Washington’s New Share: How an 8 Percent Endowment Tax Will Reshape Stanford’s Budget

In the last week of September, Stanford announced the kind of number that endowment managers spend careers chasing. The Merged Pool, the vehicle that holds most of the university’s endowment, returned 31.7 percent for the year ended June 30, 2026, more than double the 15.5 percent median for American college and university endowments that Cambridge Associates had preliminarily reported. The pool closed the year worth $61.5 billion.

Tucked into the same announcement was a qualifier that would have been unremarkable a year earlier. The returns, Stanford noted, “do not reflect federal excise taxes, which rise to 8.0% this academic year for Stanford and a very small number of other universities.”

That clause is the subject of this report. For most of a decade, the federal tax on the investment income of wealthy private universities was a rounding error in Stanford’s books. Beginning with the fiscal year that opened on September 1, 2026, it becomes one of the larger recurring claims on the university’s wealth, one that Stanford’s own Board-approved budget puts at roughly $250 million a year. Drawing on the university’s audited financial statements, its 2026/27 Budget Plan, the text of the federal statute and Stanford’s public statements, The Chronicle traces where that money comes from, how the university has chosen to absorb it, and who on the Farm will feel it.

From 1.4 percent to 8 percent

The tax itself is young. The Tax Cuts and Jobs Act of 2017 created a 1.4 percent excise tax on the net investment income of private colleges with large endowments relative to their enrollment. Stanford paid it, and its audited statements show how modest the burden was: for the fiscal year ended August 31, 2024, the university recorded $31.9 million in current excise tax expense, and for fiscal 2025, $37.0 million.

Then came Public Law 119-21, the One Big Beautiful Bill Act, signed July 4, 2025. Section 70415 of that law rewrote Section 4968 of the Internal Revenue Code into a three-tier schedule keyed to an institution’s “student adjusted endowment,” meaning its investment assets, excluding those used directly for its educational mission, divided by the number of students. Institutions with between $500,000 and $750,000 per student continue to pay 1.4 percent. Those between $750,000 and $2 million pay 4 percent. Those above $2 million pay 8 percent. Schools with fewer than 3,000 tuition-paying students and public universities are outside the tax entirely. The amendments apply to taxable years beginning after December 31, 2025, which for Stanford, with its September-to-August fiscal year, means fiscal 2027.

It is not hard to see where Stanford lands. The university’s fiscal 2025 financial report lists university investments of $51.7 billion and an enrollment of 7,289 undergraduates and 10,025 graduate students. Dividing one by the other yields roughly $3 million per student. That is a rough calculation, since the statute counts students on a full-time-equivalent basis and excludes assets used for the university’s exempt purpose, but the margin above the $2 million line is wide enough that the precise method does not change the answer. Stanford’s audited statements put it plainly: the law “increased the current excise tax on Stanford’s net investment income from 1.4% to 8.0% beginning in fiscal year 2027.”

The law also widened what counts as taxable income. Under the rewritten statute, interest on student loans made by an institution and what the code calls “federally-subsidized royalty income,” royalties tied to federally funded research, are now counted as gross investment income. For a university whose technology-licensing history is woven into the history of Silicon Valley, that is not an abstraction, though Stanford’s public documents do not break out its likely effect.

The liability that appeared on the balance sheet

The clearest measure of how quickly the new tax arrived is a line in Stanford’s audited financial statements that most readers will never see.

Because Stanford owes the excise tax only when it realizes a gain by selling an asset, the university also books a “deferred tax liability,” an estimate of the tax it will eventually owe on gains that exist on paper. As of August 31, 2024, that liability stood at $200.5 million. One year later, after the new law was enacted, it stood at $1.1 billion. The deferred tax expense recorded for the year jumped accordingly, from $16.3 million in fiscal 2024 to $792.8 million in fiscal 2025.

Two details in the notes deserve attention. First, the tax reaches beyond the academic enterprise: Stanford’s statements explain that its net investment income “includes net investment income of certain related entities, including SHC and LPCH,” the university’s two hospital corporations, and that $90.3 million and $30.0 million of the August 2025 liabilities were attributable to Stanford Health Care and Lucile Packard Children’s Hospital respectively. Second, the liability is a forecast rather than a bill. Its ultimate size depends on when, and at what prices, Stanford’s managers sell. A year like fiscal 2026, with a 31.7 percent return largely on paper, enlarges it.

