The Trump Tax Bill Is Full of Threats to Elite Universities. It’s Even Worse Than It Seems.
Among other things, the government would soon find itself deeper in the business of judging what counts as “religion.”
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Early Thursday morning, House Republicans narrowly passed a sprawling megabill that bundles together much of Donald Trump’s legislative wish list. The One Big Beautiful Bill Act, which now goes to the Senate, is massive and chaotic, touching on everything from taxing service workers’ tips to defunding climate initiatives to rolling back Biden-era student debt relief. Like many reconciliation bills, it reads less like a coherent policy agenda and more like a sugar-high Christmas list scrawled by a particularly vengeful 6-year-old. But buried within the chaos is a handful of provisions that reflect something far more methodical: a targeted effort to weaponize the federal law around tax-exempt organizations to punish political enemies and reengineer civil society.
Various tax provisions in the bill have attracted media attention. But the coverage has largely missed the bigger picture. For nonprofits, and the lawyers who work in the tax-exempt sector, what’s tucked into this legislation is genuinely alarming. These provisions don’t just tinker with tax law. They take a blowtorch to long-standing norms about the relationship between the federal government and the nonprofit sector, using tax policy as a political bludgeon in ways that until recently were considered unthinkable.
Here’s a deep dive into the substance of one specific part of the bill—the proposed amendment to the university endowment tax—and an argument why, for anyone who cares about pluralism, civil society, or democratic governance, it should be cause for serious alarm.
Conservative pundits, as well as some more populist progressives, have long fumed over the fact that elite universities—some of which sit on endowments larger than those of many hedge funds—enjoy tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. They share that same designation with a dizzying range of organizations, from soup kitchens and local churches to massive hospital systems, art museums, and even the Church of Jesus Christ of Latter-day Saints, whose investment arm reportedly manages over $200 billion in assets. The Howard Hughes Medical Institute, with its roughly $27 billion endowment, also qualifies. And all these funds are virtually exempt from federal income tax.
However, what people often seem to forget when criticizing universities is that their endowments are already taxed. In 2017 the Trump-era Tax Cuts and Jobs Act added a new provision, Section 4968, that imposed a 1.4 percent excise tax on the net investment income of private colleges and universities that 1) have at least 500 tuition-paying students and 2) hold assets of more than $500,000 per student. It’s a weird formula, but the policy logic seems to be this: Go after schools with especially large endowments (relative to enrollment, that is), while sparing smaller, less wealthy institutions, like Berea College, that serve lower-income students who often receive full rides.
In practice, the university endowment tax has remained narrowly targeted. In 2023 just 56 private colleges and universities out of the roughly 1,700 in the U.S. met the threshold and paid the tax, generating about $380 million in revenue. The list includes predictable names like Harvard, Princeton, and Yale, but also schools like Notre Dame and Dartmouth, which have mostly avoided Trump’s ire in the past several months.
However, the One Big Beautiful Bill Act would fundamentally transform the university endowment tax from a conceivably modest—but nevertheless controversial—levy on wealthy institutions writ large into a blunt political weapon. The flat 1.4 percent rate would be replaced with a steeply progressive tax that climbs as high as 21 percent for the richest schools.
To up the ante, the House bill also dramatically expands what counts as taxable under the endowment tax. It broadens the base beyond traditional investment income to include interest from student loans and royalties from federally funded intellectual property—effectively penalizing universities for supporting student borrowers and for conducting government-backed research. The legislation also sweeps in assets held by affiliated entities, like research centers and university foundations. The result is that the larger and more complex the university, the more likely it is to get hit. And that means that research powerhouses, the very institutions most entangled with public science, innovation, and student support, are directly in the crosshairs.
This wouldn’t simply make operating as a university more expensive. It would also significantly alter what it means to be a tax-exempt organization. For universities in that top bracket—think Harvard, Yale, and Princeton, among others—the financial effect would be almost indistinguishable from losing their tax-exempt status altogether. They’d be hit with tax bills similar to those of for-profit corporations, while still being bound by the restrictive rules that come with Section 501(c)(3) status, like the public disclosure of tax returns, a ban on campaign activity, and strict limits on lobbying. In other words, these schools would get the liabilities of a taxable entity and the constraints of a nonprofit—without the full benefits of either.
Moreover, one subtle but significant tweak in the bill would change how the endowment-per-student ratio is calculated. This time, only U.S. citizens, permanent residents, or individuals that can prove their intent to become a citizen or permanent resident would count. That seemingly technical adjustment shrinks the denominator, making globally oriented institutions—like MIT, Columbia, and NYU, which enroll large numbers of international students—appear far wealthier per capita and therefore more heavily taxed. And just to drive the point home, the bill would require universities to report their total student enrollment and the number of students who qualify as “eligible” under the new citizenship-based definition. In effect, it forces schools to disclose how many foreign students they enroll, turning Form 990 (the annual tax return filed by most exempt organizations) into a thinly veiled tool for political monitoring.
Although the House hasn’t provided a detailed justification for what’s in this legislation, a recent Ways and Means Committee report on a nearly identical proposal offers a revealing glimpse into the political logic. It declares that America’s “Ivy League schools” are enrolling too many foreign students, students who bring “malign foreign influence” onto U.S. campuses. Redefining the term student for tax purposes, the committee argues, would help solve this problem by “incentiviz[ing] universities to … enroll more American students.” But this change isn’t about promoting “tax fairness,” as Chair Jason Smith claims. It’s a populist, and nakedly xenophobic, culture-war maneuver disguised as a technical amendment—one that casts elite universities as disloyal or corrupt simply for educating too many people born outside U.S. borders. And it aligns seamlessly with the Trump administration’s broader efforts to limit foreign student visas and accelerate deportations.
