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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.


2 thoughts on “Attacks on university endowments are misguided”

  1. Sean Parnell says:

    Dr. Klor de Alva writes that “making something tax exempt, that is ordinarily taxed (e.g., profits), is in fact a taxpayer subsidy.” Except nonprofits don’t have profits to be taxed, hence they are called – nonprofits (the exception is for unrelated business income, but that isn’t particularly relevant here).

    This disagreement perhaps just reflects a difference of perspectives. But his statement that his proposal to tax university endowments is “in keeping with what charitable foundations already are required to pay in taxes” is utterly false.

    He proposes to levy between a .5 and 2 percent tax on the assets of large university foundations. This is substantially different than the excise tax on private foundations, which is typically 1 or 2 percent on the investment earnings of the foundation, not the assets.

    The difference is massive. Consider again Harvard University’s endowment, which earned roughly $700 million in 2016 and ended the fiscal year with $35.7 in assets. If it was taxed at 1 percent on investment earnings, it would owe about $7 million ($14 million if the rate is 2 percent). Under the plan proposed by Dr. Klor de Alva, it would owe about $714 million, or close to 15 percent of its annual operating budget.

    Finally, he suggests that universities could offset this by offering more aid to students from low-income backgrounds. But as I noted in the original piece, such students already attend most of these elite institutions for essentially nothing, something they are able to offer because they have such substantial endowments. With the cost of attendance already set to zero for low-income students, it isn’t clear that there’s much more financial aid to be given to this group.

    Dr. Klor de Alva raises a real problem, that of how to provide access to higher education to more students. He is particularly perceptive in identifying community colleges as a focus for greater attention. But his proposal would strip some our best universities of resources while undermining philanthropic giving. This doesn’t seem to be the right path forward for how to improve access to higher education.

  2. Dr. Jorge Klor de Alva says:

    It saddens me to know that the person responsible for public policy at the important Philanthropy Roundtable would write a defense of endowments as we know them without actually having read the arguments made by the critics. Had he done so, he would have learned how making something tax exempt, that is ordinarily taxed (e.g., profits), is in fact a taxpayer subsidy. He would also have learned that what we propose permits colleges to offset their potential tax liability by whatever is spent on financial aid to needy students–thus serving as an incentive to provide even more financial aid. Lastly, he would also have learned that the modest tax on endowments we suggest is, first, in keeping with what charitable foundations already are required to pay in taxes and, second, that the tax levied would become part of a tax credit to support our greatly under-resourced community colleges. To remedy the misunderstandings, we suggest Mr. Parnell read Rich Schools, Poor Students: Tapping Large University Endowments to Improve Student Outcomes, available at http://nexusresearch.org/wp-content/uploads/2015/11/Rich-Schools-Poor-Students-Revised-November-2015.pdf.

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