Should The Ivy League Lose It's Tax Exempt Status?

[standrews]

Politician's thought process:
1) Gee, that's a big pile of money.
2) Let's tax it.

[stacy]

if there were a tax on any endowment over a billion, I think we'd just see schools dividing themselves up (so Harvard Med would seperate from Harvard College, Law, Business, Divinity, etc.) and each having endowments just under a billion. Alternately, schools could spin off their endowments into private foundations that just happened to give items or scholarships to particular colleges. I believe this is one way that state colleges in places that have banned race-based affirmative action are getting around those policies--by having private foundations give out diversity scholarships.

None of this this would bring in a lot of tax revenue but would create a lot of red tape and cut down on the ability for universities to do interdisciplinary work.

[NewHope33]

Sure, I have no problem taxing the Ivy's, Stanford and MIT on their football revenue, so long as we do the same for USC, SMU, Wake Forest and Duke also. Oh ... sorry, I didn't realize the point of this thread was to beat up on wealthy Blue State institutions.

[marite]

From NACUBo 2007, a list of 76 institutions of higher education with endowments in excess of $1 billion. Quite a few state universities are on it.

http://www.nacubo.org/Images/All%20I...2007%20NES.pdf

[bartleby]

"Oh ... sorry, I didn't realize the point of this thread was to beat up on wealthy Blue State institutions."

I don't think too many conservatives support raising taxes, even on bastions of liberalism like the Ivies.

[NewHope33]

Um, if you go back a few months there are (at least) two previous threads on this topic. The earlier of these referenced the article that first suggested taxing of Ivy endowments. And yes, it was suggested by a conservative. As I noted at the time, "peculiar position for a writer who advocates keeping the government out of private affairs."

[cellardweller]

First, it is a misconception that universities pay not taxes. All major universities pay substantial taxes, just not income taxes. MIT pays over $25 million a year in property taxes alone to the city of Cambridge, and Harvard pays around $15 million. In addition, both schools make substantial payment in lieu of taxes (PILOT) for city services.

They are also among the largest employers in the local area and pay vast amounts in salaries, wages, and fringe benefits. Harvard has over 16,000 employees and MIT over 10,000. These jobs generally pay much higher salaries than average jobs in the state. They are also much less affected by economic downturns. It is also estimated over 100,000 Boston Area jobs are the direct result of Harvard and MIT technology or started by Harvard/MIT faculty or alumns.

Purchases of goods and services, construction costs, and other capital expenses by universities help fuel the area’s economy. Both MIT and Harvard each spend around $1 billion yearly on goods and service that directly impact the local economy. The top 8 universities in the Boston area generated over $7 billion in business for the local economy annually.

If a tax on wealth is going to be charged to universities, there is no reason that churches, charitable foundations and many other non-profits should not be taxed as well. There is certainly bigger fish to fry if one is looking at generating increased tax revenue. Some of the largest US corporations pay minimal income taxes. Microsoft, one of the largest employers In Washington State, pays no state income taxes, all its sales of licenses are channeled through a corporation in Nevada, which pays no local taxes. IBM saves billions annually in federal income taxes through the use of foreign susbsidiaries.

By every economic measure, imposing a tax on the largest university endowments would results in very questionable benefits and definitive negative effects.

It is hard to see how local or state governments would do a better job at allocating the funds for educational purposes that they would divert from the endowments.

If the pupose is to fill a projected shortfall of state and local tax revenues because of the poor economy, then the tax is even more questionable. This would effectively be a wealth tax, socking it to biggest contributors to the local economy. The consequences would be far worse as the rapidly growing budgets of the universities would be trimmed to accommodate the tax. Over a third of the operating budget of major universities schools directly comes from their endowments, as compared to less than 15% twenty years ago. A tax on endowment would be simply passed on as a cost of doing business and have a negative multiplier effect. Any reduction in endowment funds would result in less spending on everything from new construction, purchase of outside services, hiring of new employees. It would also result in fewer research contracts with corporations or the Federal government as the necessary facilities would be delayed.