One of the more legally fraught provisions in the bill is its carve-out for “qualified religious institutions.” At first glance, this might seem like just another nod to religious liberty. But it’s actually a major departure from how tax law has historically treated religious institutions—and a direct invitation to constitutional trouble.
While Section 501(c)(3) already gives favorable tax treatment to churches and church-controlled organizations, it doesn’t ordinarily single out religious colleges or universities for special treatment. In fact, colleges with religious affiliations, like Notre Dame and Baylor, have long been treated the same as their secular counterparts when it comes to tax obligations. So, at a minimum, this carve-out seems a bit arbitrary. Notre Dame, for example, has an endowment of over $20 billion, substantial revenue from government grants and student loan interest, and its own laboratories, institutions, and various affiliated organizations, just like the elite universities this tax is supposed to target. Yes, Notre Dame is a religious institution, but it is also a legitimate and substantial research university. Is it really different in kind from the other schools that have had to pay the tax?
But the problems don’t stop there. To qualify for the new religious carve-out, an institution would need to prove that its mission is “predicated upon religious tenets, beliefs, or teachings” and that this mission is formally endorsed by its governing board. That effectively invites the IRS to interrogate a school’s theology. Is the mission religious enough? Are the tenets genuine? These aren’t neutral administrative questions—they’re exactly the kinds of theological judgments that courts have repeatedly warned against under the church autonomy doctrine, which prohibits government agencies from second-guessing the beliefs or internal governance of religious organizations. In trying to protect certain faith-based schools, the bill could end up trampling one of the most basic principles of religious freedom in constitutional law.
Yes, the IRS already engages—at least on paper—in limited religious inquiry when determining whether an entity qualifies as a “church” under Section 501(c)(3). It uses a notoriously vague and bureaucratic 14-factor test, which includes things like regular worship services, established creeds, and an ordained clergy. But in practice, the IRS rarely enforces these criteria aggressively, in part because churches aren’t required to file for formal recognition or submit annual tax returns—meaning that audits are infrequent and hands-off.
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Even that relatively toothless framework has drawn Supreme Court scrutiny. In recent oral arguments in the Catholic Charities case, several justices expressed discomfort with the IRS’s 14-factor test, questioning whether it would survive First Amendment review. That test, at least, aims to be formulaic and institutional—closer to a checklist than a theological inquiry. The OBBBA carve-out, by contrast, explicitly requires the IRS to evaluate whether a university’s entire institutional mission is rooted in religious belief. If the court finds the former troubling, the latter should be a red flag.
And on its own terms, this provision should also concern religious freedom advocates. If the IRS is now in the business of parsing which schools are “religious enough” to escape a punitive tax, this sets a dangerous precedent. Institutions with more ambiguous or culturally grounded religious identities—say, Quaker-founded colleges, or schools that embrace pluralism or social justice as part of their mission—could be excluded. Where do schools that are religious in approach but not affiliated with any one organized religion stand? What about universities that are nonsectarian but have values deeply connected to a particular religious community? Right now, many of these colleges do not have university endowments large enough to qualify for the tax. But do we really want to set this sort of precedent? This is a tax policy that favors not just religion. It favors organized, government-approved religion, under conditions set by Congress and enforced by the IRS. That’s not religious liberty—it’s religious gatekeeping.
At the end of the day, some might see all these matters I’ve raised as small potatoes. The university endowment tax would still be narrowly targeted at elite, wealthy universities. Surely Harvard and its peers are so wealthy that they can afford to pay the same rate as corporations, while continuing to enroll international students, provide generous financial aid, fund research, and pursue their own ideological commitments. But how confident should we really be in that assumption—especially now that the federal government is pulling current and future funding, including grants, from these institutions, even though it has historically been the dominant contributor to the research budgets of even wealthy institutions like Harvard? Can we really expect their endowments to absorb the hit? It’s telling that Harvard, in response to Trump’s unilateral decision to revoke, as of now, $2.7 billion in federal grants, has turned not just to its endowment but also to debt markets to cover the gap.
This Content is Available for Slate Plus members only It’s Becoming Clearer What Trump Really Wants From Russia This Content is Available for Slate Plus members only Americans Don’t Lack Empathy. We Are Being Drained of It. Senate Republicans Are Poised to Deal a Shattering Blow to the Filibuster This Content is Available for Slate Plus members only The Biggest Sign That Trump May Already Be an Elected AutocratSure, there’s still money in the private sector, and the tax code continues to incentivize donations to Section 501(c)(3) organizations, at least nominally. But if the after-tax value of a gift to a university is effectively no different from the spending of that same amount at a for-profit company, what incentive remains? Some institutions—like private foundations—may try to fill the gap. But the OBBBA also takes aim at them, proposing to raise the excise tax on their net investment income from 1.39 percent to a sliding scale that can go as high as 10 percent, depending on asset size. In theory, that could nudge foundations to spend more in the short term. But it’s no substitute for the scale, consistency, or legitimacy of robust public funding.
And beyond the dollars and cents, there’s the chilling effect. How confident can universities be in attracting philanthropic support when the threat that the Trump administration might revoke their tax-exempt status, for nearly any reason, is always looming in the background? Institutions like Harvard aren’t just top-ranked universities. They conduct some of the nation’s most important scientific and medical research. They anchor local economies and entire employment sectors. Forcing them into financial crisis may make for good culture-war theater, but someone will eventually have to pick up the slack. And with federal cuts already gutting major research programs and hollowing out higher-education funding, alongside the slow economic collapse of many university towns, it’s increasingly clear who won’t.
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