Endowment excise tax to cost MIT $10 million a year, Reif says

Other provisions in tax law may disincentivize charitable donations

The Tax Cuts and Jobs Act of 2017, which was signed into law Dec. 22, contains a 1.4 percent excise tax on investment returns that will cost MIT around $10 million a year, President L. Rafael Reif wrote in a letter to the MIT community sent Dec. 20.

The tax will apply to private colleges and universities with at least 500 students and an endowment amounting to more than $500,000 per student. Around 30 institutions nationwide fall into this category, according to Reif.

“This is the first time that Congress has taxed university endowments, and the first time it has targeted a tax at specific universities,” Reif wrote. “It will reduce MIT’s ability to undertake exactly the kind of activities that Congress wants us to pursue — extensive financial aid for students, innovative education, pioneering research.”

Reif also spoke about the excise tax in an interview for Bloomberg TV taped Dec. 21.

“Basically, the government’s giving us a budget cut,” Reif said. “I think, unfortunately, we just will have to do $10 million less of things. So where, what do we want to cut?” (No decisions on which programs would absorb the most impact had been made at the time.)

Israel Ruiz, executive vice president and treasurer, and Maria Zuber, vice president for research, discussed the Tax Cuts and Jobs Act in an interview with MIT News Dec. 20.

“It’s important to understand that MIT’s endowment is not a bank account that we can simply tap as we need money: Such an approach would be a bit like raiding your retirement savings to buy groceries or pay your rent,” Ruiz said.

Instead, MIT relies on investment income, which accounted for 31 percent of MIT’s total campus revenues during the last fiscal year, Ruiz continued.

Ruiz and Zuber also raised concerns on other potential effects of the law. Changes to the tax code may reduce the incentive to make charitable donations. (In fiscal year 2016, MIT raised $163.7 million in individual gifts and pledge payments.) The costs of the tax cuts in general may also lead to cuts to federal support of higher education and research in the long-term.

“Last fiscal year, nearly half of MIT’s revenues — 49 percent — came in the form of grants and other funding in support of MIT’s research enterprise (including Lincoln Lab). Close to 80 percent of this funding came from the federal government. So future belt-tightening by the federal government, if the nation’s debt continues to mount, could exert significant financial pressure on the Institute in the years ahead,” Zuber said.

Reif also noted in his letter that the act did not include a provision to add tuition waivers to graduate students’ taxable income, which had been in the House version, but not the Senate’s.

Many MIT students voiced their opposition to this provision, including through op-ed pieces and participation in GSC-organized phone banks to elected officials.

“While our students enjoy the relief of this moment, I hope they will also accept our admiring congratulations; this good outcome resulted in no small part from the persistent advocacy of our graduate students and their peers across the country,” Reif wrote.