There is simply no credible economic analysis that such a harebrained scheme would have any net positive impact. Some people promote the tax as a form of punishment on greedy universities, which is simply naive. Executives of universities make only a tiny fraction of the incomes of corporations of similar size. They don't get free stock options or sell their shares at huge profits before the organization tanks. Universities don't get any bailouts when they screw up and therefore have to be conservative in their spending. It would be quite an irony to punish universities for prudent financial management just as entire industries are being shaken by mismanagement or outright fraud.

[BCEagle91]

Boston College paid $267,000 to the City of Boston in lieu of taxes in 2007. BC wants to turn a building in Boston into a dorm but the building currently generates $424,000 in property taxes. Menino has opposed the move but I'd guess that an additional $424,000 in lieu of taxes would change his mind.

One aspect of the taxation of universities is the property tax issue. I guess another is the income issue.

[Cervantes]

I don't know if they should. I do know that some schools have been investigated by Congress because there is a growing concern that top privates don't spend enough of their endowment to qualify as non profit.

[hawkette]

The idea of taxing colleges with large endowments seems analogous to the maximum amount on which one can claim mortgage interest. One can borrow up to $1mm and the interest on that is tax-deductible, but over that it is not. Along the same lines, proposing something like exempting the earnings on the first billion of endowment seems reasonable, but taxing everything above that. I'm not normally a big fan of taxes, but some of these endowments are just obscenely large relative to the rest of the educational world. Is that healthy for the system?

[molliebatmit]

NewHope33, I fully support taxing MIT's football revenue. In fact, I think the state should get at least 200% of the revenue MIT brings in from football. At least. Maybe something like 500% would be more appropriate.

[JHS]

We already have a tax on the excess earnings of nonprofits. Organizations characterized as "private foundations" have to use at least 4% of their assets per year, determined on a three-year rolling-average bases, for their charitable purpose. If they fail that test, their earnings in excess of what they give away are subject to an excise tax. "Public charities", including pretty much every private university, are not subject to that rule. But it wouldn't be a huge leap to impose something like it.

The last time I looked at numbers, Harvard had earned $3.5 billion on its endowment in the previous year, and had taken in close to $500 million in new contributions. The total amount it contributed to the operating budget of Harvard University -- including all those medical discoveries, as well as education -- was about $1 billion (which was a little less than 4% of the endowment as of the beginning of the year).

Now, I'm a big fan of Harvard. But the sheer volume of its unused wealth is a little troubling. When a corporation amasses that much, it has shareholders who will be agitating for the company to do something productive with the money, or to distribute it to them so they can enjoy it (and pay taxes on it, of course, unless they are Harvard et al.). But nonprofits have no shareholders to which it can distribute money it doesn't plan to use. And their administrators don't mind sitting astride the largest diversified investment pool on earth.

Furthermore, one of the things that keeps public charities honest is the need to keep raising contributions from the public. If people don't think the charity is doing a good job, funding dries up quickly, and heads roll at the top of the organization. Harvard still raises money actively, but it has almost certainly passed the point with its endowment where if it never raised another cent from alumni no one would notice the effect for several generations.

Am I casting my vote to make some of Harvard's investment earnings taxable? Probably not. But it's not a crazy idea.

[arbiter213]

But there's a difference between taxing the earnings and taxing the assets themselves, which seemed to be what the OP was suggesting.

I agree with your post though.

[cellardweller]

The idea of taxing colleges with large endowments seems analogous to the maximum amount on which one can claim mortgage interest.

Not really. It is more like taxing any appreciation in your home equity whether you sell your house or not.

Most endowment growth is strictly a paper profit. Universities may have to sell some of their assets in order to pay any additional tax. They are not sitting on a lot of extra cash beyond of what they use for operations.

[marite]

It would be bad policy to base it on a single case, to wit Harvard.
Taxing earnings in excess of an institution's needs for its operating budget (or above a certain threshhold) would need to take into account 1. periodic fund-raising campaigns that provide temporary excesses and 2. the savings such institutions make in order to build new buildings and programs.
Harvard has made known its plans for Allston which is something like a 25 year plan during which it not only raises money but also taxes its own faculties (this has been one of the reasons why the Faculty of Arts and Sciences was so unhappy with Larry Summers). Once the university actually begins building, a lot of the "excess" will likely disappear. Other colleges and universities similarly have plans for adding buildings and programs, though perhaps not as ambitious. Any scheme to tax their excess earnings would have to take into account the way they finance their expansion.