Tax policy/IRS

The tax on endowments will unfairly damage small colleges (opinion)

Taxing Endowments

The Tax Cuts and Jobs Act places an explicit emphasis on unleashing the potential of the private sector. Proponents argue that slashing tax rates will lead to greater private business investment, capital formation and improved productivity -- resulting in more jobs and higher wages for American workers.

Some have argued that the cuts don’t go far enough. Wisconsin Senator Ron Johnson initially balked, arguing that the legislation favors corporations over so-called pass-through companies. He worried that differential treatment would skew investment decisions and worsen the competitive position of small businesses and business partnerships.

Johnson is right on this point. It is bad public policy to have the tax code favor one form of organization over another. But there is another class of private enterprise getting even worse treatment: America’s small colleges, particularly private liberal arts colleges. There are hundreds of these institutions across the country, typically with 500 to 2,500 students, offering distinctive alternatives to the big university settings.

Many are located in small communities, contributing to the local economy and often helping to shape the area’s cultural life. These colleges have thrived not through public handouts, but by meeting budgets through a combination of tuition revenues, alumni and donor contributions, and a draw from the institutional endowment. However, as the higher education marketplace has become increasingly competitive, many institutions are struggling. The pending legislation has fiscal implications for many of them, and might well be the final nail in the coffin for those struggling to survive.

The legislation is clearly antagonistic to the higher education status quo, with provisions such as eliminating the deductibility of interest on student loans and limiting deductions for charitable contributions, which will almost certainly affect gifts from less affluent donors. Perhaps most egregious: placing a 1.4 percent excise tax on investment income from college and university endowments. The House bill originally applied to private institutions with endowments over $100,000 per student and was amended upward to $250,000, while the Senate version relaxed this to $500,000 in endowment per student.

The tax affects so few and raises so little revenue that the Cato Institute’s Neal McCluskey says it essentially amounts to Republicans saying, “Take that, Harvard!”

In response, representatives from Harvard University and other institutions are speaking up in opposition to the tax. George Will dedicated a recent column to defending his alma mater Princeton’s use of its $20 billion endowment to support its “need-blind” admissions and generous need-based financial aid. On a smaller scale, Grinnell College President Raynard Kington appeared on National Public Radio to talk about the revenue stream from its $1.8 billion endowment that allows more than one-quarter of its 1,700 students to attend tuition-free. As a Grinnell alumnus and a beneficiary of its generous aid packages, I found a lot to agree with in President Kington’s assessment.

But many of the colleges subject to the House bill’s endowment tax have much different economic profiles than Princeton and Grinnell and are located in rural communities, such as Wabash College and Earlham College, both in Indiana. Senator Johnson might consider why an institution such as Ripon College, in a small community in his home state, with an endowment of under $100 million, would potentially have been treated like Harvard, Yale, Stanford and Princeton -- each with endowments in excess of $20 billion.

The case against the tax isn’t really about survival, though clearly that is of concern, but about principles of the proposal itself. Small colleges survive because amid the greatest university systems in the world, they offer students attractive curricular and co-curricular offerings. I am a professor of economics at Lawrence University, one of a handful of small institutions that offer a liberal arts curriculum alongside a conservatory of music. Many of our students enroll because we deliberately foster interaction between the college and the fine arts. One of our recent economics graduates performed in operas during his time here, and he now runs a company that manufactures and distributes LED lighting. Another economics major had leading roles in campus plays and is now earning her graduate business degree at Duke. These stories are not unusual. They represent a central reason why students choose to attend a small college.

There are similarities across many institutions, but each offers something that distinguishes it and allows it to thrive in a competitive market for higher education. Some colleges have preprofessional programs, others have distinctive curricular offerings or pedagogic approaches, while some follow distinct religious precepts. The Milwaukee School of Engineering and Rose-Hulman Institute of Technology offer engineering education. Colorado College and Cornell College offer a single course at a time in several-week blocks. Wheaton College in Illinois offers a liberal education “deeply rooted within a Christian worldview.”

And then there is Hillsdale College, the small Michigan institution that is a darling of conservatives for its emphasis on the Western canon and its eschewal of all federal funding. The Senate plan would have exempted Hillsdale from the tax had four Republicans not broken ranks to defeat the exemption.

The near-unanimous support among Republicans for the proposed Hillsdale exemption is clear evidence that the endowment tax is expected to be detrimental to the operations of even well-heeled organizations. If the Republicans want to target the largest endowments, they should do it directly rather than pushing forward this charade that will undermine small American colleges and their communities.

David Gerard is the John R. Kimberly Distinguished Professor in the American Economic System and associate professor of economics at Lawrence University in Appleton, Wis.

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Congress should change the proposed endowment tax so institutions use resources to serve less-affluent students (essay)

Taxing Endowments

The U.S. House and Senate are working to reconcile their tax proposals, each of which includes an excise tax on high-endowment, private, nonprofit colleges and universities. The fact that such a tax on endowments appears in both bills suggests it is going to become law if the reconciled bill passes Congress. But rather than taking those resources away, the conference committee should propose a new version of the tax, one that changes the incentives facing those institutions.

