New Tax Slams Billion-Dollar College Endowments with 50% Penalty on Restricted Investments

This new legislation, the Protecting Endowments from Our Adversaries Act, introduces a massive new excise tax targeting the investment strategies of the largest private colleges and universities. The bill’s core action is simple: if a private university with over $1 billion in assets buys or earns income from investments linked to companies on specific U.S. government watchlists—like the Commerce Department’s Entity List—they get hit with a crippling tax penalty.

The Billion-Dollar Barrier

First, let’s talk about who this affects. This tax only applies to “specified educational institutions,” which means private colleges with total assets exceeding $1 billion at the end of the prior tax year. That high threshold means this is aimed squarely at the wealthiest universities—think Harvard, Stanford, and similar institutions with multi-billion-dollar endowments (SEC. 2). They even closed a loophole: when checking that $1 billion mark, the university must count the assets of related foundations and affiliated groups, ensuring they can’t hide assets in separate legal entities.

The Cost of Investing in Restricted Companies

The penalties here are not subtle; they’re designed to be a hard stop. If a covered college buys a “listed investment”—meaning stock, debt, or any interest in a company on a restricted government list—they face an immediate 50% excise tax on the fair market value of that investment at the time of purchase (SEC. 2). Imagine buying $10 million in stock, only to owe $5 million in taxes right away. This doesn't just discourage the investment; it makes it financially impossible.

Even harsher is the rule for income. If the university earns any net income (gains minus losses) from a short-term listed investment, the tax rate jumps to a full 100%. This means every dollar of profit they make from these restricted holdings goes straight to the Treasury. The definition of a “listed investment” is broad, covering any company on the Entity List, the Military End User List, or the FCC’s restricted communications equipment list, linking university investment decisions directly to national security and trade policy concerns.

No Hiding in Mutual Funds

For most people, investing means putting money in mutual funds or ETFs. The colleges do too, and this bill anticipates that. The law includes “look-through” rules, meaning if a university invests in a pooled fund (like an ETF) that happens to hold a listed investment, the university is still treated as owning that restricted asset and could be subject to the tax. This is a huge compliance headache, as it forces colleges to track the underlying holdings of every fund they invest in. The Treasury Secretary will have to create a certification process for funds that promise they don't hold these restricted assets, but until then, it creates a massive layer of complexity for managing these huge pools of money (SEC. 2).

What This Means for Everyday People

While this tax hits only the largest institutions, the real-world impact could eventually trickle down. Endowments exist to fund scholarships, research, faculty salaries, and facility maintenance. By severely restricting investment options and potentially imposing massive tax liabilities (even if accidental), this bill could reduce the long-term returns of these endowments. For students, this could mean less financial aid or slower growth in institutional resources aimed at keeping tuition costs manageable. The goal is clearly to align institutional investment with federal policy, but the cost of compliance and the reduction in investment flexibility could ultimately be borne by the students and researchers who rely on these funds.