3 min read

Republicans in the House of Representatives finally unveiled the first draft of their tax reform bill last week.

As might be expected in the age of Trump, the House plan hits some populist high notes—by holding the top tax rate steady at 39.6%, for instance, penalizing companies that move their operations overseas, or expanding the child tax credit.

But on the whole the proposed overhaul represents a victory for House Speaker Paul Ryan, whose unshakeable faith in tax cuts is finally paying off. Since first coming to the Hill nearly thirty years ago Ryan has hoped for this moment, when Republicans control both the White House and the combined chambers of Congress, and he’s now well poised to push through a tax revamp that would slash corporate taxes, eliminate the estate tax, and lower rates for so-called “pass-through” companies, among other things.

As many critics have noted, the proposed changes would directly affect (read: benefit) the ultra-wealthy, who in addition to all the other goodies, would also get to keep the charitable tax deduction.

However, the National Council of Nonprofits worries that the proposed plan might serve to depress overall charitable giving. The plan’s celebrated simplicity (tax returns will be able to be done on a postcard-sized form) may discourage middle- and upper-middle-class families from itemizing their deductions, which would prevent them from claiming charitable deductions.

But amid the rat’s nest of loopholes, carve-outs, and rate cuts, one provision of the proposed reform package deserves special mention here.

Section 5103 (see p. 75 of this summary document) provides for a “1.4 percent excise tax on net investment income” upon “certain private colleges and universities.” That is, the House plan proposes to tax college endowments, a proposal that has already generated spirited discussion at Philanthropy Daily.

To be sure, the GOP plan targets only private colleges or universities with more than 500 students and assets totaling more than $100,000 per student. But as recent analysis by the Chronicle of Higher Education shows, the proposed rule would still hit some 140 schools.

Yes, that includes the Ivy League heavy-hitters like Princeton, Yale, and Harvard (whose 2014 endowments came in at over $20 billion, $23 billion, and $36 billion, respectively); but it also sweeps up many others in their wake. Most of the institutions set to be affected by the new tax are small but prestigious colleges like Bates, Holy Cross, and Lafayette (whose respective endowments were all under $1 billion in 2014). Not to mention very small schools—like Wesleyan College in Georgia (2015 enrollment: 558) or University of the Ozarks (633 students)—that nevertheless have per-student endowment values at (just) over $100,000.

In his initial piece in favor of taxing college subsidies, Jeff Polet argued that schools like his own Hope College can’t compete with the Ivies when fundraising or maintaining endowments. Polet blamed the top schools for “draw[ing] their students from all over and send[ing] them all over,” saying these universities were producing little more than “rootless fragments of [the] population that don’t know whom to serve because they don’t have a place to serve.” Polet wonders aloud what will happen to small college towns like Holland, Michigan, if schools like Hope are eventually forced to close.

I think this sort of rhetoric distracts more than it clarifies. Does the argument for taxing endowments really boil down to a redistributive cash-grab at the expense of elite universities? Would taxing Ivy League endowments really serve to keep schools like Hope open? Or would it rather just send that much more grist to the bureaucratic mill, where it is more likely to be scooped up and redirected than invested back into small local communities?

I think Polet is ignoring the scores of small- and medium-sized schools that have nowhere near the endowment figures of the Ivies but would nevertheless be the ones to suffer under the proposed plan. (Besides, the overall amount that the House Ways & Means hopes to take in with the new endowment tax is about $3 billion over nine years—hardly a significant landfall when spread back out nationally.)

Polet also focuses narrowly on the unpaid property taxes that top-tier schools ostensibly avoid, citing numbers from a 2015 Nexus Research & Policy Center report suggesting Harvard cost the city of Boston some $38 million in lost revenue in 2009 alone.

But as the Philanthropy Roundtable’s Sean Parnell noted in his contribution to the Philanthropy Daily debate, colleges contribute public goods to their surrounding communities (like leading scientific research, for example) which can more than justify their tax-exempt status. Advocates of endowment taxes seem to think “elite” colleges and universities are hoarding their resources for private purposes—but this assumption whitewashes the incalculable cultural, scientific, civic, and reputational advantages that these schools bring not just to their local cities but to the country as a whole.

I’m anything but a tax expert, and I leave it to others to arrive at more specific predictions about the proposed GOP plan. It’s also far from certain that the proposed Section 5103 will survive in its current form once the bill makes its way through conference. But for the moment it’s worth simply noting that the House has forced a debate about what our colleges and universities are for, and what role they play in our crowded civil society.

Leave a Reply

Your email address will not be published. Required fields are marked *