The current Senate proposal would apply to colleges with more than 500 students and endowments per student greater than $500,000, and would affect about 26 institutions. The current House version has an endowment-per-student cutoff of $250,000 and would add roughly an additional 40 institutions to the list. An excise tax will force those institutions to reduce spending or find ways to increase revenues to offset the loss from the excise tax. Faced with reduced resources, they will have to make decisions about cutting something. Will it be research funding, financial aid to students, the academic program -- or all of the above?

Reduced resources for public higher education from strained state appropriations have led to increases in tuition, which would be another alternative for these colleges and universities, since many families of students competing to attend them are willing and able to pay the tuition. It is very likely that many of the private institutions affected by the endowment tax would choose some combination of all the options, balancing competing priorities and the downsides of these alternatives on the margins. As a result, reducing need-based financial aid would be part of the response -- only one of several unintended, shortsighted and damaging consequences.

The final Senate bill exempted one additional college from the excise tax, and it was not Hillsdale College (with that amendment being defeated). Adding two words, the Senate amended the House’s definition of “applicable educational institutions” from ones with at least 500 students to ones with at least 500 tuition-paying students. With that change, Berea College, which otherwise would have been subject to the excise tax, becomes exempt.

Berea only admits students from families with incomes in the bottom 40 percent of the income distribution and charges them no tuition. If the goal of this exemption is to recognize the value of making a quality education available to talented students from the bottom 40 percent of the income distribution, why not structure the proposed excise tax in a way to encourage all of the other targeted colleges and universities to offer admission and free tuition to more students from the bottom 40 percent of the income distribution? Legislators could use Pell as a measure: students who are eligible for Pell Grants are a good proxy for students from this part of the income distribution.

Assuming policy makers want this group of colleges and universities to admit more students from this demographic, they could exempt other institutions on the list from the proposed excise tax if their share of Pell Grant students exceeded a certain level. Currently, the share of Pell Grant recipients at the colleges and universities that would be subject to the excise tax in the Senate version ranges from 7.4 percent to 22.5 percent. If the approximate amount of revenue that would be taken away from these institutions through the excise tax were instead used for need-based financial aid for additional Pell Grant recipients, approximately 5,000 more students could be supported through financial aid, increasing their number of Pell Grant recipients by approximately a third, and their average share of a college or university’s student population from about 15 percent to 20 percent Pell. (Note: This assumes a long-run average return of 8 percent and institutional grant aid per Pell student of about $40,000.)

Alternatively, the excise tax could be implemented on a sliding scale, depending on an institution’s share of Pell Grant recipients and the net price that students are asked to pay. These options, rather than taking resources away from higher education, would create incentives for wealthy institutions to use their resources to educate more of America’s talented low- and middle-income students.

Many of these same colleges and universities are already committed to educating a more socioeconomically diverse student body and have been hard at work on this for years. A majority of the institutions on the Senate list are committed to the American Talent Initiative, working to increase the access and success of talented lower- and middle-income students by 2025. A change in the excise tax provision could encourage additional colleges and universities to make similar commitments, contributing to the public good by increasing economic mobility through education -- long an important component of the American dream.

Catharine B. Hill is managing director of Ithaka S&R and president emerita of Vassar College.

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How the Senate and House tax bills would hit higher education

On eve of vote on Senate tax reform plan, we compare it to the House version, which would hurt students and families more. Both would hit colleges and universities hard by imposing new taxes and constraining state budgets.

How financial aid policies are like tax policies (essay)

In recent weeks, people across the country have paid quite a bit of attention to tuition resets.These discussions almost always start with a premise about “unsustainable discount rates,” which results in the impression that colleges are giving away too much financial aid to those who don’t need it. I dislike the terms “discounting” and “discount rate” and think those unfortunate terms have done real damage to the purpose of financial aid, the value of financial aid policy and even the perceived value of a college education.

Recently, however, I think I’ve found a way to refresh this conversation in way that could add some value. Unfortunately, my inspiration comes from our tax code -- which has also been receiving a great deal of interest lately, given the GOP plans to reform it.

I heard a segment on American Public Media’s “Marketplace” program about the U.S. tax code and how it’s used to influence behaviors and accomplish goals that go well beyond just fueling our government with the resources it needs to function. I found myself thinking it sounded similar to how financial aid is awarded in higher education. Tax policy and financial aid policy are both complex and not well understood by the public, and are both under fire from various stakeholders. Financial aid and tax breaks both cost their sources (higher ed and the feds) at the outset, and the policies are difficult to change once they are established.

But for the purpose of my question, the most important characteristic they share is that they are both designed to influence behavior.

