The U.S. Treasury Department is proposing a rule that would strip private colleges of their federal tax-exempt status if they engage in diversity, equity, and inclusion work. The new proposal, announced Thursday, aims to align the agency’s definition of racial discrimination with a January 2025 executive order from President Donald Trump. Under current law, the IRS tax code does not grant tax-exempt status to private colleges that discriminate based on race. The proposed regulation seeks to establish that “all forms of racial discrimination in education, regardless of the intent behind or the legality of such discrimination,” run contrary to U.S. public policy.
Reversing Decades-Old Guidance
The rule would revoke a decades-old IRS provision allowing colleges to favor racial minority groups in admissions, programming, and financial assistance decisions. This shift targets the use of race-conscious college admissions, a practice banned since the U.S. Supreme Court ruled it unconstitutional in 2023. The proposal will be published in the Federal Register on Sept. 4 and is the latest move by the Trump administration to target diversity initiatives within higher education. Public comments on the proposal are accepted until early November, after which the agency will create a final rule set to go into effect in June.
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Officials cited Trump’s executive orders directing federal officials to root out DEI in colleges and K-12 schools. The proposal likened these directives to President Dwight Eisenhower’s 1957 order authorizing the use of the National Guard to enforce school desegregation in Little Rock, Arkansas. Treasury Secretary Scott Bessent said the rule would set “a clear standard” for tax-exempt institutions. Frank Bisignano, head of the IRS, added that schools continuing to engage in racial discrimination should expect to lose that status.
Exemptions and Criticism
Colleges could still adopt policies intended to eliminate prejudice and discrimination so long as they do not discriminate “on the basis of race, color, or national or ethnic origin.” The rule also explicitly allows religious colleges to admit students “on the basis of religious affiliation or membership.” Kara Freeman, president and CEO of the National Association of College and University Business Officers, called the proposal “far exceeds” the Treasury’s authority. She urged policymakers to reconsider the rule, noting that any change with profound consequences for tax-exempt status should be firmly grounded in statute and provide fair standards for compliance.
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The administration has already alleged that high-profile private colleges—including Harvard, Yale, Duke, and George Washington University—are in violation of federal nondiscrimination laws, often citing campus diversity efforts. A loss of tax-exempt status would significantly weaken these institutions’ financial standing. Vanessa Williamson, a senior fellow at the Brookings Institution, described the proposal as “the latest indication of a deeply concerning effort by the administration to politicize tax administration.” She stated that threats to the IRS’s neutrality and nonpartisanship should worry anyone who supports the rule of law.
