Harvard University could pay $200 million a year or more in taxes on its endowment income after passage of President Trump’s signature Big Beautiful Bill, a result critics say could deter donations but supporters call a feature not a bug. 

The tax bill raises the highest endowment tax rate — first passed into law in 2017 during President Trump’s first term, but set to expire along with the rest of the tax cuts in the original bill — to 8 percent from 1.4 percent. The new tax rate, which applies to annual investment income, will go into effect in the 2026 tax year. 

The tiered tax rate is based on the amount of endowment per student. Schools with more than $2 million in endowment investments per student would pay the 8 percent rate. Schools with $750,000 to $2 million per student would pay a 4 percent tax rate. Schools with less than $750,000 invested per student would pay 1.4 percent. Schools with fewer than 3,000 tuition-paying students are exempt entirely. 

The tax applies to annual investment income. For schools like Harvard, with its $53 billion endowment fund and $2.9 million in assets per student, the 2024 tax bill was imposed on $2.5 billion in distributed earnings.

Harvard officials say the tax will strain its finances, since 37 percent of the university’s operating revenue comes from endowment distributions, most of which are restricted for use on financial aid, faculty salaries, and research. 

School officials have not stated how they will restructure finances to accommodate the tax hike, but options include laying off faculty, reducing the endowment draw or programming, or reallocating unrestricted funds to shorter-term initiatives.  

Other universities facing the 8 percent rate include Yale University, Stanford University, the Massachusetts Institute of Technology, and Princeton University, which has the highest per-student endowment investment rate. 

The Senate version of the legislation, which passed 51-50 with a tie-breaker cast by Vice President Vance, was adopted by the House on a 218-214 vote on Thursday and signed by President Trump in a White House ceremony on Independence Day. 

The Senate version significantly reduced the House’s initial attempt to increase endowment taxes to 21 percent from 1.4 percent. Congressman Troy Nehls of Texas, who introduced endowment tax legislation in January that was incorporated into the House version, said the Senate bill did not go far enough.  

“Congress was instructed to generate revenue to deliver on President Trump’s mandate. Yet, the Senate gutted a provision that would raise the tax to 21% on endowment profits, leaving billions of dollars in revenue on the table. Why is the Senate trying to protect these elite universities?” he wrote on X.

The original language of the Senate bill had exempted “qualified religious institutions,” but that non-budgetary provision violated Senate rules, according to the parliamentarian, so the language was omitted.

As a result, dozens of small, private liberal arts colleges like the conservative Hillsdale College and Claremont McKenna and liberal schools like Wellesley College, Amherst, Swarthmore, and the California Institute of Technology ended up benefiting.

“While almost 60 colleges and universities paid the endowment tax in 2023, the proposed Senate version would cut that number by more than two-thirds,” Education Reform Now’s post-secondary education policy director, James Murphy, said before the vote. Mr. Murphy noted that it is likely that more institutions could be added to the list once 2025 enrollment and endowment data are calculated.

An earlier version of the bill also would have excluded international students from the per-student calculation. That provision was aimed at schools with large international student populations like Columbia University, but that provision was also struck by the parliamentarian, sparing the university from the higher tax rate. 

The new tax structure adds about $761 million to university tax payments over 10 years, down from the House version’s $6.3 billion in expected new taxes. It also adds to the pressures that the Trump administration has imposed on universities like Harvard, which earlier this year had its federal research funding frozen in an effort to punish elite schools for their anti-Israel protests and large international student populations.