Along the same lines, schools with a huge endowment that are ‘required’ to pay a percentage out will tend to increase payments to faculty, increase tuition and the associated admin costs so they can stay ‘whole’ while keeping the money effectively in the institution. This is a part of the problem we have with hyper-inflation vis-a-vis college tuition.
FWIW, I know that at the Med School where dh teaches the NIH reduced the percentage they could get in overhead a while back. It really created huge problems.
[quote=musicprnt} Not sure what you are getting at here, about obligations to the public because of the tax breaks they get, universities are no different than any other non profit.
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Yes, it’s true, the U.S. tax code gives very generous tax breaks to a broad array of “non-profit” institutions—but it’s not their God-given right. It’s a policy choice. It doesn’t need to be that way, and it’s not just the natural order of things. The questions isn’t “are they entitled to favorable tax treatment under the current Internal Revenue Code?” The answer to that is obvious; of course they are. Instead, the question is what justifies affording them such favorable tax treatment? Economists and tax policy experts who have considered that question have an extremely difficult time coming up with a persuasive answer. Presumably the answer has to be that there’s some public benefit to their activities. But what, exactly, is that public benefit, and is it enough to justify the lavish tax subsidies that the wealthiest of those institutions receive?
Here’s a thoughtful and dispassionate analysis by Henry Hansmann, a highly respected law-and-economics scholar at Yale Law School. Hansmann is no wild-eyed populist. He’s a thoughtful, careful scholar. He examines several possible rationales for tax subsidies for private higher education, and finds them all wanting, but he concludes that change is probably impossible for the foreseeable future for political reasons: too many people have a stake in the present system, and there’s relatively little public sentiment for change.
http://ncpl.law.nyu.edu/zz_resources/documents/HenryHansmann-COLLEGEANDUNIVERSITYEXEMPTION.pdf
Hansmann, by the way, has a straightforward answer to the argument that as non-profits, these institutions have no profits to tax. Our corporate income tax doesn’t tax “profits” per se, it’s a corporate income tax, taxing net corporate income, generally defines as gross income less allowable expenditures. Hansmann says we could tax university endowments the same way: take their annual gross income (new contributions plus interest, dividends, and capital gains) and subtract from that the amount they actually spend from the endowment on providing educational services in the current year. Then we’d be taxing their net income, the same way to tax for-profit corporations. The only reason this isn’t “taxable income” is that the Internal Revenue Code is written in such a way that it’s excluded from the statutory definition of taxable income.
I’m not as sanguine as Hansmann about the wisdom of taxing endowments. But I think it’s worth asking the question, what benefits does the public receive in exchange for this extraordinarily generous tax treatment? And yes, I would ask the same question about churches and other kinds of non-profits as well.
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Some of the nonprofits has gotten so big in recent years. Tax revenue loss from just one organization can be sizable. It is less consequential for smaller nonprofit organizations. One could limit the size to be tax exempt. Tax exempt up to a certain amount, anything beyond is taxed at a lower rate. We have to ask where we are going with it if they are allowed to grow tax free. Does it further contribute to the inequality we see now? It seems that way with the higher ed. While we cut funding to public universities, tax break to wealthier institutions gets bigger.
It’s not just income tax. Non-profits also don’t pay property taxes on the land and buildings they own.
On Boston, for example, around 30% of all property value is held by non-profits. This creates serious burdens on other taxpayers. And every time BU or BC or Harvard or Mass General buys up another building in the surrounding neighborhoods, it comes off the tax rolls and everybody else is left to make it up. It’s absurd that BU, for example, which owns $2 billion in real estate, does not have to pay a penny for the services provided by the city. (They do pay a small amount as a Payment In Lieu Of Taxes (PILOT) but the amount is not even close to what they’d pay if their property was taxed).
This isn’t a public vs. private issue though. In MA at least, state-owned property is not liable for local property tax, so the publics are just as bad as the privates in this case.
In Albany it’s 63% of all property is tax exempt.
@notrichenough Don’t BU, Harvard et al create a ton of well paying jobs and those people pay income tax, property tax on their homes, and in turn create lots of jobs supporting the universities? And businesses that want to be near them and they pay property tax, etc? I’d think Boston would prefer to keep the universities, on balance, than have them locate elsewhere, property tax or not.
Guessing @emilybee 's Albany example is similar…I’d guess Albany isn’t eager to have the capital move to another city and take all the jobs with it, despite the property tax situation.
Same is true of for profit entities in terms of job creation, people paying income taxes, property taxes, etc. And vast majority of those for profit entities are paying taxes.
It seems to me that most for profit businesses would have an easier time relocating than would colleges/universities. Much of the total experience of colleges/universities is tied up in the location/buildings.
