Paul L. Caron
Dean



Friday, May 9, 2008

Mass. Considers 2.5% Excise Tax on College Endowments > $1 Billion

From yesterday's Boston Globe: Lawmakers Target $1b Endowments; Exempt Status of Schools Debated, by Peter Schworm & Matt Viser:

Massachusetts lawmakers desperate for additional revenue are eyeing the endowments of deep-pocketed private colleges to bolster the state's coffers by more than $1 billion a year, asserting that the schools' rising fortunes undercut their nonprofit status.

Legislators have asked state finance officials to study a plan that would impose a 2.5% annual assessment on colleges with endowments over $1 billion, an amount now exceeded by nine Massachusetts institutions. The proposal, which higher education specialists believe is the first of its kind across the country, drew surprising support at a debate on the State House budget last week and is attracting attention in higher education circles nationally.

The idea has prompted a range of questions, including whether it is legal to infringe upon private colleges' tax-exempt status or single them out based on their wealth. It also faces significant opposition from the colleges and some skeptical lawmakers.

Today's Boston Globe editorializes against the idea in How to Strangle an Economy:

Representative Paul Kujawski['s] ...  amendment to the House budget calls for a study of a 2.5% assessment each year on university endowments over $1 billion. The tax would affect nine of them, and in theory could generate an enormous amount of revenue; Harvard alone, with its endowment of $34 billion, would be on the hook for $840 million a year. But a tax of this magnitude on the state's universities and colleges would be economic suicide. ... The Legislature should abandon the endowment tax - an ill-conceived money grab that ignores how vital higher education is to the local economy.

(Hat Tip:  Eric Lustig.)  More media and blogosphere coverage:

https://taxprof.typepad.com/taxprof_blog/2008/05/mass-considers.html

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Comments

If it weren't the Boston Globe editorializing I would'a thought that it was a "supply side" argument being made against the tax.

Posted by: edh | May 10, 2008 2:13:18 PM

Wake up call, Harvard: You live in Taxachusetts.

Posted by: Max | May 10, 2008 2:29:36 PM

Question:

How many of the folks at these schools voted for Democrats in the past, and how many plan to vote for Democrats this fall?

I think I already know the answer.

My advice to the people running these schools is:

"You voted Democratic because you wanted higher taxes. You got what you wanted: now deal with it."

Posted by: MarkJ | May 10, 2008 2:33:02 PM

What there should be is an assessment on a portion of their endowment earnings if these wealthy universities fail to spend at least 5% of their endowment balance each year in furthering their institutional missions. There is already a tax disincentive in place to discourage the accumulation of great wealth, but it seems to be rarely if ever enforced against any charity. In recent years, the wealth management teams of many private colleges, including those of Harvard and Yale, have returned an ROI of 17% or more on the endowment funds they are charged with investing. It's high time for those schools either to spend a fair portion of their income each year to justify their tax exemptions or else to forfeit part of that income to their host communities.

Posted by: Tout D. Suite | May 10, 2008 2:42:41 PM

Certainly in the hospital sector, not-for-profits are abusing their trust, a trend accelerating as the nuns in many of these orders are dying out and have ceded control. Tax subsidized universities with massive endowments seem to raise tuition ad naseum, plead poverty, yet sit on billions of untapped wealth. I think this is an idea with merit. Frankly, the entire concept of not for profits should be reexamined, especially when their net worth exceeds a certain amount and the salaries and benefits paid to the directors and employees rivals or exceeds that of for profits.

Posted by: Jesse | May 10, 2008 3:01:05 PM

It's about time...too many private colleges have grown fat w/o any oversight, their tuition rates have soared, yet thier endowments have grown astronomically! Harvard has $40 BILLION! The only way out for them is to eliminate tuition (while keeping their acceptance standards high).

If they do that, only THEN could they argue w/a straight face that they don't deserve to be taxed.

Posted by: richard Vail | May 10, 2008 3:32:11 PM

It's about time...too many private colleges have grown fat w/o any oversight, their tuition rates have soared, yet thier endowments have grown astronomically! Harvard has $40 BILLION! The only way out for them is to eliminate tuition (while keeping their acceptance standards high).

If they do that, only THEN could they argue w/a straight face that they don't deserve to be taxed.

Posted by: richard Vail | May 10, 2008 3:33:05 PM

For too long, Big Education has skirted its responsibility to pay its fair share. It's obvious these institutions have windfall profits that need to be taxed.

Posted by: arlo | May 10, 2008 3:53:09 PM

Sen. Charles Grassley (R-Iowa)and Sen. Max Baucus (D-Mont.) posed a question to colleges. They said: "It’s fair to ask whether a college kid should have to wash dishes in the dining hall to pay his tuition when his college has a billion dollars in the bank."

