Tax policy/IRS

Some tax-bill provisions opposed by higher ed dropped in conference negotiations

Reports indicate congressional negotiators have dropped repeal of tax-exempt tuition waivers for graduate students and other provisions affecting higher ed from final tax-reform bill.

Senate tax bill has some but not all provisions that alarmed higher education leaders in House bill

Tax on wealthy private college endowments is included. Deductions for state and local taxes -- viewed as essential by public higher ed -- would be killed. Some other provisions of House bill opposed by colleges are not included.

Grad students and policy experts say taxing graduate students' tuition waivers would spell disaster

Graduate students and higher education experts warn GOP plan to tax tuition waivers would be disastrous to both students’ finances and institutions’ teaching and research missions.

Excise taxes on colleges spark criticism but may signal a tough future for higher ed

Republican tax plan would cut off key source of borrowing and impose new taxes on wealthy institutions. Some see historic shift in view of elite universities from a public good worthy of sheltering from taxes to a source of funds for government.

GOP tax overhaul would eliminate tax breaks used by colleges and students

Republican tax reform plan would tax large endowments and limit or kill key deductions, including one for student loan interest and another for graduate students.

The tax on college endowment unconstitutionally targets institutions (opinion)

In December, Republicans in the U.S. Congress passed a tax bill aimed at helping the very, very rich. Meanwhile, the rest of us will be paying for it the rest of our lives, as it adds trillions to the national debt. But the Republicans excluded one group of rich institutions from the gift it gave to big corporations: elite colleges and universities.

In fact, the tax legislation includes a big bill for the wealthiest higher education institutions: a 1.4 percent tax on endowment income for any college with more than 500 students and an endowment worth over $500,000 per full-time student. For about 30 colleges, the Republicans are the Grinch who taxed Christmas.

It might be tempting for some of us not to cry any tears for overprivileged colleges, run by wealthy administrators to serve the children of the affluent, which waste vast sums of money to prove how much better they are than everybody else. But doing so would miss a vital point: the endowment tax is an attack on academic freedom, and it is an attack on all colleges and universities. This is a warning shot across the bow of higher education, done for explicit ideological reasons to try to pressure institutions to silence leftists and lift up conservatives.

Although the endowment tax will raise a few hundred million dollars a year to offset the massive tax cut for the wealthy, both supporters and opponents of the tax acknowledge that its true purpose is to send a political message to American colleges and universities deemed hostile to Republican interests.

Columnist George Will argued that “the Republicans, without public deliberations, and without offering reasons, would arbitrarily make university endowments uniquely subject to a tax not applied to similar entities.” Neal McCluskey of the Cato Institute said it “amounts to little more than a politicized, ‘Take that, Harvard!’”

Harvard Law professors Jack Goldsmith and Adrian Vermeule blamed elite universities themselves for the endowment tax, citing “the public contempt of so many university academics for those who fund their subsidies.” According to Goldsmith and Vermeule, “Conservative politicians and their constituents hear, on the one hand, that government owes universities a continuance of largesse and, on the other, that conservatives are ignorant, unworthy or corrupt. This sounds suspiciously like special pleading by an intellectual elite that wants to indulge in social criticism at the expense of the criticized, in both figurative and literal senses.”

Yes, it sounds like educators want the government to fund education and yet they want to have the freedom to criticize the government. Since when is free speech considered “special pleading”? Since when is supporting the ideology of the government in power considered part of a professor’s job in a free society?

The few Republican politicians who have commented on the endowment tax have tried to disguise the obvious ideological motives. Tom Reed, a Republican congressman from New York, claimed that the tax would be aimed at pushing colleges to address the “college debt crisis.” Reed did propose to tax only colleges that fail to spend a minimum amount of endowment dollars on financial aid. But the endowment tax that passed has no such provisions, and taking away endowment money that’s used for financial aid has the exact opposite effect.

Kevin Brady, a Republican congressman from Texas and the lead sponsor of the Republican tax bill, claimed that the endowment tax “ensures that private endowments are placed on equal footing with private foundations.” Private foundations, which disperse money to charities, are required to pay a tax. But colleges are the only kind of charity being targeted by Congress. Just as Democrats could not target churches for leaning conservative and demand that they should pay extra taxes, right-wing Republicans cannot target universities based on ideological beliefs.

