Tax policy/IRS

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.

Time for a Wartime Higher Ed Tax Policy

 

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

Subject:
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?

Author/s: 
Wick Sloane
Author's email: 
wsloane@well.com

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.

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.

A Venturesome Community College

Smart Title: 
IRS ruling that 2-year institution can give seed money to startups could encourage more campus business incubators.

Rooms to Rent (Tax Free)

Smart Title: 
IRS ruling suggests broader ability of colleges to lease dorm rooms to visitors without paying taxes on the revenue.

How the Financial Aid Flows

Smart Title: 
Annual federal study for first time documents impact of tax breaks for college costs, which are larger for the wealthy than for the poor.

Turning Blue from College Costs

Smart Title: 
A partisan pollster said that young voters think Democrats can better confront the college affordability crunch.

Surprising Shift for Senate Tax Panel

Smart Title: 
Finance Committee plans hearing -- but on link between tax breaks and rising tuition, not college  governance or pay.

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