Readers of Philanthropy Daily have seen two opinion pieces in recent weeks decrying the large endowments of certain private universities (Endowments on the table: why should taxpayers subsidize elite private colleges? by Jeff Polet, and Taxpayers are over-subsidizing rich nonprofit colleges by Mark Schneider and Jorge Klor de Alva). But the arguments in both are misguided, and their suggestion that Congress should reconsider the tax-exempt status of private universities with large endowments would set a dangerous precedent not only for higher education but for all of philanthropy.
The first mistake in both articles is the assertion that taxpayers are subsidizing elite universities (think Ivy League schools, Duke, Stanford, and a handful of similar institutions) by allowing tax-free contributions and not taxing endowment earnings. But the tax deductibility of gifts to universities, or any other charitable nonprofit for that matter, isn’t a subsidy at all.
The charitable deduction serves as a guardrail between the nonprofit sector and government, and recognizes that money given away isn’t available for personal consumption or saving and therefore isn’t properly considered taxable income. And nonprofit universities don’t have profits to tax, which is of course the basis of the corporate tax system.
There are other serious problems with their attack. For example, the authors assert “the majority of taxpayers are poorly served by the tax-exempt status of large college endowments,” in large part because most taxpayers will not have their children enrolled in elite institutions. This claim is based on the simplistic notion universities provide little value to taxpayers, the nation, and civil society as a whole, benefiting only students, alumni, and faculty.
But these institutions do far more than simply educate students. To cite just one example, the faculty at these universities are often involved in groundbreaking scientific research benefiting taxpayers and the world far beyond the lecture hall.
The authors also overlook that large endowments permit elite private universities to waive most or all of the cost of attendance for students from low- and middle-income families, which would be difficult if their tax-exempt status were curtailed or stripped. Consider one plan proposed in Massachusetts in 2008 that Alva and Schneider speak approvingly of in a recent paper, to impose a 2.5 percent tax on the value of university endowments.
At the end of 2016, Harvard’s endowment was $37.6 billion, total revenue was $4.8 billion (including $1.7 billion from endowment earnings), and its financial aid budget was around $172 million. A 2.5 percent tax would require it to cut a check for $940 million to the state. It doesn’t take an Ivy League degree to see that siphoning off a fifth of Harvard’s operating budget and more than half of its annual endowment contribution would put a severe crimp on things, including its generous financial aid budget that effectively makes attendance free for students from families earning less than $65,000 per year.
Beyond the misguided attack on endowments, these articles are part of a broader attack on philanthropic freedom that would establish a “hierarchy of giving” privileging some forms of charitable giving over others. Giving to one’s house of worship, for overseas disaster relief or animal welfare, to address hunger or illiteracy, supporting a museum or refugee resettlement – all of these have historically been treated equally under the tax code, without discriminating amongst the different areas where philanthropic dollars might be directed.
These authors add their voices to the small but vocal number of people calling for dumping philanthropic freedom in favor of politically-guided giving. Congressman Tom Reed (R-NY), for example, is thinking of giving larger tax deductions for donations to universities that are unrestricted or directed to student aid while denying altogether tax deductibility for gifts earmarked for other purposes. Beyond the realm of higher education, there are proposals to end tax deductibility for gifts to groups engaged in public policy, a call to radically narrow the definition of what qualifies as educational, and suggestions that giving to cultural institutions such as museums, operas, and symphonies shouldn’t qualify for the tax deduction.
But these voices, if heeded, would diminish philanthropic freedom and set off a bidding war among competing nonprofit sectors claiming that they deserve preferential treatment, with elected officials and bureaucrats favoring and disfavoring groups based upon perceived political advantage and personal preference.
A strength of America’s robust philanthropic and charitable community has been that organizations have historically had a free hand to pursue their missions and donors have been free to support the charitable organizations and causes of their choice, without the government attempting to steer their giving. So while there are real issues relating to higher education that should be addressed, including affordability, policymakers should reject efforts to have the government establish a hierarchy of giving that would bring political pressures into the philanthropic and charitable sector.
Sean Parnell is vice president of public policy for The Philanthropy Roundtable.