What $250 million a year means

Stanford’s 2026/27 Budget Plan, approved by the Board of Trustees on June 10 and 11, 2026, opens its executive summary with the tax. The legislation, it says, “has an expected annual impact of $250 million on investment returns, directly reducing endowment payout that supports Stanford’s key missions.”

Some proportion helps. Stanford says the Merged Pool will distribute more than $2.2 billion to the university in fiscal 2027, roughly one-fifth of its operating budget. By The Chronicle’s arithmetic, a $250 million annual impact equals about 11 percent of that distribution. It is also about one-fifth of the record $1.2 billion in financial aid and student support that Stanford says it will provide this year, and it exceeds the $140 million in general-funds cuts the university imposed in 2025.

The budget plan projects consolidated revenue of $10,750.2 million against expenses of $10,412.3 million for 2026/27. Endowment income is budgeted at $2,174.8 million, up 5.0 percent. Those are large and healthy numbers. The tax does not threaten Stanford’s solvency, and nothing in the university’s documents suggests otherwise. Its effect is subtler and, over decades, more consequential: it lowers the rate at which the endowment’s support for the university can grow.

How the university absorbed the blow

The first response came before the tax took effect. In a June 26, 2025 letter to faculty and staff, President Jonathan Levin and Provost Jenny Martinez announced a $140 million reduction in the allocation of university general funds for 2025-26, citing “reductions in federal research support and an increase in the endowment tax.” A staff hiring freeze already in place continued. In early August 2025, according to Reuters and Inside Higher Ed, the university disclosed plans to lay off 363 employees, with a filing to California’s Employment Development Department citing “anticipated changes in federal policy—such as reductions in federal research funding and an increase in the excise tax on investment income.”

The 2026/27 Budget Plan gives the fuller accounting. Over 600 staff positions were eliminated, it reports, including the layoff of 391 staff and the elimination of 271 vacant positions. According to the Stanford Report’s account of Martinez’s June 2026 presentation to the Faculty Senate, staff headcount in administrative and auxiliary units has declined 7.4 percent since August 2024, and the hiring freeze on general-funds staff positions will continue “for the foreseeable future.” The same account states that “the endowment tax necessitated the budget cuts and layoffs that were implemented in the summer of 2025.”

The second response is quieter and lives in Stanford’s payout machinery. The university does not simply spend a fixed share of the endowment each year. Under a smoothing rule last revised in October 2021 and documented by Stanford’s financial-management office, next year’s payout per share is generally set by weighting the current payout at 80 percent and a target of 5.25 percent of the share price at 20 percent, then adding a long-term growth factor of 4 percent, with lower and upper guardrails at 4.25 and 6.25 percent. The design is meant to keep a single good or bad year in the markets from whipsawing departmental budgets.

For 2026/27, the budget plan says, payout to an individual fund invested in the Merged Pool will rise 3.0 percent, “lagging the expected growth in costs the endowment supports (primarily faculty compensation, financial aid, and research and instruction).” The tax, it says, “reduces individual-fund payout growth by about 1.5 percentage points,” and that effect “will be phased into the payout through the university’s smoothing rule.” Total Merged Pool payout is still projected to rise 4.9 percent, helped by new gifts.

Stanford also cut the payout rate on its Expendable Funds Pool, the roughly $7.0 billion collection of non-endowed money such as unit budget savings, faculty discretionary accounts and auxiliary reserves, from 5.5 percent to 5.0 percent “to recognize the impact of the 8% investment excise tax.” That one change, the plan says, reduces payout to operations by $28.6 million.

Martinez described the cumulative effect to the Faculty Senate in measured terms. “While there are still a great number of uncertainties and pressures on our budget, we find ourselves in a much more stable position where we aren’t contemplating further budget cuts [for FY27] at this time,” she said, according to the Stanford Report. Strong returns and the smoothing formula, the Report’s account says, helped the university “metabolize” the tax, which in the years ahead “will likely be felt primarily through slower growth in endowment payout.”

