Colleges Seek Answers Amid Trump Push To Cancel Tax Exemptions Over Diversity Programs

The Trump administration is threatening to cancel universities’ tax exemptions over diversity programs, and the higher education world is worried.

The new rules, which aim to stamp out policies supporting minorities on college campuses, are unusually stringent. At the same time, they’re also vague, leaving many to wonder what commonplace activities and practices might land a school in the government's crosshairs.

And the penalty for flunking the test — the loss of nonprofit status — is extreme: It would upend schools’ finances. Colleges could suddenly find themselves facing stiff tax bills, not to mention higher borrowing costs and other expenses.

“What if a university has Black History Month?” Sen. Sheldon Whitehouse (D-R.I.), who sits on the tax-writing Finance Committee, said in a recent interview. “Is that going to cause them to lose their tax-exempt status?”

Schools don’t have much time to prepare — the IRS regulations proposed Sept. 3 are slated to go into effect next June. Legal challenges are likely, with many saying the administration doesn’t have the authority to make the changes without Congress’ blessing.

But the proposed regulations open yet another front in the Trump administration’s ongoing war with universities already battling the White House on a number of issues: charges of antisemitism amid campus protests against Israel; policies governing diversity, equity and inclusion practices; accommodations for transgender students; and enrollment of foreign students.

Some conservatives are cheering the proposed rules — and urging the administration to go even further.

Edward Blum, the longtime conservative activist whose Students for Fair Admissions won a 2023 Supreme Court case throwing out affirmative action in college admissions, sees the IRS rules as a way to not only enforce that landmark decision but to influence other aspects of campus life as well.

He said the regulations should also be used to prevent schools from considering race in decisions over who they hire and promote, for example, and when they make contracting decisions.

“This is an extension of that [case], but it is also a logical next step in the use of race in public policy in the United States,” said Blum. “The doctrine that that presented has power and energy outside the admissions process.”

Devastating financial impact

The rules would cancel universities’ tax exemptions if they have any “policy or practice” that discriminates based on race or ethnicity “for any purpose,” including attempts to make up for past discrimination.

They not only apply to admissions criteria but also educational policy, scholarships, loans, athletic programs and any "other school-administered or supported program." Only private schools, including trade, elementary and secondary schools, are subject to the rules. State schools are exempt.

Losing their tax exemption would make it so colleges are suddenly liable for taxes on things like the money made through their endowment investments. Their borrowing costs would rise because they couldn’t issue tax-exempt bonds to finance campus infrastructure projects. Gifts from alumni could shrivel because they’d no longer be tax deductible. Schools may even have to change their employees’ retirement plans.

“Everything that a school does starts with the assumption that it is, and will continue to be, tax exempt,” said Alex Reid, a lawyer specializing in nonprofit issues at BakerHostetler.

The regulations cite university scholarships pegged to recipients’ race as one area that will have to go, with the administration estimating that change alone could affect 750,000 students. But colleges have paused, ended or shifted hundreds of race-conscious scholarships worth millions of dollars since the Supreme Court decision. And college scholarships for students of color, women and others have continued to decline amid lawsuits and pressure from the Trump administration.

The National Scholarship Providers Association told The Washington Post earlier this year that about 11% of all higher education scholarships still have race, ethnicity or other demographic factors in their eligibility requirements since the Supreme Court decision.

But the regulations as written mostly leave the question of what activities would cross the line unanswered, leaving the academic world struggling to figure out whether, say, race-based “affinity” housing could also cost a college its tax exemption.

It’s possible the administration will provide more detail about how the rules would work, but some wonder if the vagueness is deliberate because it will prompt schools to censor themselves. Steven Bloom, assistant vice president for government relations at the American Council on Education, predicts schools will go overboard to scrub their campuses of anything that could potentially be a problem.

“We don’t know the scope of it — it’s potentially very, very broad,” he said. “What is likely to happen is that institutions will engage in anticipatory compliance, even when they haven’t done anything wrong.”

Some changes would be difficult to make, like revising race-based scholarships funded by donations made on the precondition that they are reserved for students from certain groups. In many cases, as the regulations acknowledge, the donors may now be dead. Schools “may need to work with the donors, or the donors’ heirs, to find an alternative set of criteria for the scholarship recipients,” the IRS says.

If certain scholarships can't be changed, some warn that colleges may stop offering them altogether, leaving students who rely on them in the lurch.

“What do you do with the kids who are caught in this transition?” said one lobbyist, granted anonymity to speak candidly.

The rules also do not include a so-called de minimis exception excusing minor violations — raising the prospect of a sprawling university, with multiple satellite campuses, losing its exemption because a single office somewhere violated the rules.

“Of course, we should and do comply with Students for Fair Admissions,” Garry Jenkins, president of Bates College, a liberal arts school in Maine, said in reference to the Supreme Court case Blum's group won. “But to take and use the IRS in this way is a significant and, frankly, frightening change.”

‘We have to respond’

The IRS is collecting comments from the public as it pushes to finalize the plan, which are due Nov. 3. Some universities are wary of criticizing the rules, though, because they fear that will only invite retaliation from the White House.

“They’re all scared to comment,” said the lobbyist.

In the meantime, Blum wants the administration to make the regulations even tougher.

In lieu of race, the regulations say schools can use other criteria such as where a student is from, how much their family makes and whether someone is the first in their family to attend college. But Blum said location is a “proxy” for race and ought to be dropped.

“It is nearly as effective a racial-classification, and that is something I hope will be revisited when the final rule is adopted,” he said.

Democrats in Congress are keeping a close eye on the fight, though their options are limited, even if they win back control of both chambers of Congress in the Nov. 3 midterm elections.

Democrats could theoretically block the regulations by putting a policy rider in an appropriations bill to defund enforcement. Lawmakers could vote to nullify the rules using the Congressional Review Act, as they did last year when they nixed a Biden-era tax rule involving cryptocurrencies. But either approach would require the president’s signature.

“It’s something we have to respond to,” Sen. Raphael Warnock (D-Ga.), another tax writer, said in an interview. “I’m certainly prepared to do everything I can to support universities.”

Bianca Quilantan contributed to this report.