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University leaders examine new tax bill’s effects on endowment

Administrators say the university will remain wholly committed to sources of students’ financial aid

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University leaders examine new tax bill’s effects on endowment

President Dudley in his office. Photo courtesy of Norm Shafer and the Washington Post.

President Dudley in his office. Photo courtesy of Norm Shafer and the Washington Post.

President Dudley in his office. Photo courtesy of Norm Shafer and the Washington Post.

President Dudley in his office. Photo courtesy of Norm Shafer and the Washington Post.

Anthony Lorson

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In an estimate from the Office of University Development, Washington and Lee will pay approximately $800,000 in excise taxes this year following the passage of President Donald Trump’s new tax plan. University President William Dudley further estimated the plan will cost the university about $1 million over the coming year—the equivalent of 20 full-tuition scholarships, 150 student internships or nine faculty positions.

Dudley published his conclusions in an online editorial for The Washington Post last month, protesting the law’s tax on the endowments of roughly 30 private colleges and universities, including Washington and Lee.

“There is a poor understanding of how a school like Washington and Lee uses its endowment,” Dudley said.

One million dollars may only be a small fraction of the university’s $1.07-billion endowment. But the real cost of this tax comes not in a single year, but over time, according to university officials charged with examining how the tax increase will impact educational and financial aid opportunities at Washington and Lee.

The Tax Cuts and Jobs Act, the largest change to the American tax code since President Ronald Reagan’s Tax Reform Act of 1986, was signed into law in December 2017. The act gives substantial income tax cuts across the board and cuts the corporate tax rate from 35 percent to 21 percent.

But Congress also introduced a number of provisions into the act to offset the estimated $5.5 trillion of revenue the government would lose over the next decade.

One of these provisions is a new 1.4-percent excise tax on private colleges and universities with endowments worth $500,000 or more per full-time student.

“Large endowments are seen as sitting targets,” said Brant Hellwig, dean at Washington and Lee University’s School of Law. “Congress was looking for revenue to finance massive tax reduction.”

Some universities with large amounts of capital in their endowments are reluctant to spend on current needs, Washington and Lee Treasurer Steve McAllister said. But McAllister said instituting an excise tax is far from the only way to change that behavior.

“A better solution to increase spending [of large university endowments] is a provision saying that we must spend five percent of our endowment annually,” McAllister said.

But Washington and Lee does not sit on its cash reserves. In his article for The Washington Post, Dudley outlined the many ways in which the university spends its endowment.

President Dudley in his office. Photo courtesy of Norm Shafer and the Washington Post.

“Our endowment underwrites 40 percent of the annual operating budget and substantially subsidizes the education of every student,” Dudley said in his article.

About half of the university’s endowment is dedicated to scholarships and grants, which Dudley estimates will account for $52.7 million this year. The structure of financial aid at Washington and Lee ensures that no undergraduate students receiving aid are required to take out loans.

Washington and Lee also has two signature financial aid programs, the W&L Promise and the Johnson Scholarship, which are made possible by the university’s endowment. The W&L Promise guarantees tuition, and in some cases, room and board, for students from families with annual incomes below $75,000. The Johnson Scholar Program, which is endowed by an alumnus, awards full scholarships to 10 percent of each class as well as support for summer programs for 40 students annually.

Photo courtesy of the W&L Office of Financial Aid

In addition, Washington and Lee has goals of growing its endowment to provide future students with further educational opportunities. Starting this fall, the W&L Promise is being extended to apply to all families making less than $100,000 annually.

The new tax bill will make it more difficult for Washington and Lee to accomplish these objectives, but the university said it has no plans of backing down from its commitment to its students.

Members of the Washington and Lee community have reached out to their congressional delegates to “express [their] deep concern about the way in which private colleges like Washington and Lee have been unfairly targeted by these proposals,” according to a letter to the community from McAllister in November.

Likewise, Dudley said in his article that the nation’s current politicians “would do well to heed the wise words of our nation’s first president.”

Dudley concluded his article with a quote from George Washington, who donated a gift valued at $200,000 to Liberty Hall Academy in 1796, which later became Washington and Lee University in 1870: “There is nothing which can better deserve our patronage than the promotion of science and literature. Knowledge in every country is the surest basis of happiness.”

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The student newspaper of Washington and Lee University
University leaders examine new tax bill’s effects on endowment