Americans love a good deal -- which in taxation can translate into a good tax deduction or break, and which in the college decision process often is related to a scholarship offer or need-based financial aid. If colleges suddenly stopped offering financial aid, with an accompanying tuition reset or not, some colleges would be just fine, enrolling the same number of students. But the composition of the student body would be quite different from what it is today and nowhere near as diverse. And that is because higher education uses financial aid to shape the student body in ways that are deemed most beneficial to the college and its students.

This is a valuable observation when one thinks about how the tax code works, too.

Tax deductions, tax credits or tax preferences are designed to accomplish something that is needed or offers value. In the interview on “Marketplace,” Daniel Hemel of the University of Chicago described the tax code as an anti-poverty program, a housing program, a primary way to fund health care and so on. The tax code can incentivize taxpayers to give to charity, save more for retirement, etc. The basic argument is that the tax code supports the things that the government needs and wants to do. If you take away the incentive, worthy efforts suffer.

Similarly, financial aid is designed to influence behavior and accomplish some altruistic goals, too. Financial aid is awarded for many reasons, including making higher education affordable. It is also part of many colleges’ business plans to sustain enrollment.  And financial aid is awarded to accomplish institutional goals and influence the behavior of students and families during the college decision-making process.

So rather than viewing financial aid as discounting the cost to attend college, what if we thought of institutions’ investments in it as advancing affordability, geographic diversity, racial diversity, overall student academic profile, musical or athletic talent, and academic program distribution? By definition, “discounting” implies that colleges could otherwise command those dollars from students, which is very unlikely in many circumstances.

I understand that the anti-taxers will find folly in this argument because they’d like to support only what is needed. And the anti-discounters will want to make similar arguments that discounting jeopardizes the sustainability of our colleges. It may, yet if it done strategically, it might actually be what saves some colleges and enriches the experience for students.

Meanwhile, I believe it would benefit the higher education community to think in terms of how financial aid represents a college’s values -- not in terms of offering families a so-called discount. Perhaps the simplest way would be to actually adopt another term rather than “discount,” and one that’s pulled directly from the language of taxes: “incentive.” This term works transparently for both institutions and families and certainly works for public policy makers. A college or university would communicate that it is offering an incentive to enroll a student to advance its goals, and the student would receive another incentive to apply to that institution.

Whatever the terms we use, we should think about financial aid as something that advances important, strategic and even noble goals -- and that benefits the student and the institution. That could enrich the conversation we are having about the cost of higher education and help us find better ways to address and solve the problem.

By W. Kent Barnds, Executive Vice President for External Relations at Augustana College in Rock Island, Ill.

 

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Exempting tuition waivers for graduate students helps all of society (essay)

Many graduate student employees receive tuition waivers as part of their compensation package. As my fellow University of Illinois Ph.D. student Emily Rodriguez noted, these waivers are like coupons, providing a discount on graduate education in exchange for labor provided at below-market value. Although I was shocked to learn that the new GOP tax plans proposed to tax our waivers, I learned that this is not the first time such measures have been introduced.

In 1987, because of changes in the 1986 tax bill, graduate employees were unsuspectingly taxed. Luckily, colleges and universities were able to successfully lobby on graduate students’ behalf. This time around, there have been a few stories from Inside Higher Ed and other publications, including even Forbes, that position graduate students as unfortunate victims of a dispassionate Congress. Although the human cost of this regressive reform is important, this is ultimately a condemnation of education.

Like other graduate students, I was devastated when I heard the news about the tax bill. I began tweeting and talking to colleagues so that we could start organizing a response. Unfortunately, I heard skepticism from people that anyone outside academe should care about graduate student tuition waivers. Such skepticism is misguided and relies on the notion that universities are disconnected from or do not serve the public. It improperly values universities and both graduate and undergraduate education.

Land-grant universities, created in 1862 by the Morrill Act, serve the public by providing the education necessary for creating an informed citizenry and propelling economic growth. Despite the importance of higher education, universities have been hit by significant budget cuts. According to a study in Minnesota, such cuts do not save money in the long run. Researchers found that reducing subsidies for higher education would result in fewer completed degrees and lower wages for workers, as well as fewer benefits from research. The value of the individual and societal benefits of universities was estimated to be much more than the cost of subsidies. Likewise, the meager gains from taxing 145,000 tuition waivers would not outweigh the cost to our democracy and economy.

Treating graduate students like disconnected eggheads is a dismissal of the skills obtained in graduate school and of the benefits all Americans gain from a more educated society. Graduate employees perform a variety of types of work on campuses. They teach classes, in either stand-alone sections or by assisting professors; they grade papers and exams; they hold office hours; they engage in their own research and research with colleagues; they hold administrative positions; they train for their professional careers. Although this work is often thought of as necessary training for future professors, not all graduate students become faculty members.

In fact, a study of biomedical departments found that graduate students who have research assistantships go on to research and development jobs in both academia and the private sector. The same skill sets that are useful in academic research, such as strong analytical and problem-solving skills, are valuable outside academe. Furthermore, teaching, in particular lab sections of science courses, can help graduate students develop their own research skills, which may be used to develop innovations in science or technology within or outside academe.