Who feels it

Endowment payout is not a single pot. Stanford invests more than 9,000 endowed gifts through the Merged Pool, and most of their payout is restricted by donors to specific purposes. Only 18 percent of endowment income, $391.7 million in 2026/27, is unrestricted, according to the budget plan. The rest funds named professorships, fellowships, scholarships, research centers and programs whose budgets rise and fall with the payout on their particular funds.

That is why a 1.5-point drag on payout growth matters more than its size suggests. A chair whose endowment payout rises 3.0 percent while the salary and benefits it supports rise faster leaves a gap that someone must fill. The budget plan reports salary expense rising 5.4 percent in 2026/27 and the fringe-benefit rate for regular employees climbing from 32.4 to 33.8 percent. The plan acknowledges the problem directly: “To help offset the impact of reduced endowment payout due to the excise tax, the budget also provides targeted mitigation for units whose endowments support faculty and postdoctoral salaries as well as graduate student support.”

The same budget raises the share of tuition the university covers for research assistants from 55 to 75 percent, making graduate researchers less expensive for faculty grants to employ, and directs added support to undergraduate need-based aid for middle-income families. Stanford says it held undergraduate tuition flat for 2026-27, and that families earning under $100,000 pay no tuition, room or board, while those under $150,000 pay no tuition. Those commitments are the ones the university has said it would protect first. The pressure, by the logic of its own documents, lands on growth: on the pace of new faculty lines, on staff positions that are not refilled, and on the slow compounding of restricted funds that donors intended to grow with the institution.

The argument behind the number

The tax rests on a policy judgment that the wealthiest universities, sheltered by tax exemption, should return a larger share of their investment gains to the Treasury. Its critics in higher education respond that endowment income is not idle wealth but the financing of teaching, research and aid, and that taxing it ultimately taxes students and science. Both arguments have long histories, and The Chronicle does not resolve them here.

What Stanford’s records allow is a narrower and more useful observation. The university’s long-run investment record is exceptional. Robert Wallace, chief executive of Stanford Management Company, said its ten-year performance “places the university in the top 5% of higher education endowments,” with a 12.5 percent annualized ten-year return against a 9.9 percent median. He added a caution of his own: “Performance in any one year should not be given undue weight.”

That caution cuts both ways. A single extraordinary year does not change the arithmetic of the tax, because the 8 percent rate applies to the very gains that produce such years. The larger the gains Stanford realizes, the larger the bill. Federal policy has, in effect, made Washington a standing participant in the upside of Stanford’s investment success.

What to watch

Three documents will tell the next chapter. The first is Stanford’s fiscal 2026 financial report, which the university says will publish the endowment’s August 31, 2026 value “in the coming months” and which should show how the deferred tax liability moved after a 31.7 percent year. The second is the 2027/28 Budget Plan, due before the Board next June, which will show whether the 3.0 percent payout increase was a one-time adjustment or the new normal. The third is the university’s first full-year excise tax figure at the 8 percent rate, which will appear only after fiscal 2027 closes.

There is also the statute itself. Its tiers are defined by endowment per student, and enrollment is the denominator. The fiscal 2025 report notes that Stanford’s leadership is pursuing “exploration of further expansion of the undergraduate class.” Stanford has not tied that exploration to the tax, and nothing in its public record suggests the two are linked. But the arithmetic of the law means that every policy affecting the size of the student body now carries a tax dimension, and that every great year in the markets carries a federal share.

Leland and Jane Stanford endowed a university meant to last “over decades and centuries,” as President Levin put it in September. The endowment tax will not change that horizon. It will change, slowly and by compounding, how much the university can do along the way.

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Sources: Stanford University Annual Financial Report, fiscal year 2025; Stanford University Budget Plan 2026/27; “Stanford University reports annual financial return in its Merged Pool,” Stanford Report, Sept. 24, 2026; “Update on the 2025-26 budget,” Stanford Report, June 26, 2025; “Budget and staffing update,” Stanford Report, July 31, 2025; “Stanford FY27 budget invests in faculty, students, and staff amid continued uncertainty,” Stanford Report, June 2026; Stanford Financial Management Services, Endowment Payout Process; 26 U.S.C. § 4968 as amended by Pub. L. 119-21, § 70415; Reuters and Inside Higher Ed reporting, August 2025.

Photo: The Main Quad entrance by Jerrye and Roy Klotz MD, licensed under CC BY-SA 3.0, via Wikimedia Commons.