In the eyes of the law, private colleges are just like charities.
Just like any other nonprofit, private colleges and universities provide a public service. And because they serve the public good, they are exempt from certain federal and state taxes.
But that rationale doesn’t always sit well. The wealthiest universities have tens of billions of dollars in their endowments -- so why, critics wonder, shouldn’t they pay taxes?
“There’s a pushback in different sectors around the country around the tax-exempt status of colleges and universities,” said Richard Jacob, Yale University’s associate vice president for federal and state relations. “It’s a worrisome trend.”
With an endowment totaling $25.57 billion, Yale has been the target of two bills in the last two months alone that could change the way the university pays its taxes.
The first bill would have allowed the state to tax the earnings on Yale’s endowment, a move that echoed conversation on the national stage. Earlier this month, the bill died in the Legislature.
But a second bill, which would allow New Haven to tax certain commercial properties at Yale, was approved earlier this month by the Legislature’s Finance, Revenue and Bonding Committee and will soon face a full Senate debate.
‘Just a Clarification’
SB 414 focuses on an obscure piece of Connecticut legislation, written in 1834: under the law, Connecticut colleges and universities don’t have to pay taxes on buildings that generate for-profit revenue under $6,000 a year.
At the moment, some of Yale’s buildings are clearly academic, while others are clearly commercial. But some are used for both purposes, and it’s harder to determine how they should be classified. The spells out what kinds of revenue count toward the $6,000, making it easier to determine which mixed-use properties should be taxed.
State Representative Roland Lemar, a Democrat and one of the bill’s sponsors, insists that the bill is only a “clarification.” The law in question is 182 years old, and Lemar hopes the new bill will shed light on what the law should mean for Connecticut’s colleges and universities in 2016.
“I think that what this bill tries to get to is a firmer understanding of what types of activities are being conducted, where it is private, commercial, profitable outside of an academic mission,” Lemar said in a recent legislative hearing.
Yale leaders have argued adamantly against the bill, saying that it is both illegal and counterproductive. They see the bill as an erosion of its charter, a legal contract between the university and the state.
But the bill won’t change the current law, supporters say. In fact, it won’t technically add any new taxes.
“Whatever tax ability that the state had, it has had since the 1800s,” New Haven Mayor Toni Harp said in an interview on WNHH radio, “so this is just a clarification.”
Both Harp and Lemar have pointed to a travel program for alumni that Yale runs out of one of its buildings. From Yale’s perspective, the tours are educational and therefore should not be taxed. But as Lemar told the New Haven Independent, “You go with other Yale alums on European tours. It looks like a vacation. It’s an income stream for them.” Under the new bill, gray-area buildings and programs would become easier to classify.
It’s unclear how much the bill would cost Yale; its backers and its critics have different interpretations of how much the bill would change. Yale spokesman Tom Conroy said that the university doesn’t have an overall estimate, but that the taxes on Woolsey Hall, an auditorium, would be around three-quarters of a million dollars a year. Right now, the New Haven Symphony Orchestra pays to rent Woolsey, and Yale has said that the orchestra may lose the space if SB 414 goes through.
“There is obviously no point in the sponsors proposing a tax bill that wouldn’t generate significant property tax revenue for the city,” Conroy said.
Taxing the Wealthiest Colleges
Colleges are protective of their tax-exempt status. As nonprofits, they are used to a legal system that affirms their value as a public good, and proposals to change that system are viewed as threats to their core mission.
“Taxing a large university would set a precedent for taxing not only other private colleges but also every nonprofit, from local churches and soup kitchens to the Red Cross and Salvation Army,” the Association of American Universities, the American Council on Education and the National Association of Independent Colleges and Universities wrote in response to the Connecticut bill. “Nonprofit charitable organizations are part of the foundation of American society. If we begin to tax them, we erode that foundation.”
But some say that Yale actually has a leg up over New Haven’s other nonprofits. In a letter to the General Assembly last week, more than 100 New Haven clergy members and community leaders voiced their support for the bill. Churches pay taxes on their commercial properties, they argued, and Yale should be subject to the same rules.
At the national level, wealthy colleges have been a target of similar movements for years. Earlier this year, for instance, Congress sent letters to several dozen of the wealthiest colleges, asking for more information on how they spend their money. Since 2011, Princeton University has been fighting a lawsuit filed by a group of residents who argue that the university's tax-exempt status drives their taxes up.
Karin Johns, director of tax policy at the National Association of Independent Colleges and Universities, said that similar state-level proposals aren’t unusual -- and that movements at the federal level tend to spur them on.
“When there are accusations at the federal level that there’s too much money not being used properly,” she said, “states take notice of those accusations and see a potential revenue source.”
Yet Yale’s commercial pursuits help New Haven’s economy, Jacob, the Yale VP, said, and the legislators pushing these bills are misjudging the contributions that colleges make to their communities.
“No other institutions are being taxed for successfully contributing to economic development in their hometown,” he said.
And Yale also has donations to think about, which are typically restricted for specific purposes, said Peter McDonough, the general counsel at the American Council on Education. As a result, even the wealthiest colleges could struggle to come up with the extra cash.
“We can talk about the multiple billions of dollars Yale has, but it can’t allocate them to property taxes,” he said. “It has to find them somewhere else.”
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