Time for a Wartime Higher Ed Tax Policy

Will colleges and universities yield on new buildings for funds to keep low-income students in school and help veterans go to college? Wick Sloane asks.

June 29, 2007


Memorandum to:
The Honorable Max Baucus (D-Mont.), Chair
The Honorable Charles Grassley (R-Iowa), Ranking Member
U.S. Senate Committee on Finance

Wartime Higher Ed Tax Policy:
Make Increased Student Aid Revenue Neutral


Perhaps it’s time for the nation to admit we are at war and to act accordingly. The immense Iraq war spending is the answer, not the obstacle, to helping millions of low-income students attend and finish college now. Via tax policy for donations and endowments alone, our nation allocates $18 billion in benefits to higher education. In a commendable bipartisan spirit, the Senate, this year and last, has moved to reallocate billions in federal funds for student-loan subsidies from banks to students. The Tax Code offers the same opportunity.

Executive Summary:

  1. Until the end of the Iraq war, eliminate tax deductions for new campus construction. Institutions are free to raise money and build away. I am only shifting the tax policy. How can we reconcile tax-deducted student centers with U.S. troops, the same age as college students, in Afghanistan and Iraq sleeping outdoors and eating meals out of plastic MRE bags? And being shot at.
  2. As evidence that I am for education, make donations to endow need-based scholarships for families with income under $50,000 tax deductible at a rate of 115 percent. Allow those endowing whole scholarships to write off the gift as fast as their income permits. Now, the write-off is at least three years. Donations to endow scholarships create funding in perpetuity. Buildings only create ever-increasing operating expenses in perpetuity.
  3. No tax deductions for any donations to institutions spending less than 5 percent of endowment income for student aid, not capital costs. The National Association of College and University Business Officers, NACUBO, reports an average endowment return of 10.7 percent. Note: I am not proposing federal mandates on endowment spending. My point is wartime tax policy. Yale had a 22.9 percent endowment increase, to $18 billion, for 2006; for this fiscal year Yale will spend 3.8 percent of the endowment; Yale has launched a $3 billion fund raising campaign; and Yale raised tuition and fees 4.5 percent to $43,050. Why the tax breaks in wartime?
  4. No tax deductions to institutions with endowments greater than $250,000 per student that raise tuition or fees. My own Williams College, for example, has an endowment of $750,000 per student, just raised $400 million more, raised tuition by 5.9 percent, all while using tax-deducted dollars to tear down a sound student center and build a new one. I don’t propose seizing funds, only shifting future federal focus to low-income students for as long as Iraq War spending constrains funds for social programs.
  5. Ask the federal Office of Management and Budget (OMB) to fast track proposals for formulas that would determine institutional tax status as a function of enrollment, endowment per student, percentage of full Pells, application of Work Study funds, and need-based scholarship aid. National tax policies for individuals and corporations derive from wealth and income. Why not for colleges and universities? Too complicated? Well, consider higher education and federal sponsored research. I have heard no complaints about the 35,000-word, 123-page Federal Office of Management and Budget Circular A-21, which governs formulas for research funding. Higher education wades through this play book without complaint each year for the $27 billion in federal research dollars.
  6. Save time in the public hearings and invite to testify only the chairs of the trustees of colleges and universities. The trade groups protect the presidents, and the presidents, many my heroes for what they must endure, take the public hits for their trustees. Lobbyists and presidents can’t give you straight answers. What’s the fun of subpoena power if you are just going to talk with lobbyists?
  7. Reclaim your Constitutional responsibilities over federal spending. Columbia University, Cornell, Yale and other colleges and universities have multi-billion-dollar fund raising campaigns under way. These, in turn, cause billions in forgone federal tax revenues. College and university trustees, elected by no one, then, are making decisions about billions in federal spending. Why is your Finance Committee ceding this responsibility to college and university trustees?

Discussion, Exhibits and Photographs

No, I do not propose wholesale plunder of higher education. My lunatic premise is that this $18-billion subsidy is a public good, a public trust. The $18 billion are not funds owned by colleges and universities. The $18 billion are resources that we, the people, allocated to higher education. If national circumstances change, we can review the allocation. What higher national priority can our nation have than helping students through college?

Dining at Harvard.


The Finance Committee must revise higher education tax policy to recognize wartime spending without further denying access to millions of low-income students. Reallocation of even $1 billion could create 240,000 new Pell Grants for students deciding today between groceries and books.

Your inquiry to Treasury Secretary Paulson to review college and university tax status in light of high institutional salaries and increasing student need is way too narrow. The Finance Committee can create wartime tax policies that free up funds and narrow the nation’s focus to educating low-income students.

Dining in Iraq. For more images, click here (YouTube video) or here (PowerPoint).


Higher education federal tax policy discriminates against low-income students. Our one-size-fits-all policy treats the poorest colleges the same as mighty Harvard with its $30-billion endowment. Is this fair?