Not saying that colleges should be taxed. Just that I don’t think the argument that they create jobs that result in employees paying income and property taxes so thus the universities shouldn’t be required to do so.
I live in a college town, we have the same issues wrt property tax. But the net economic effect is positive, not even close.
The reason for non profits not paying taxes is based on the idea that this is for the public good, that non profits, unlike profit making corporations, have as their basis whatever cause they support, whether it is education, health care, support for the poor, non profits, at least in theory, are supposed to be altruistic, among other things they are a check and balance against the for profit sector of things. Put it this way, a for profit school has every incentive to cheapen up on the education they supposedly give, whereas without the profit motive a non profit is encouraged to spend a lot more (whether this plays out in real life is debatable, some of the big non profits have where 90% of the money donated goes to overhead and seems to be there to pay off a lot of high level employees making pretty sizable salaries).
The government is supposed to ensure that non profits and their endowments actually spend the money, and I think that there could be adjustments where excess money that is not used, that goes back into the endowment, is taxed, likewise perhaps they could encourage better financial aid for the students by taxing money that is used to pay for let’s saying buying a 10 million dollar townhouse for a ‘distinguished’ professor rather than using that for aid to students, and I would have no problem with that, tax code can be a carrot and stick that can achieve goals.
I don’t think we would ever see taxing of non profits, among other things, could you imagine what would happen if they started taxing things like the land and rent that religious groups collect? Trinity Church in NYC is incredibly rich with the NYC real estate they still own, the Catholic Church is one of the largest landlords in NYC, and could you imagine if they started hitting the mega churches? Pastors pay taxes,.but under the IRS code the amount taxed is their income - housing expenses, and some of the mega church leaders have claimed some pretty significany housing expenses against their income…supposedly this was to balance out churches between the rich and poor (a poor church might not be able to house their pastor, so the tax break allowed the pastor to basically live in their own place tax subsidized).
I don’t doubt there are reasonable questions about big colleges and their endowments and I think at the very least there should be tax oversight on how they use their endowment money and modity it so that if a school is sitting on too much cash, or spending money away from the core values of teaching and research and are supporting for example lavish benefits for their employees rather than helping students afford it, their could be legitimate reason to tax such expenditures from the endowment. When I hear about the ‘public right to input’ I cringe, because often that translates into the attitude like colleges and universities should kowtow to popular belief, whether the university is more liberal than the area it is in, religious conservatives wanting the school to tone down certain science teachings to fit their beliefs and so forth, or the idea that somehow a well off school like Harvard somehow is responsible for the lack of educational opportunities in another place in the country, that if we taxed these well off non profits it would pay for others, that simply isn’t true and is more along the lines of 'they got so much money, why should it be tax privileged?" That populist nonsense gets shot down when people aim it at corporations and the well off, and the answer should be that policy towards non profits should be towards achieving the goals we made them tax exempt for in the first place.
Sure. But so do Google, Amazon, Genzyme, and tons of other companies that have their offices in Boston and Cambridge. Yet they somehow manage to pay property taxes (and income taxes!) and still thrive.
Boston started a program where they try to get non-profits to voluntarily pay something to the city in lieu of taxes. Some pay a tiny amount, most pay less than what the city requests, some pay nothing. Clearly Boston feels like they would be better off if they could tax these institutions.
Just because you have been designated as a “non-profit” doesn’t mean you don’t run the place to make a profit.
Examples:
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For a fraction of 1% of their endowment every year, Harvard could provide free tuition to all undergraduates. Would this not be the highest, best use of their money? Yet they don’t because they don’t have to, people are begging to throw their money at Harvard. Why give up easy revenue?
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A few years ago, during the last recession Harvard was feeling the pinch, along with everyone else. Rather than dip into the endowment to tide them over until the economy turned around, they did what any major, for-profit business does when revenue falls a little short - they had a big layoff. Preserving their margins was more important than preserving peoples’ jobs.
Interesting points, @notrichenough I’d guess part of the reason Google etc are in Boston at all is because of those universities. Boston may be a poor example of the effect of tax-exempt universities though, because the city has so much else going on. Perhaps the impact is greater in smaller towns and cities like, say, Amherst, to use another Massachusetts example.
They already essentially do, for those who aren’t very wealthy. I don’t think the highest best use of their money is giving money to millionaires.
Totally agree that #2 is not cool.
“Guessing @emilybee 's Albany example is similar…I’d guess Albany isn’t eager to have the capital move to another city and take all the jobs with it, despite the property tax situation.”