At the University of Illinois, there is a “What Do I Do with a Ph.D. in the Humanities?” group that specializes in helping students navigate careers outside higher education. The group demonstrates that humanities graduate students have a lot to offer the public and private sectors -- including excellent writing skills, the ability to lead meetings or trainings, and the capacity to research and analyze complex ideas. It is a choice to apply the skills gained from graduate education, teaching and research in the public or private sector.

Graduate research and teaching experience are not only important for graduate students but are also formative for undergraduate students. Some of the critiques of the tax bill have focused on the deleterious effect it might have on STEM education, but the impact on the social sciences, humanities and arts is equally important. A 2012 survey reported that written and oral communication are two skills employers seek most in employees. Teaching assistants in English, communications and other departments spend hours grading papers and talking to students about how to write and present their research coherently. At the University of Illinois, many students are required to take public speaking, a course taught by graduate students within the Department of Communication. Those are skills that students can take with them in the private sphere in many fields.

Between the late 19th and mid-20th centuries, the United States invested in improving access to higher education because of the importance to individuals and society. But today, by proposing to tax graduate tuition waivers, Congress is signaling that higher education is not important to the economy. They are wrong. Education increases the lifetime earning of those with degrees and can raise the wages of those they work with. Individuals with college education and advanced degrees are more likely to vote, volunteer and give charitably.

Finally, research universities can help solve societal problems in a variety of areas. Engineering researchers at the University of Illinois recently developed a camera that could lower the cost of cancer detection. The Andrew W. Mellon Foundation recently awarded a grant to the Education Justice Project, which serves prison populations by providing education, which can improve quality of life and lower recidivism rates.

Unfortunately, there are still obstacles to access, including in graduate education. By taxing tuition waivers, Congress will create further barriers to graduate education, particularly among students from poor or minority backgrounds who may already feel isolated in higher education.

Instead of taxing tuition waivers for research and teaching assistants, Congress should be moving in the opposite direction. Exempting tuition waivers from taxation is not only fair, but it is also a continuing commitment to the economic and societal benefits of accessible higher education.

Mary Grace B. Hébert is a Ph.D. candidate at the University of Illinois at Urbana-Champaign.

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Possible solutions to the higher ed wealth gap, an old problem (essay)

Inside Higher Ed's recent article on the growing chasm between wealthy institutions and “poorer” (in dollars) institutions begs us to answer this question: How should we deal with the reality that the 40 wealthiest institutions (the Elite 40) hold 66 percent of the higher education endowment wealth, receive 60 percent of private donations and have highest percentage of endowment growth in recent years among higher education institutions? Can we and should we live with this reality?

Regardless of one’s views of wealth distribution as a generalizable matter, the concentration of wealth in the Elite 40 is problematic for many within and outside government. I suspect that this concern is not because of a distaste, per se, for wealth and its benefits. Rather, it is the felt need to provide affordable quality education for the thousands upon thousands of vulnerable students currently and prospectively in the educational pipeline coupled with the current lack of resources at many of the institutions that have served and continue to serve these students.

In situations like this, I worry that current and future proposed solutions (whether public or private) will suffer from three defects: they will be overbroad, they can have dramatic unintended consequences and they will not lead to enabling educational opportunity for those most in need.

Take this example from the Inside Higher Ed article. One of cited colleges' presidents suggested that instead of redistributing wealth from the Elite 40 to others, we should redistribute students. This is, in essence, a call to address undermatching, an issue of keen interest to the Obama administration, among others. It sounds good; it sounds right. It appeals, at least on the surface, to our sense of fairness.

Would that the fix were that simple.

Even if elite institutions were to take more Pell students (say, double their current percentages), that alone will never address the growing chasm between the wealthy and the poorer (in dollars) institutions. Further, many vulnerable students would not succeed at or be a good fit for the Elite 40. Moreover, and perhaps of greatest significance as a reality check, given the growing percentage of vulnerable students in America, the Elite 40 cannot meet these needs, even if they so desired.

One Proffered Solution: Altered Taxation

So, we need to consider other solutions. There is a long history of using federal and state taxation to redistribute wealth.

Best to start with the most commonly proposed solution: taxing nonprofit institutions at the local, state and federal level. Unfortunately, this solution is at once overbroad and misguided.

Assuming the focus is on all nonprofits, such an approach would mean that churches, hospitals (many) and educational institutions could be subjected to property, income and capital gains taxes, as for-profit corporations are now. Such a solution would put many vulnerable institutions in jeopardy, as they would not have the capacity to meet these multilayered tax burdens. To be sure, one could determine that only some taxes paid by for-profits should be carried over to the nonprofit sector.