Most charities are required by law to disperse at least 5% of their assets each year to maintain their not-for-profit status. Only colleges are exempt. Or were exempt? We'll see. If Mass gets its way, you may see other states jumping on the band wagon.

I'm glad to see that I'm not the only one who is following this issue.

Posted by: Bruce | May 10, 2008 4:09:07 PM

The idea has prompted a range of questions, including whether it is legal to infringe upon private colleges' tax-exempt status or single them out based on their wealth.
---------

private taxpayer, private college...

Live by the sword, die by the sword......

Why am I enjoying this so much?

Posted by: Sandy P | May 10, 2008 4:37:07 PM

Remember, this is how the income tax started - "Oh, we're only putting a small tax on the very wealthy." If this comes to pass, don't be surprised in ten years when endowments over $1 million are taxed.

Posted by: Don't Trust Them | May 10, 2008 5:00:32 PM

And the chickens come home to roost. The Ivy league has been turning out good little socialists for decades. Seems they didn't realize that eventually their monsters would turn on them.

Posted by: JKB | May 10, 2008 7:32:06 PM

The only reason why Harvard still has tuition is that way they can collect money from government scholarships. If they didn't have tuition, they wouldn't be able to charge the various government scholarship programs for their tuition.

I went to college on a ROTC scholarship. (not at Harvard!)

Posted by: Don Meaker | May 10, 2008 8:10:32 PM

Hey M.I.T., relocate to the great state of Washington! The old brewery in Olympia would make a great campus.

Posted by: Sounder | May 10, 2008 8:31:23 PM

How about ruling that Universities with endowments greater than (say) $15 Billion can no longer offer tax deductions for their donors? So those wealthy Hahvahd donors could then direct their wealth to some other worthy college.

Posted by: Half Canadian | May 10, 2008 9:57:01 PM

"The idea has prompted a range of questions, including whether it is legal to infringe upon private colleges' tax-exempt status or single them out based on their wealth."

Gee, I don't remember anyone in higher education getting their knickers in a twist when Wal-Mart or "Big Oil" get singled out for discriminatory tax treatment. Maybe they should have looked at their bank balances and guessed who would be next.

It is painful to watch my daughter's tuition go up 10% this year knowing that her school (UVa) has more than $1 billion accumulated. Couldn't they spend just a little and try to keep fee hikes reasonable?

Posted by: stealthpundit | May 11, 2008 4:51:32 AM

Another example of the liberal viewpoint of "taxes for thee, but not for me." While we're at it, let's take a look at Harvard's carbon footprint...

Meanwhile, my state campus is purchasing land and building condos on it, retaining ownership to the land. A tax-funded institution can legally become a land baron/real estate developer?

Posted by: PJ | May 11, 2008 7:52:57 AM

Since when has a tax increase ever been a bad thing? It should be more like 10%, not 2.5%. It's time that Big Education paid its fair share.

It's all for the common good, dont'cha know.

Posted by: John | May 11, 2008 10:42:40 AM

I'd support this idea if it got the schools to spend the money currently going to their endowments to lower tuition costs. Unfortunately, I really doubt that that would happen.

Posted by: Ben | May 12, 2008 5:01:38 AM

Any discussion of a law revoking or changing the tax-exempt status of colleges and universities will, of course, begin in Boston, the capital of Taxachusetts and, conversely, home to more institutions of higher learning, and thus tax exempt, than any comparable city in the world. Depending on your metric, there are 80+ of them within a 50-mile radius!

Harvard and MIT essentially own the most desirable 5-mile section of the Cambridge side of Charles River waterfront from the coast in. Boston University owns a good chunk on the Boston side, along with a great deal of Commonwealth Avenue from Kenmore Square out to Brighton. Would anyone hazard a guess as to the total monies lost to the cities of Boston and Cambridge in property taxes on this real estate, some of the most coveted property in one of the most expensive areas in America? A bit further out we have Boston College doing the same to the tax base in both Boston and Newton. Northeastern University, the same in the rapidly-gentrifying Back Bay/South End area.

Their payments in lieu of taxes, which Pravda, err, the Boston Globe, occasionally covers, are laughably small. It's time these wealthy, arrogant institutions (including my alma mater, BU) begin paying their fair share.

Posted by: Brutus | May 12, 2008 11:36:01 AM

Writing this from Canada, all I can say is you don't know how lucky you are in the USA to have institutions like Harvard, and you should never take them for granted.

The USA is a superpower in education and research (at least as far as private universities are concerned), and should be aware that other countries are coming up fast, especially China and India.

So hold on to what you have and don't listen to the second-rate jealous people who want to tax the institutions that the USA needs most to assure its future in a world which is becoming much more competitive.

For its part, Harvard should proceed as quickly as possible to establish a satellite campus in another state, so that it will have options in the event that the mediocrities in the state legislature actually do proceed with a tax.

Posted by: John D. | May 27, 2008 8:32:06 PM