Guarding the Ivory Gates: Endowment Taxation, Financial Resilience, and the Boundaries of Behavioral Compliance

Abstract

This empirical research examines the 2017 Tax Cuts and Jobs Act, primarily the 1.4% excise endowment tax on the net investment income of eligible private, not-for-profit universities, and its impact on key financial metrics, including institutional spending and balance sheet dynamics. Employing a difference-in-differences framework with an embedded fixed-effects model using IPEDS data spanning 2014-2024, this research constructs three threshold specifications anchored at the $500K statutory cutoff. Results align with the tax's equity-driven rationale, showing that core academic spending, both in total and per student, increases among those directly exposed to the tax, with the magnitude and statistical significance diminishing with distance from the tax provision. However, these same institutions expanded their unrestricted assets and long-term investment holdings. The composition of their balance sheets largely remained unchanged, allowing them to absorb the tax burden with little financial sacrifice. These findings establish a baseline case study for an expanded tiered endowment tax system in the 2025 One Big Beautiful Bill Act, which broadened and heightened rates, warranting an assessment of its legislative validity to improve previous tax provisions.