Moneybox

It’ s Great That Politicians Are Talking About Taxing College Endowments Again

Yale_Campus
A woman sits on the grass at Yale.

Christopher Capozziello/Getty Images

Every so often, politicians around the country like to bat around the notion of taxing large college endowments, or at least forcing schools to spend more of their money on things like financial aid. It’s a good idea, and it’s currently back in season.  

In Connecticut, where the government is facing a sizable budget deficit, legislators have introduced a bill that would tax Yale’s $25.6 billion endowment, America’s second largest university nest egg behind only Harvard’s. Technically the legislation would apply to any college in the state with a endowment larger than $10 billion—but that list starts and ends with the pride of New Haven, which of course opposes the bill.1

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Over in the nation’s capital, meanwhile, members of the House Ways and Means Committee and Senate Finance Committee have sent letters to the 56 private colleges with endowments larger than $1 billion, asking for more information about their investments and spending on things like financial aid. Rep. Tom Reed, a Republican from New York, has already floated a draft bill that would require wealthy schools to spend a quarter of their endowments on financial aid, or give up their tax exempt status.

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This is all fairly familiar territory. Back in early 2008, before the financial crisis totaled the markets and gave everybody more pressing issues to worry about, the Senate Finance Committee queried 136 well-endowed schools about their finances. Around the same time, lawmakers in Massachusetts also debated taxing colleges with endowments larger than $1 billion. But ultimately the Ivy League escaped with their tax privileges unscathed. Given higher education’s lobbying power, it’s hard to imagine much will be different now; there are colleges in every congressional district, no politician likes picking a fight with a major employer back home. Even a proposal aimed exclusively at rich schools would probably encounter resistance from elsewhere in the higher-ed world, which wouldn’t want to see a slippery precedent set for politicians meddling with their endowments.

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Still, it’s good to see these ideas being discussed again. As I wrote in a longish piece last year, America’s richest colleges and universities have stockpiled enormous fortunes with the help of their nonprofit, tax-exempt status. The subsidies they receive through the IRS code can be shockingly large, amounting to tens of thousands of dollars per student, by one recent estimate—far more than the typical state school gets in direct government funding. And given how many cash-strapped public institutions are basically begging for resources these days, it’s not clear why the government should be helping Harvard and Yale stack their bank accounts a bit higher when it could instead be funneling assistance to deeply under-funded community colleges.  

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The specific proposals on the table aren’t exactly perfect. Forcing rich colleges to spend more endowment money on their own students seems less than ideal, given that their undergrads are already fairly well off and often receive generous aid. It could also just encourage them to shuffle around their accounting, by cutting spending that would have been funded by tuition revenue. And any attempt by a single state to tax a university like Yale is probably just going to end in new creative tax-avoidance strategies. But if politicians are starting to conclude that endowments at Harvard, Yale, Stanford, and the like aren’t off limits, well, that’s progress.

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Update, March 25, 2016, 5:55 p.m.: I should probably note that this seems to be a really, really badly designed bill. It would tax the annual increase in Yale’s endowment, minus its “total expenditures for its tax exempt purposes,” which, as far as I understand, basically means the school could deduct all of its operating expenses (there’s also an allowance for inflation in there). This is theoretically meant to give Yale an option: It can either “expand access to education and create innovative jobs” by spending down more of its money pile, or “share a small percentage of their retained earnings with the state’s taxpayers.” However, the legislators seem to have neglected the fact that Yale already spends more each your than it adds to its endowment (after all, they have to do something with all their tuition revenue). From 2014 to 2015, for instance, its operating expenses amounted to $3.2 billion. Its endowment only grew by $1.68 billion. So, unless I’ve totally misread something, it doesn’t look like the bill, as written, would do much of anything.

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