Putting nonprofits in financial jeopardy is unwise for many reasons. Nonprofit institutions truly contribute to their communities in meaningful ways and can be seen as having a positive economic impact, absent taxation. Some nonprofits actually pay local taxes on newly acquired property or renovations; others pay for water and sewerage. Others contribute space to the community or offer programs that benefit communities’ well-being -- like being a disaster relief site or immunization site in the event of a massive outbreak. They are often large employers in small communities, and they bring in revenue through visits and parental/family/friend stays. Just look at some of economic impact statements prepared by institutions.

Now, one could suggest a progressive tax solution where nonprofits with the largest endowments would pay the highest tax (federal and state) and then that rate would lower as endowment size diminished. Obviously, institutions could game the system (not unheard of in the world of tax); for example, instead of holding money in endowments, they could shift the monies to trusts or other nontaxable vehicles to avoid taxation.

Another tax approach would be to change the deductibility of donations (of individuals and organizations) to institutions with endowments of a certain size. For example, donations to endowments over $1 billion would be taxed at a predetermined rate. Alternatively, one could make this a regressive tax to encourage large gifts, where the deductibility would be greater than smaller gifts. This approach shifts the burden to donors, rather than receiving institutions and could reduce the level of giving to all institutions, an unfortunate outcome.

Some Out-of-the-Box Solutions

Instead of tax-based solutions, here are three other solutions worthy of consideration. They offer approaches that encourage giving, that retain revenue for the benefit of educational improvement and fit within the framework of how educational institutions currently function or could effectively function prospectively.

Before turning to them, a pragmatic note: for these approaches to succeed, the Elite 40 would need to see their obligations to other institutions and society more broadly. They would need to see that there is a price for wealth in terms of giving back to the larger community of students who want and need an education.

Idea One: For educational institutions with endowments over $1 billion (the threshold is a matter that could be adjusted), 5 percent of all dollars received as donations from private sources (whether individuals, corporations or foundations) would be placed into a national (or regional) designated fund designed to improve education across the pre-K-to-20 pipeline. (One could debate whether the right figure is 5 percent or 1 percent or 10 percent.) This fund could be managed by an existing or a to-be-created foundation. The Elite 40 (and those with endowments over $1 billion -- the Elite Plus) would be contributing to the same fund. How the fund operates, how it elects to distribute its interest and corpus can be determined.

In essence, this 5 percent “penalty” is akin to the penalty (often termed luxury tax) charged to professional athletic teams that have salaries over a mandated cap. Interestingly, the rationale is comparable in a sense: to create parity among competitive teams, salaries are capped so that the richest teams cannot accumulate all the talented players. Or, the fund could be analogized to the cy pres awards in class action lawsuits. These funds, made up of undistributed awards, must be given to nonprofits that will use the monies for a similar purpose. By way of example, a cy pres in a class action award against a credit card company could go to a nonprofit that engaged in financial literacy education.

Idea Two: The Elite Plus would be able to retain all donations received if they entered into meaningful partnerships with one or more colleges/universities that served at least 40 percent Pell-eligible students, 60 percent first-generation students or 50 percent minority students. (To be sure, these percentages can be re-evaluated.) The key here is meaningful partnerships, and how that would be assessed on an ongoing basis is a critical issue, as one wants to encourage compliance rather than gaming the system to further self-interest. The costs of these partnerships would be borne by the Elite Plus and would have to equal or exceed the dollar amounts identified in Idea One.

Examples would include reciprocal faculty swaps, payment to faculty from the Elite Plus or who are newly hired to teach at the partner institution; cross registration with the requisite transportation to/from the Elite Plus; shared or funded student support systems including tutoring, mentoring, psychological services, academic advising, career planning and graduate school preparation; creation of shared multicultural events and programming with joint participation from both campuses; and summer programming starting in the year between high school and college and each summer thereafter.

Viewed through a positive lens, these partnerships are not one-way transfers of dollars, knowledge and capacity. There are reciprocal benefits, creating a win-win rather than mandated largesse. Professors may learn from teaching students who are less privileged, and that learning can benefit their home institution. Research opportunities, mentoring and shared academic programming can be enriching. Consider a conference on homelessness or drug abuse or incarceration; might students who have had these experiences in sizable numbers enrich the understanding of these problems and their solutions?

Idea Three: The Elite Plus could create institutionally funded centers designed to study, reach out to and assist institutions serving vulnerable student populations (based on the criteria established in Idea Two). These centers would be funded from a percentage of the donations made (calculated as described above); their contributions would have to be tangible, producing scholarship, empirical research, conferences, engagement opportunities and the like.

A current example, although now funded through grants and donations from outside sources, would be the Penn Center for Minority Serving Institutions. As its website reflects, the center is engaged in a host of research projects designed to improve the outcomes for students at minority-serving institutions, including HBCUs. It issues white papers and publishes books, holds conferences, and its grants usually include monies to be distributed to fiscally constrained minority-serving institutions to enable them to effectuate change effectively.

Conclusions: Process and Theory Concerns

It is easy to critique the solutions presented here.

