the clause was dropped in December, when the Senate parliamentarian concluded it violated the so-called Byrd Rule, which bars matters that don't directly involve the budget from a piece of reconciliation legislation.

Sen. McConnell, right from the start, was interested in making sure this tax didn't disadvantage Berea.
Lyle Roelofs
president of Berea College

Sens. Bernie Sanders, I-Vt., and Ron Wyden, D-Ore. applauded the parliamentarian's action.

"In the mad dash to provide tax breaks for their billionaire campaign contributors, our Republican colleagues forgot to comply with the rules of the Senate," they wrote in a joint statement.

Soon after, some Kentucky residents blamed McConnell for letting the provision protecting Berea get dropped. Cartoonist Marc Murphy published this illustration in The Courier-Journal of Louisville.

McConnell quickly fired back in an op-ed in the newspaper, arguing that Democrats had exploited "a procedural tactic" to kill the provision protecting Berea from the tax.

"The suggestion made in a recent Marc Murphy cartoon that I am somehow responsible for the new tax on Berea College but it also ignores the hypocrisy coming from Senate Democrats," McConnell wrote

Berea College has a very unique and laudable mission, but other colleges that will be impacted by the endowment tax have laudable missions as well.
Elizabeth Clark
National Association of College and University Business Officers

After the provision was dropped, Roelofs said he received a call directly from McConnell. "He told me he remained committed to finding a way to restore protection to Berea," Roelofs said. "Even though it had not appeared in the final tax bill."

In early February, the two men met in Washington to discuss the legislation.

In the end, the "tuition-paying" language was restored in the bipartisan budget agreement reached earlier this month, which leaves more room for provisions than reconciliation legislation. In the end, Berea College won't be paying the endowment tax.

"I am proud to have worked with my colleagues, especially Congressman Andy Barr, to fulfill my commitment to these students," McConnell said in a statement.

Senator McConnell met with Berea College President Dr. Lyle Roelofs in the U.S. Capitol to discuss legislation.
Source: Sen. Mitch McConnell

"I was pretty happy," Roelofs said. "Most people were appalled that there was even a possibility of this tax applying to Berea."

About 30 other colleges and universities were not so lucky. Institutions where the endowment is valued at more than $500,000 a student will still pay the 1.4 percent tax.

That translates to a tax of around $1 million on a $1 billion endowment (the exact assessments are still being worked out). Dartmouth College estimates the change will cost it an additional $5 million in taxes each year.

These are the affected schools, according to an analysis provided to CNBC by the American Council on Education.

Steven Bloom, director of governmental relations for the American Council on Education, said the endowment tax will do nothing but harm.

"It just takes away money from schools that will be hit and sends the money to Washington," Bloom said. "Those dollars could be used for things like financial aid."

One of the schools that will be taxed is Cooper Union in New York City. For decades, the school admitted students for free. Today, it covers around 75 percent of students' tuition but had hoped to return to an entirely free institution one day.

"The new tax reform plan has the potential to make that return to free tuition much more difficult," said Laura Sparks, the school's president.

Elizabeth Clark, senior director of federal affairs at The National Association of College and University Business Officers, doesn't see why one school should be exempted from the levy.

"Berea College has a very unique and laudable mission, but other colleges that will be impacted by the endowment tax have laudable missions as well," Clark said.

That the Republicans' legislation reflects their preferences, Roelofs said, shouldn't come as a surprise.

"They won the election," he said.

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