The political motives behind the bill were also revealed by how hard Republicans worked to exempt conservative colleges from the tax. Passage of the Republican tax bill was delayed by a day as part of a failed attempt to exempt a Christian college in Senator Mitch McConnell’s Kentucky from the endowment tax. Only four Senate Republicans voted against a special exemption for Hillsdale College, the college beloved by conservatives for its right-wing political correctness. But because that special exemption didn’t pass, Republicans protected Hillsdale by raising the threshold for taxes to an endowment of $500,000 per student. That indicates a clear political motive in passing this special tax and a desire to punish colleges perceived (incorrectly) as being too liberal.

In short, it’s clear that the point of the endowment tax is not to tax wealthy universities. It’s to send a warning shot at all colleges and universities to restrain academic freedom or risk further economic assaults on higher education.

Punching Progressives in the Mouth

Richard Vedder and Justin Strehle at Minding the Campus attribute the endowment tax to “growing hostility by Republican lawmakers angered over the large political donations and public criticism that academics have made attempting to oust them from office. Lawmakers are growing tired of feeding the mouths that bite them.”

Vedder and Strehle praise the endowment tax because it “does send a warning to politically relatively clueless college administrators that their special privileges as institutions should not be taken for granted, and, indeed, are under intense scrutiny.”

But the First Amendment does not allow Congress to punish people or institutions as a way to send politically motivated warnings aimed at silencing criticism. And that is what makes it unconstitutional. Congress cannot impose “ideology taxes” on particular types of corporations they believe are antithetical to the political interests of the party in power.

What’s more, tax-avoidance schemes are notorious among the wealthy, and there’s no reason to think rich universities won’t adopt them if taxes become onerous enough. In fact, there might be an easy way every college could refuse to pay the endowment tax. They could perhaps avoid it by simply offering online courses and declaring that anyone who takes free online classes is an enrolled “student.” Students don’t need to be eligible for a degree and don’t even need to pay anything, since earlier provisions about “tuition-paying” students were ruled out of order by the Senate parliamentarian. Harvard’s online Introduction to Computer Science, with about 350,000 registrants from around the world, should be more than enough students to exempt Harvard from a $43 million annual tax. That would be a very real act of resistance if universities are courageous enough to risk retaliation from Republican politicians by refusing to pay a politically motivated tax.

But will colleges challenge the constitutionality of the new endowment tax as retaliation for the expressions of controversial ideas by their employees? The First Amendment protects freedom of speech and academic freedom, so a law by Congress that punishes colleges hated by the party in power is deeply suspect.

The Constitution also specifically bans bills of attainder, when Congress targets an individual or a group for punishment. If Congress passed a law imposing a 1.4 percent tax specifically on Warren Buffett or Planned Parenthood, it would be unconstitutional. Attacking a small group of elite colleges for their perceived political offense of being too liberal should also be unconstitutional. Although courts have interpreted the bills of attainder provision narrowly, it adds to the argument of a constitutional prohibition on congressional retaliation against their ideological enemies.

No, rich colleges won’t be bankrupted by this law. That’s not the point. The point is the principle. If Congress passed a law imposing a 1.4 percent excise tax on college professors making over $100,000 a year, it might not bankrupt anyone. But it would still be wrong, and unconstitutional.

David Horowitz, who long ago pushed for the Academic Bill of Rights, has written Big Agenda: President Trump's Plan to Save America, which proposes massive repression of liberal institutions as a tool of political power. According to Horowitz, Republicans cannot “continue to allow the left to use the trillion-dollar structures of the university system as a political base to destroy the society that created them.” He argues that Republican politicians must target universities for repression by using the power of money: “Republicans control the purse strings that can be used to restrain the progressive juggernaut. Why should half the country fund institutions that regard them as racists, sexists, homophobes, Islamophobes and xenophobes -- in a word, ‘deplorables’?”

Horowitz believes that conservatives “must begin every confrontation by punching progressives in the mouth.” The endowment tax is the first punch. More taxes, and other efforts to silence criticism of President Trump and his Republican supporters in Congress, will follow.

If the Republicans are allowed to target universities (even wealthy ones) for political retaliation, the repression will only escalate. The endowment tax is an unconstitutional attack on higher education by powerful conservatives who see universities as an enemy to be destroyed. And that means we are all vulnerable.

John K. Wilson is the author of eight books, including President Trump Unveiled: Exposing the Bigoted Billionaire (OR Books).

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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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