The biggest problem is that homeowners property tax is even higher then in the most affluent suburbs which, not coincidentally, also have the best school districts. The public schools in Albany are not good at all - so on top of the higher taxes homeowners pay - add in 13 years of private school. Most state workers do not even live in Albany. We have suburbs with larger population than the city.
City of Albany just got an additional $12.5M from the state in this years budget to help out.
Personally I differentiate between “giving money to millionaires” and “not taking money from millionaires” but maybe that’s just me.
One of the problems Harvard has (and all the Ivys and probably all the expensive private schools) is getting more people from poor and poorer households to apply, often because they don’t realize the great aid they could get.
Currently only 4% of Harvard grads come from the bottom quintile of incomes, and less than 20% from the bottom 60% of incomes.
I think free tuition would go a long way towards rectifying this.
Imagine if Harvard were free, and all of the publicity that would go with a school like Harvard eliminating tuition. You don’t think that would be a great use of their money?
I wouldn’t be surprised if alumni contributions increased enough in response to this that Harvard might even come out ahead!
I would be careful about the second one, I am no expert on endowments and the rules around them but I am not sure that a school for example can easily dip into the capital in an endowment to make up for shortfalls, it depends on the rules around the endowment, some allow an institution to do that, others may not (and for the record, I don’t know about Harvard and its rules). The other thing to keep in mind is that the endowment likely took a major hit in the 2008 crunch, I know of several big name schools whose endowments lost 40% of their value, so it may not have been all that easy to dip into them, it would mean selling off assets at depreciated prices to ‘dip into them’, and that would mean a lot harder struggle when things got better to build the endowment to where it generates sufficient income to fund the various things it does, it isn’t like the endowment is this pile of dollar bills sitting in a safe, they are invested in the markets and such, and their value fluctuates with the markets themselves.
I think Harvard’s acceptance rate would drop below 5% or whatever it is now, frustrating even more applicants.
Part of it is PR and Harvard could fix that by mailing posters or whatever to every high school in the country, targeting poorer ones, making sure kids DO know that.
But I think the larger problem there is that poor kids tend not to have Harvard-level stats, in part because our schools are not good in areas where most poor students live.
@ohiomomof2:
Which would become another point of contention Harvard couldn’t win, so let’s say they became full free ride, that between their aid and federal and state aid, a poor kid could attend (let’s say from a rural area), they likely would have to make allowances for the kids from disadvantaged areas, and the stats jockeys would be yelling “that’s unfair discrimination, look at my stats”…so Harvard couldn’t win.
So if we admit Harvard is an elitist institution (and something like 50% of students receive no financial aid, meaning their family incomes exceed $200K, which is 1% territory), then there is even less reason for them to escape paying their fair share on the grounds that they are serving a public need.
As for not finding enough low income kids who can qualify, give me a break. Harvard has only 5500 or so undergraduates. You are telling me they can’t find 1000 or 1500 kids out of the whole country who are Pell eligible? They already have between 10% and 16% Pell-eligible students (depending on where you read), who graduate at the same rate as everyone else. Or find another 2000 from middle income homes? I am not buying it. It’s purely a matter of Harvard wanting to find these kids. It’s not that hard.
Harvard received $1.2 Billion in donations last year. This is new revenue coming in… $30 or $40 million to pay for their fair share of local services like roads, fire and police protection, mass transit, schools, etc., is barely a rounding error for them. But they don’t pay because they don’t legally have to.
(Why anyone donates to Harvard is a mystery to me. Unless your donation reaches 9 figures it has virtually no impact on Harvard at all. Donate your money somewhere where it will actually make a difference.)
@notrichenough:
As long as they are willing to do that with other non profits, I would agree…like how about the 20 some odd millions of dollars a year schools in big college football divisions get in tv revenue? Why should Penn State get 80 million dollars a year from all their revenue pool, why should Alabama get close to 100 million dollars, and no pay taxes on it? Why should college coaches be making 6 million dollars a year from a non profit institution, why isn’t that money going towards scholarships? It isn’t that I am necessarily a fan of Harvard or Elitism, but why should the big sports schools be allowed to make that kind of money and not pay taxes on it? Where do you draw the line? Take it from me, I am not necessarily a fan of elitism or the mystique of the Ivy League and what they do, but is college football or basketball any different because ‘ordinary people’ love college football? ESPN signed a deal with the SEC that is worth a couple of billions of dollars, how is that allowed to be tax free?
@musicprnt, I agree with you to a large extent. Although one mitigating factor is that at many schools the football and basketball money is funding all the non-revenue sports, and I think sports are a worthwhile endeavor for any educational institution.
There are many schools that break out sports as a separate fee on your bill each semester, and many of them are charging hundreds of dollars per year per student, regardless of whether you play a sport or have any interest in sports at all. It’s crazy.