In your Iowa, Senator Grassley, Grinnell College has an endowment of more than $1 million per student and revenues totaling 181 percent of expenses. Senator Baucus, for your alma mater, Stanford University, recent reported revenues were $4.5 billion with expenses of $2.6 billion, for a surplus of $1.9 billion. Stanford undergraduate tuition and fees this fall are $45,608, up 5.17 percent, and Stanford is boasting about another surplus. Grinnell -- $1 million endowment per student remember – will charge $42,422 this fall. Shifting tax policies is not seizing assets from colleges and universities. It’s deferring gratification until the troops are home. During wartime, do these institutions, however well managed, need tax benefits for gyms and student lounges and golf nets at the expense of single mothers who can’t qualify for any Pell Grant at all?

The duchies of Dupont Circle trade associations and the higher education lobbies will howl. Invite those who disagree to make their case on television in your stately Dirksen 215 committee room. Let them make their complaints eyeball to eyeball to a panel of wounded Iraq soldiers and veterans, and a few community-college students holding two or three jobs just to go to school part time.

Every year in a special section on executive compensation, The Chronicle of Higher Education also includes institutional revenues and expenses. See for yourselves below. Ask your staff to run the numbers on the federal Integrated Postsecondary Education Data System (IPEDS). This list goes on. Let these institutions raise and spend money as they wish. In wartime, why the tax breaks at the expense of low-income students?

Higher Education Positive Cash Flow Numbers      
  Revenue (000s) Expenses (000s) Profit (000s) Profit as %
of revenues
Ratio of revenues to expenses
Grinnell $165,000 $91,000 $74,000 44.8% 181%
Stanford $4,500,000 $2,600,000 1,900,000 42.2% 173%
Yale $3,400,000 $1,900,000 1,500,000 44.1% 179%
Harvard $5,000,000 $2,800,000 2,200,000 44.0% 179%
Princeton $1,900,000 $1,000,000 900,000 47.4% 190%
Williams $242,000 $160,000 82,000 33.9% 151%
Amherst $257,000 $133,000 124,000 48.2% 193%
Cornell $2,500,000 $2,100,000 400,000 16.0% 119%
Brown $776,000 $621,000 155,000 20.0% 125%

Source: Revenue and expense totals from IRS tax forms, via The Chronicle of Higher Education, November 2006


I calculate my $18 billion per year by the forgone revenue to the U.S. Treasury at a 30 percent tax rate for the $28 billion in tax-deductible donations and the tax-free income on $300 billion in endowments. Reasonable analysts may derive different numbers. None can dispute that even at the scale of federal budgeting, real money is at stake.

Your Finance Committee colleague, Sen. John Kerry, when he visited our class at Bunker Hill Community College, noted that proposed tax breaks for students and families are expensive, given the funding needed to finance the Iraq war. I have considered how to address the concern. Aren’t the proposed breaks expensive if they are in addition to the current tax policy? Modest, reasonable tax-policy adjustments, for the duration of the Iraq War, can increase desperately needed federal aid to low-income students facing soaring tuitions without breaking the Iraq-strapped Treasury.

On spending, remember, Senators, that Article 1, Section 8 of the U.S. Constitution provides to Congress, not university trustees, the “Power To lay and collect Taxes, Duties, Imports and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.” My Constitutional reading, constructionist or liberal, finds no spending power granted to college and university trustees.

For the hearings, when higher education piles in to tell you the U.S. economy will crumble with any shift in tax policy, do swear in the witnesses, for form if not for necessity. The trustees set the fiscal decisions. Invite, for example, Burton McMurtry, the chair at Stanford, Nordahl Bruce from Grinnell, James Houghton from Harvard, Jide Zeitlin from Amherst, Robert Lipp from Williams, Stephen Oxman from Princeton, Thomas Tisch from Brown, and Stanley Gold from University of Southern California. Your ambrosial lagniappe for this hearing, Senators, is the Senior Fellow of the Yale Corporation, Roland Betts, lifelong friend of President Bush. The Michael Brown or the Socrates of education? Trustees are the people to explain to Iraq and Afghanistan veterans and to community college students why a tax deduction for a fitness center is more important than more Pell Grants. Let these chairs explain why all the tax policies should stand when the total G.I. Bill benefits of $50,000 wouldn’t pay for a single year, including books, pocket money, and travel, at their colleges, let alone four years.

This column began gathering in my mind on Sunday of Memorial Day Weekend. That afternoon my friend Rich Morales telephoned from Dulles Airport. Rich, a U.S. Army Colonel, and his wife were leaving for Germany. From there, Rich would leave for his fifth combat tour in the Mideast since Gulf I. Rich, a graduate of West Point and Yale and a White House Fellow, has a three-year tour commanding a 600-soldier tank battalion.

U.S. higher education leaders will scoff at any policies that curtail their ability to spend money. These leaders believe the U.S. has the finest higher education system in the world. We end-users of this great education, though, are not doing well by the world -- pollution, poverty, and war thrive. What does that say about the work of U.S. colleges and universities? Why, for example, is Rich returning to Iraq?


Wick Sloane’s column, The Devil’s Workshop, appears as needed. He was recently awarded a fellowship from the Hechinger Institute on Education and the Media to write about community college finance and equity issues.


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