Some of the challenges are what I would call design questions: What institutions fit within the Elite Plus? How would the various financial thresholds be determined and would they come with automatic inflators (or deflators)? How would the fund created in Idea One function and who would oversee it? What would be the structure of the partnerships and how would success be measured and collaboration ensured in Idea Two? How would the centers within the Elite Plus would be created and overseen in Idea Three?

But there is another set of questions about how we want to treat the Elite 40 and whether they have obligations to others and whether strategies to redistribute wealth are apt in this situation, recognizing that we redistribute wealth regularly in this nation through any number of means at both the state and federal levels. Fundamentally, these questions go to the core of how we want to function as a nation, what obligations we have to others and how we view charitable giving, education (particularly higher education) and wealth disparities.

Process questions matter, but until the deeper philosophical questions are addressed, progress will be limited. To that end, here are two guiding principles that, at least for me, justify the suggestions made here.

First, whatever the challenges, it seems wiser to have the solutions developed and vetted by those with a real stake in the outcomes -- public and private educational institutions, organizations that support educational and social reform, including think tanks from all sides of the proverbial aisle, and philanthropists. Solutions delivered from the states or federal government are less likely to meet everyone’s needs effectively.

Second, as a nation, we are only as strong as our weakest citizens. As such, we all benefit by lifting the bottom -- overtly. We create a greater likelihood that more and more individuals will contribute meaningfully to their families, their communities and our nation. Our economy will be better off if more and more individuals have access to postsecondary education and career opportunities.

Failure is expensive. Think about the costs of prisons and psychiatric treatment. Ponder the costs of the criminal justice system. We pay a price for poverty. Poverty impacts health, education and community safety, among other negative consequences. Social support systems, even minimal ones, are expensive. There is no question about that.

So, it seems wiser to pay for success, to pay to create pathways to and through postsecondary education. Rather than paying for the consequences of failure, let’s develop ways to fund success. Indeed, the promise of opportunity is the bedrock of this nation. We need to make good on that promise. The ideas suggested here start us on that pathway.

Karen Gross is a former president of Southern Vermont College and a former senior policy adviser at the U.S. Department of Education.
 

GOP tax plan would combine tuition tax breaks, end popular deductions for colleges

House Republicans' vision for tax reform would consolidate tuition tax breaks into a single, more refundable credit -- but end benefits for student borrowers, repeal deduction for those who purchase football tickets, and tax the cherished tuition remission for college employees.

Congress should end tax breaks for wealthy universities (essay)

Yo! Congress! How about $10 billion to help balance the 2014 budget, be home for Christmas, and sled off the fiscal cliff another day?  All you have to do is your job.  

Stop ignoring this $10 billion raid on the U.S. Treasury by colleges and universities.  What raid? The annual abuse of nonprofit status whereby colleges and universities use tax-exempt dollars to gorge on luxurious buildings, presidential salaries of $500,000 and more, indoor golf nets, skyboxes at stadiums, and on and on and on. With this $10 billion, be my guest on reducing the deficit or, better, fund 1.8 million new Pell Grants, the federal aid for the nation’s poorest students. 

Any of you blinking? I invite you, then, to explain to my 7 a.m. community college students why a skybox or indoor golf nets are a higher national priority than aid for students working 30 and 40 hours a week.  I’ll let you explain this to the older woman who works overnight before coming to class at 7 a.m. She wrote a stunning essay about being punched, beaten and shouted at while riding a bus to a newly integrated school in North Carolina. 

Just follow these simple steps --

  1. Eliminate all tax deductions for donations to all colleges and universities next year, from January 1, 2013 through December 31, 2013.  Renew the ban for another year, and another, until colleges present their own plan to end abuse of their nonprofit status.

    How would that produce $10 billion in new tax revenues? Here's my math. In 2011, colleges and universities raised $30.3 billion, according to the Council for Aid to Education. This means that people deducted $30.3 billion from their income before the Internal Revenue Service applied a tax rate to what these people paid. Lower personal income means lower taxes paid.  I’ll pick a 30 percent tax rate. Due to the deductions for these donations, then, the federal government received $10 billion less than it would have.
     
  2. Next, come Senators, Congressmen, please heed this call and read Article I, Section 8, of the U.S. Constitution: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States.”  That’s right – The Constitution gives you, not college trustees and presidents, the responsibility to determine federal spending, be that one dollar, $10 billion, or $10 trillion.
  3. Any new plan for higher education federal tax benefits , must require from the college an Educational Impact Statement (EIS) prior to construction of any new buildings or initiatives financed with tax-free dollars.  The EIS must explain and demonstrate measurable educational benefits for undergraduates brought by the new project. College and universities will report results versus plan each year in the annual IRS 990 report.  Deductions for athletic buildings and facilities will end.  (James E. Coleman Jr., a Duke University law professor, first suggested the EIS to me.) 

