By Lisa Lambert
WASHINGTON (Reuters) - Tax legislation working its way through the U.S. Senate would put a new levy on endowments held by large private universities and colleges, a proposal that more than three dozen higher-education lobbying groups on Tuesday called "fundamentally flawed."
The groups, led by the American Council on Education, wrote that "creating a new and unprecedented tax on endowments" would redirect large amounts of money to the federal government and "away from providing scholarships to our students and supporting research and education."
"It also would effectively be a tax on donors' contributions and shift money from the dedicated purpose for the donation," they wrote in a letter to the Senate Finance Committee's Republican chairman, Orrin Hatch, and top-ranking Democrat, Ron Wyden.
The plan would tax investment earnings of the largest schools' endowments at 1.4 percent. All private college endowments total $350 billion, according to the National Association of College and University Business Officers.
A representative for Hatch was not immediately available to comment on the letter.
The Republican-led House of Representatives is expected to pass its tax overhaul bill as soon as Thursday. The Senate, also controlled by the Republicans, is expected to approve its version of the legislation after this month's Thanksgiving holiday on Nov. 23.
The House tax bill sparked anger from colleges and universities. In addition to the endowment levy, the legislation wipes out the deduction that graduates can take on their federal taxes for student-loan interest and eliminates other tax breaks intended to ease the burden of paying tuition.
However, the Senate bill maintains all of those individual benefits, indicating that the interest deduction will survive after the two chambers combine their tax plans for President Donald Trump to sign into a single law.
Supporters of the endowment tax say it would put the most lucrative investment funds on equal footing with other tax-exempt charities. Trump and fellow Republicans have locked horns with colleges and universities recently, saying the institutions force liberal values onto students.
The groups wrote that, even though the tax would only hit private institutions, it would set a precedent and could ultimately lead to taxation of all higher education investment funds. The groups included the Association of Catholic Colleges and Universities and the National Association of Student Financial Aid Administrators.
(Reporting by Lisa LambertEditing by Jonathan Oatis)