Tax policy/IRS

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

Smart Title: 

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

Smart Title: 

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: 
newsroom@insidehighered.com

Bernard Fryshman is an accreditor and a professor of physics.

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