ACT leader David Seymour wants to require universities and tertiary institutions to ensure "free speech and academic freedom" in order to receive funding.
Mr Seymour says there is a "growing trend" of universities "abusing their health and safety obligations in order to 'deplatform' speakers or cancel events small groups of left-wing activists find to be offensive".
"This year, Massey University cancelled Don Brash and Feminism 2020 events, and staff tore down pro-Hong Kong democracy posters. The University’s new policy for dealing with external speakers allows it to cancel speakers if there is a chance of ‘mental harm to students’," Mr Seymour said.
The ACT MP plans to put forward a proposed law change, but it would need to be pulled from the ballot containing other MPs' Members Bills.
Mr Seymour's Education (Freedom of Expression) Amendment Bill would force tertiary institutions to issue free speech codes of practice and not use "the avoidance of mental harm to students, staff or visitors as a reason not to comply with the requirement to protect free speech and academic freedom".
If they were found to not have followed those proposed rules, the institution could have funding suspended, revoked or withdrawn.
"It is not the role of universities to protect students from ideas they find offensive. It is for students to make judgments about which ideas they find disagreeable and to openly and vigorously contest them," Mr Seymour said.
It comes after Mr Seymour withdrew his earlier bill that proposed to repeal part of the Human Rights Act and the Summary Offences Act which make insulting and offensive speech unlawful.
Earlier this month, University of Auckland PHD student Anisha Sankar told TVNZ1's Q+A universities have an obligation to protect marginalised communities from hate speech.
She said acts of hate speech come in a "context of inequitable power distribution".
"So the weight of certain kinds of speech have more violent consequences and effects than any kind of speech that might be offensive," she said.
Ms Sankar was worried about the possibility of the recruitment of white supremacist groups after Time reported a 182 per cent increase in white supremacist propaganda efforts in the US, according to a study by ADL.
"I'm really worried and feel unsafe about the possibility of that happening on our campus because of a refusal to de-platform white supremacist groups," Ms Sankar said.
"Especially with the white supremacist stuff that's happening at Auckland University."
Last month, Students occupied Auckland University's ClockTower building, calling for Vice Chancellor Stuart McCutcheon's resignation over reports of white supremacy activity on campus.
At the time, Mr McCutcheon told the University's student magazine Craccum, the group's posters were "unfortunate", but were protected by free speech.
In October, Massey University cancelled the Feminism 2020 event that was scheduled to take place on campus after receiving external advice on its obligations under the Health and Safety at Work Act 2015.
The university was originally going to donate the proceeds of the venue booking to a sexual or gender-diverse group, after receiving complaints "on why we have allowed the booking to go ahead, as this group holds controversial views on the rights of transgender and intersex people".
"Massey University is committed to the values of academic freedom, the freedom of speech, and the freedom of expression, as values that lie at the very heart of the tradition of a university and academic inquiry.
"However, this event has created significant disruption to our students, staff and university operations, and we cannot accept any further risk or issues, or any risk of potential harm that may impact upon a particularly vulnerable community," the university said in a statement.
Feminism 2020 was then held at Parliament.
It came after a tumultuous ordeal involving Don Brash, who was invited to speak in August 2018 at Massey University, but the event was subsequently cancelled by Vice Chancellor Jan Thomas.
Letters released via the Official Information Act revealed Ms Thomas did not want a "Te Tiriti led university to be seen to be endorsing racist behaviours".
Mr Brash was invited back and spoke in October, 2018.
Last month, Stuff reported Hong Kong pro-democracy posters were taken down by Massey University staff, with the university saying it was due to complaints and the group did not have permission to put up the posters in a certain area.
The idea of cutting funding to tertiary institutions was batted around last year, with National's Simon Bridges telling TVNZ1's Q+A that the Government had tools to deal with the situation of Don Brash's talk cancellation, with the possibility of funding cuts "at an extreme level".
"I do think they need to send a message that free speech really matters," he said at the time. "We don't want to see a culture war develop in this country, where universities in particular which are meant to be bastions of free speech actually get into narrower and narrower view points where only certain kinds of views are countenanced."
Massey University and the Tertiary Education Commission refused to comment on this story.
Massey University Student Association and NZ University Student Association were approached for comment.