The U.S. Treasury Department is reportedly weighing a monumental policy shift that could strip tax-exempt status from colleges and universities considering race in admissions, scholarships, and other institutional practices.
In a move that could send seismic shockwaves through American higher education, the U.S. Treasury Department is reportedly weighing proposals to revoke the tax-exempt status of colleges and universities that factor race into their admissions, scholarships, and other institutional practices. This potential shift, if enacted, threatens the financial bedrock of hundreds of institutions, including many of the nation’s most prestigious universities.
Sources close to the deliberations, including staff within the Treasury’s Office of Tax Policy, indicate that draft language is under review. These proposals, being formulated as IRS revenue procedures, could take effect without the need for congressional approval, marking a significant expansion of the current administration’s efforts to influence the landscape of higher education.
The core of the proposed changes lies in barring private, nonprofit educational institutions from retaining their coveted 501(c)(3) tax-exempt status if they are found to favor any racial group in areas such as financial assistance, loan programs, facility usage, or other academic and extracurricular initiatives.
Currently, existing IRS regulations permit schools to maintain their tax-exempt status even when favoring racial minority groups, provided the “purpose and effect” is to promote a “racially nondiscriminatory policy.” The new proposals would effectively redefine this, requiring schools to adopt strictly race-blind policies across the board or face substantial financial penalties.
The financial implications for institutions found non-compliant would be immense. Tax-exempt status provides colleges with a myriad of benefits, including:
Collectively, the revocation of these benefits could amount to billions of dollars in new tax liabilities for institutions, potentially forcing them to drastically rethink their financial models and operational strategies.
While the Supreme Court’s 2023 ruling already prohibited the consideration of race in admissions, these new IRS proposals would extend far beyond, potentially scrutinizing a wide array of programs and practices across more than 1,500 colleges and universities, including every Ivy League institution.
Compliance would likely necessitate the dismantling of many programs designed to address long-standing disparities in wealth and educational access for certain minority groups, notably Black and Hispanic students. Furthermore, the inclusion of “national or ethnic origin” within the definition of race could provide the administration with additional leverage in examining how schools handle issues related to international conflicts or allegations of antisemitism.
This initiative from the Treasury Department aligns with a broader push by the current administration and its congressional allies to reshape higher education. Recent actions from agencies such as the Departments of Education, Homeland Security, and Health and Human Services have seen increased pressure on institutions like Harvard University, with threats of visa withholding for international students and cuts to federal funding, often tied to concerns over campus climate and diversity programs. Even student-run organizations, such as the Harvard Law Review, have faced scrutiny over their policies.
The IRS, traditionally viewed as an independent agency, is now seemingly being utilized as another powerful lever to drive this agenda. While a White House official stated that neither the White House nor the president is directing the IRS’s actions, the Treasury Department’s recent statement from Secretary Scott Bessent, asserting that “tax-exempt status is a privilege and not a right,” underscores the seriousness of this potential policy shift.
There is precedent for such action: in 1983, the Supreme Court upheld the IRS’s revocation of Bob Jones University’s tax status due to discriminatory practices, though the university later regained its status after amending its policies.
As the Treasury’s Office of Tax Policy continues its review, the higher education sector watches with bated breath. Contemplating the profound and far-reaching implications of these potential changes. The very structure of how colleges operate and fund themselves could be on the cusp of a dramatic transformation.