A few heard but none listened in 2006 when I felled a tree in the woods with a paper entitled "U.S. Tax Policy, Research Grants and Higher Education: The Undebated Billions," with Jonathan Leirer, a research assistant. 

My opener was: “Columbia University has announced a $1 billion -- or 246,913 Pell Grant -- raid on the U.S. Treasury. Cornell University has also joined the game, taking away another $1 billion in possible taxes. These raids have the blessings of the Secretary of the Treasury, of both Houses of Congress, and of you and me.”  Some numbers have changed, but the principles and formulas remain.  Click here for a link to the paper.  Senator Grassley, this is the paper I gave to you.

David Warren, president of the National Association of Independent Colleges and Universities (NAICU), I stipulate here that you are the best lobbyist in Washington, period. Keep your powder dry and lead your flock. Yes, I read past the first paragraph of the CAE report. I know that 25 percent of the colleges amount for 86.3  percent of the fund-raising.  Your member colleges who might go out of business without charitable deductions need to stand up to the abusers.  For the record, remember that it was 10 years ago now that I first pitched you the idea of having donations to fund need-based scholarships be 115 percent tax deductible.  And to let donors of endowed scholarships write off the gift as fast as their incomes permit.  No reply on my reminders to you. In any rebuttals to my proposal to eliminate tax deductions, please delineate why indoor golf nets and such should receive federal subsidies.

Eliminating charitable deductions, an idea in this budget debate, is a crazy idea.  Reframe the discussion to eliminate the indiscriminate abuse of these deductions at so many colleges. The idea of a tax deduction to a nonprofit is that the nonprofit is providing a service the government would otherwise have to provide. Charity would be feeding, clothing, housing, educating the poor. I await anyone’s explanation of why charity is buying the Aeron chairs I saw in a Brown University library.

Why not instead focus the deductions on activities that align with national goals?  Senator Reid and Speaker Boehner: The U.S. uses tax policy to support national goals all the time, from oil drilling to home ownership to hedge-fund enhancement. How about using tax policy for donations to college to close the science and math gap with the rest of the world? You may not choose to do this.  Such a policy would work. Senator Grassley? Who got you to chicken out from your investigations of what colleges were doing with all this wealth? Heck, I went up and told you all this after a 2007 Finance Committee hearing.

Here’s how bad this college/tax policy situation is. Remember that the maximum Pell Grant, aid for the poorest students, the ones with 40-hour-a-week jobs, is $5,500. The federal subsidy via today’s tax policies alone at the nation’s wealthiest colleges – Yale, Princeton, Harvard, Stanford, Williams, Grinnell – is $10,000 to $30,000 per student, depending on your assumptions. (See box at right.)  That’s every undergraduate, not just the ones on financial aid. Repeat: every undergraduate student at Yale, Princeton, Harvard, Williams, Stanford, receives twice the federal subsidy as the nation’s poorest students. Remember, the hedge-funder’s child at Grinnell received this $10,000 just for enrolling. No needs test. The poor students and their families must hand over all their personal financial information in the FAFSA form. 

The plain truth, of course, is the monkey wrench explaining the horrors of colleges and abuse of tax policies.  Even I wonder if I am making this up. Is this the nation any of us want to live in?  Twice the federal subsidy for wealthy students at Williams as for a 50-year-old woman working overnight and showing up at a 7 a.m. class in a community college? As usual, I pray for ideas better than mine. Remember, the point of tax deductions for charity is to create a public good for the nation.  Remember, the colleges leading this $10 billion treasury raid are the same as those who have enrolled only 174* undergraduate veterans.  The * is because some don’t even know the number of veterans enrolled. 

I’ll close with an invitation to all who have read this far disagreeing. What would your argument be against this discussion-sparking idea:

Why not link deductibility on gifts to college presidential pay (including annuities and housing, of course)? Gifts would be 100 percent deductible to a college where the president earns $250,000 or less; 50 percent deductible at colleges with presidential pay between $250,000 and $500,000; and no deductions for college with presidential pay higher than $500,000? 

Your answer must convince a community college student in a 7 a.m. class.

Wick Sloane writes the Devil's Workshop column for Inside Higher Ed. Follow him on Twitter: @WickSloane.

 

Section: 

Conference on PILOT agreements highlights lack of formal policy

Formal rules surrounding agreements on payments in lieu of taxes are rare, so local politics determine who pays and how much.

Today, Harvard. Tomorrow ... ?

It may seem strange for me, an ordinary mortal, to be defending Harvard’s $34 billion endowment. But we all know the way government works: today it’s Harvard, tomorrow it’s my $34 billion or maybe my 1993 Lexus. Because our government, acting through the Senate Finance Committee, has started to reach into private pockets, where it does not belong.

A college endowment belongs to the college and the fact that it may be extremely large is no one’s business. Unfortunately, there are people who feel otherwise. There is a mindset that believes that the granting of a tax exemption entitles the government to control how the resources of the nonprofit sector are to be spent. This raises questions about the compact made with the American people when the income tax was first imposed. There were understandings at the time, one of which was that nonprofit institutions carrying out charitable functions would be exempted from the income tax.

