In Trump vs Harvard battle, a tax-exempt status threat. How this could deal a big blow to the US university

The face-off between Harvard University and US President Donald Trump is heating up. A day after the Trump administration announced a federal funding freeze of $2.2 billion, the US president threatened to strip the elite college of its tax-exempt status.

This latest clash between Trump and Harvard could test the limits of the government’s power and the independence that has made US universities a destination for scholars around the world.

As the war hots up between the two, we take a closer look at what’s going on and what benefits Harvard gains from being a tax-exempt institution.

Trump threatens to revoke Harvard’s tax-exempt status

On Tuesday morning, in a Truth Social media post, US President Donald Trump wrote, “Perhaps Harvard should lose its tax-exempt status and be taxed as a political entity if it keeps pushing political, ideological, and terrorist inspired/supporting ‘sickness?’ Remember, tax-exempt status is totally contingent on acting in the public interest!”

The social media post is part of Trump’s continued intimidation tactics against the wealthiest college in the world. Last Friday, this battle heated when the Trump administration sent a list of demands it said must be met, or risk losing some $9 billion in federal funding.

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Trump’s demands of Harvard were:
>> Eliminate any consideration of demographic diversity in its hiring and admissions, and shutter all diversity, equity, and inclusion programmes.
>> Submit to an external audit that ensures hiring and admissions include sufficient “intellectual diversity.”
>> Harshly punish students involved in protests against Israel and its war in Gaza, and ban several pro-Palestinian groups from campus.
>> Reorganise its leadership to elevate staff devoted to complying with the administration’s demands.

However, Harvard University’s president seemed to be in no mood to comply. Alan Gerber, the college’s president, said the school would not “negotiate over its independence or its constitutional rights”.

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In a letter to the Harvard community on Monday, Garber claimed the demands violated the university’s first amendment rights and “exceed the statutory limits of the government’s authority under Title VI”, which prohibits discrimination against students based on their race, colour or national origin.

This, in return, prompted the federal government to announce a freeze of more than $2.2 billion in grants and $60 million in contracts to Harvard. Notably, this is the seventh time that the Trump administration has taken such a step — it has suspended funding of several of the country’s most elite colleges, including Columbia, Brown and Cornell.

Harvard receives praise for standing its ground

Harvard, the oldest and wealthiest university in the United States, is now the most prominent institution to stand its ground against Trump. This has prompted many higher leaders to praise the US college — former US President Barack Obama wrote on X, “Harvard has set an example for other higher-ed institutions — rejecting an unlawful and ham-handed attempt to stifle academic freedom. Let’s hope other institutions follow suit.”

Ted Mitchell, the president of the American Council on Education, an organisation that represents more than 1,600 colleges and universities, told NPR that by taking the lead, Harvard paved the way for other institutions to oppose the administration’s demands. “If Harvard hadn’t stood up, it would have sent a chill across higher education that would have really hampered the ability of other institutions to define for themselves where that red line is.”

Meanwhile, Trump and his team have justified their pressure campaign on universities as a reaction to what they say is uncontrolled anti-Semitism and support for the Palestinian militant group Hamas. Trump “wants to see Harvard apologise. And Harvard should apologise,” Press Secretary Karoline Leavitt told journalists. The anti-Semitism allegations are based on controversy at protests against Israel’s war in Gaza that swept across campuses last year.

Harvard’s tax-exempt status

But what does Trump mean by revoking the tax-exempt status of Harvard?

In the US, nearly all colleges and universities are tax-exempt organisations as defined by IRC Section 501(c)(3). They are given non-profit status along with charities, religious institutions and some political organisations. This is because colleges have long been recognised as fundamental to fostering the productive and civic capacity of their citizens—and/or the fact that they are state governmental entities.

What this means is that the charitable contributions Harvard receives and its investment income on its $50 billion-plus endowment are not subject to federal income tax. It also means other income it receives is exempt.

Owing to its tax-exempt status, Harvard enjoys several benefits; it doesn’t have to pay traditional property taxes on educational buildings. According to realtor.com, Harvard avoids levies on $4 billion worth of buildings and land in Boston and $8.7 billion in Cambridge that currently aren’t subject to property taxes.

Additionally, it can sell bonds that pay interest that’s exempt from federal taxes, which lures investors and helps lower borrowing costs. Donors can also gain tax benefits for gifts to charitable institutions. As per Bloomberg, Harvard gained at least $465 million in 2023 owing to its tax-exempt status.

If Trump does revoke Harvard’s tax-exempt status, it would face increased taxation and financial aid programmes, faculty hiring, and University-funded research would likely bear the brunt of the effects, a Harvard spokesperson said.

Losing tax-exempt status

Amid the threats to revoke Harvard’s status, the one question that emerges is: Can the US president actually do it?

The decision to scrap an institution’s tax-exempt status lies in the hands of the Internal Revenue Service (IRS), which is supposed to enforce federal tax laws independent of partisan pressure. According to the IRS, an organisation can lose its status if they’re involved in political campaign activity or are heavily involved in lobbying. A group can also lose their designation if they have excessive income unrelated to their core mission or fail to file annual returns with the IRS.

It is yet to be seen how long can Harvard fend off Trump’s increasing pressure, but it does set up a likely long-running, high-profile fight.

With inputs from agencies