Treasury Department Proposes Stripping Tax Exemptions from Colleges with Race-Based Programs
The Treasury Department proposed a regulation Thursday that would eliminate tax-exempt status for private educational institutions providing targeted assistance to students based on race, marking a significant escalation in the White House's effort to dismantle diversity programs benefiting Black, Hispanic, and other minority students.
The proposed rule, which would take effect after May 2027 if finalized, broadly targets policies or programs helping students because of their race. The regulation explicitly states that such benefits in admissions, scholarships, and facilities "would be incompatible" with maintaining tax-exempt status. The Treasury Department and IRS estimate that up to 18,000 private schools, colleges, and other education institutions could be affected.
This proposal represents the latest pressure tactic from the Trump administration, which has systematically worked to eliminate diversity, equity, and inclusion policies that had become widespread before President Donald Trump returned to office. The administration's campaign began with Executive Order 14173, issued January 21, 2025, titled "Ending Illegal Discrimination and Restoring Merit-Based Opportunity," which directed federal agencies to investigate colleges with DEI programs and specifically targeted institutions with endowments exceeding $1 billion.
The strategy has proven effective. According to the U.S. Department of Education, over 300 colleges and universities have eliminated DEI requirements, closed DEI offices, or removed diversity statements from hiring practices as of April 2026. Major institutions including the University of Michigan, which terminated one of the country's largest and most costly DEI initiatives in March 2025, along with Ohio State University, the University of North Carolina system, and Purdue University, have closed or restructured their diversity offices.
Financial Stakes and Historical Precedent
The tax-exempt status carries substantial financial value for private universities. A 2013 analysis found that Princeton University's tax exemption generated more than $100,000 per full-time equivalent student in taxpayer subsidies, compared to approximately $12,000 per student at public Rutgers University. This benefit has saved many universities millions of dollars annually for over a century, granted because they provide a public good.
The federal government has rarely challenged a college's tax-exempt status, but one notable precedent exists. The IRS revoked Bob Jones University's tax-exempt status in 1976, retroactive to 1970, after the South Carolina Christian school maintained policies prohibiting interracial dating despite admitting Black students starting in 1971. The Supreme Court upheld the IRS decision in an 8-1 ruling on May 24, 1983, in Bob Jones University v. United States, establishing that the IRS may deny tax-exempt status to institutions whose policies contradict established public policy. The university eventually dropped its ban on interracial dating in 2000, issued a formal apology in 2008, and regained federal tax-exempt status in 2017.
Legal Challenges and Political Context
The administration's earlier DEI actions have encountered legal obstacles. A federal court in Maryland issued a preliminary injunction on February 21, 2025, blocking portions of Trump's initial DEI executive order after finding that plaintiffs were likely to succeed on claims that it violated First Amendment rights through content- and viewpoint-based discrimination.
The federal push aligns with a broader state-level movement. At least 18 states, including Texas, Florida, Alabama, and Indiana, have passed laws restricting DEI offices, trainings, and statements at public universities. The administration has also employed financial pressure through other channels, delaying funding for thousands of TRIO programs in fall 2025 and canceling nearly 100 grants affecting over 43,000 students, though it later reinstated the funds following a federal court order and political pressure.
Treasury Secretary Scott Bessent emphasized that cosmetic changes would not shield institutions from scrutiny.
Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature.
IRS Chief Executive Officer Frank J. Bisignano reinforced the message:
Today's proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status.
Higher Education Response
Higher education leaders sharply criticized the proposal.
The administration's latest rules changes are its most blatant attack to keep working class Americans and people of color from accessing higher education and a better life,said Mike Gavin, president and CEO of the Alliance for Higher Education.
By claiming that efforts to increase fair opportunity for all students are discriminatory, the administration is trying to gaslight the American people into believing that up is down and black is white.
Marjorie Hass, president of the Council of Independent Colleges, warned the change would most likely impact donations, which are often earmarked for scholarships. Tim Powers, a vice president of the National Association of Independent Colleges and Universities, noted that
the proposed rule may create new compliance burdens and legal uncertainties for institutions of higher education that are already operating in line with existing nondiscrimination rules.
The administration frames the proposal as restoring merit to the nation's education systems. Trump officials invoke Title IV of the Civil Rights Act of 1964, a federal law created to fight segregation that forbids discrimination in education, arguing that any favoritism toward Black and Hispanic students violates this statute. The Justice Department has opened separate investigations into several medical schools accused of favoring Black and Hispanic students in admissions.
Laws prohibit the IRS from targeting individuals and organizations for ideological reasons, and federal officials are not allowed to direct IRS investigations. Preston Cooper, a senior fellow at the conservative American Enterprise Institute who studies higher education policy, described nonprofit status as requiring "a really high bar to mess with" across both political parties. Whether the regulation becomes a widespread enforcement tool or merely serves as a warning to institutions may determine future political responses.