It was never envisioned that the tax exemption would be used as a club to beat such organizations into submission to new policy directives. And if we are going to change any part of the relationship, then we must reexamine all aspects of the compact, comprehensively.

Americans do not believe that everything belongs to the government. Quite the contrary, we believe the government is an instrument of our will and not the reverse. That being the case, it is perfectly in order to ask why the fruits of one’s labor should belong, even in part, to the government. In fact, one can propose that there is an element of seizure associated with the IRS taking a portion of a person’s salary check, before the remainder ever reaches the worker.

We can take this unrestrained examination of assumptions a step further: if indeed Americans are to be taxed to pay for expenditures for the common good, why not tax wealth instead of work? In point of fact, the Senate Finance Committee eyeing Harvard’s $34 billion is conceptually no different from its looking at everybody else’s bank account.

Everyone has benefited to one degree or another from a tax exemption. The tax code has been structured in a way that uses tax exemptions to implement social policy. If some billionaire survived in his early years on welfare, or was able to save up for his initial investment because he received a tax exemption for his children, could we not envision a grasping political jurisdiction trying to make the case that it should be a partner in the good years as well? Government seeking to work its will, supported by a society almost overwhelmed by all those needing help, can make a powerful case for itself, and with sufficient public support reach into the private fortunes of individual Americans. It is certainly not inconceivable that we will in our lifetime hear people piously mouthing the question “‘if we tax work, why not tax wealth?”’

At this moment, the members of the Senate Finance Committee are not directly threatening to tax Harvard’s endowment but simply to pressure it into spending some of it. This is therefore the time we, and Harvard, should tell the honorable members of the committee that as long as Harvard is fulfilling its responsibilities as a nonprofit entity, the question of how -- and whether -- it spends its money is none of their business.

If we do allow it to become the business of Senate Finance, we can expect people in Washington to ask, “why just tuition?”, “Why not ask Harvard to spend its money for a whole variety of worthy purposes?” “Why is reducing tuition for the children of extremely well-to-do families a public good?” Are we prepared for widespread discussion as to which public purposes Harvard’s endowment money should go?

The “all money belongs to government” thesis has a powerful corollary: a tax exemption is a tax expenditure. And this has an outcome that currently affects all nonprofit organizations -- the use of the IRS form 990 to promote transparency. Only we aren’t talking about transparency: the correct word is exposure, including all the embarrassing synonyms for this word in the desk thesaurus.

The 990 form at one time was intended to help the IRS carry out its enforcement responsibilities. No one ever objected to revealing all to the IRS. Later, the 990 became public, but this was at a time before the Internet. Getting access to someone’s 990 form was not particularly easy and people with excess time on their hands looked for other areas of amusement.

No longer. Detailed and sometimes embarrassing information about individuals whose only transgression is to support an unpopular cause can be front and center on computer screens all across the world.

(Is it anyone’s business that I am an officer of the Greater National Arachnid Welfare Society (GNAWS)? My employer should not be able to pressure me, no matter how subtly, to leave, nor should anyone know how much GNAWS has to pay to hire an effective executive director.)

The very publication of the form 990 is troubling. America is not a nation where compliance with the law depends on people monitoring each other. The IRS should not be seeking to improve accountability by encouraging the public to inspect 990s and to report problems to the IRS.

Why should every nonprofit be expected to describe its mission to the public? We at GNAWS are perfectly happy to describe our mission to people prepared to support our noble work. But why do we owe a mission statement to anyone else, other than the IRS?

And why should non profits have to describe “their three most significant activities,” even to the IRS? Is the IRS in a position to judge what is and what is not significant? Certainly the IRS can expect that an organization fulfill its original mission. But why the additional intrusion? And again why the publication of what could be quite controversial and embarrassing to everyone associated with a not-for-profit organization? Why the questions regarding governance? Is there a new orthodoxy to which all nonprofits will have to subscribe?

It is important for America as a nation that non profits that advocate unpopular views, also survive. People who volunteer their time as directors, governors, officers and trustees to such groups, should not be hurt as a result of their service. So why all the questions regarding these categories?

Why must tax-exempt groups report certain employees’ compensation on their 990 forms even though the IRS has this information from previous years’ 1040 forms?

What kind of judgment can the public make about the compensation of key employees without appropriate context? Should we expect nonprofits to justify occupying expensive quarters? Or hiring a first rate public relations staff?

From the point of view of those who view tax exemption as a tax expenditure, there is really no limit to how far government can intrude. The rest of us must speak up, and must resist, respectfully but firmly. And we must carefully define the boundaries of the interaction between government and the thoroughly private, and independent, nonprofit sector. Or we may ultimately all receive mail from Senate Finance….

Author/s: 
Bernard Fryshman
Author's email: 

Bernard Fryshman is an accreditor and a professor of physics.

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