Princeton Reaps Tax Breaks as State Colleges Beg

Princeton University and the College of New Jersey are schools of roughly the same size located just 12 miles apart, but they could be on different planets.

The world knows Princeton to be a very elite private school, while if anyone thinks of the College of New Jersey at all, it is as the former Trenton State College, a public institution serving a far less upscale population, with a much larger proportion of students receiving some federal or state government aid.

In one vital respect, however, the popular perception of these schools is wrong. A far better case can be made that Princeton is more of a publicly subsidized school than the College of New Jersey, which is proportionately more dependent on private funding.

Federal research grants play a role in paying professor salaries and providing funds for administrative and building overhead, but the major reason for my statement is simple: Princeton’s use of tax exemptions has facilitated its accumulation of vast amounts of wealth, something largely denied to the College of New Jersey and most other so-called state universities.

Billion-Dollar Endowment

Princeton’s endowment on July 1, 2010, was $14.3 billion. That works out to almost $2 million for every student in attendance.

Over the following year, Princeton’s endowment rose by more than $2.7 billion, about 500 times the growth in the College of New Jersey’s endowment, which was about $20 million in 2010, according to the National Association of College and University Business Officers, and rose to about $25 million over the next year.

Let us assume Princeton earns 3 percent annually on its 2010 endowment -- more than $431.7 million total for 2010-11 -- in actual income payments. A private individual or corporation owning those assets would have been taxed at probably a 35 percent rate, conservatively, or $151 million. By my calculations, it also appears that the school accrued at least $2.5 billion in capital gains, the realized portion of which ordinarily would be taxable at 15 percent. If 25 percent of the gains were taxable (a conservative estimate), Princeton saved an additional $94 million that other taxpayers would have paid.

Then, of course, there are new gifts, on which donors pay no tax. The precise impact this had on Princeton’s finances for the year is unknown, because we do not know if many gifts were motivated by tax considerations. But a figure of $100 million seems plausible (the school received more than $50 million just for its annual giving campaign, a small portion of total giving).

Finally, the school acknowledges receiving roughly $250 million in research grants. Most of those funds were legally committed to specific projects, but it is probable that more than $75 million of that amount was in overhead funds, because the typical federal reimbursement for operating expenses is conservatively 30 percent of the total grant amount, for which the university has considerable discretion in spending.

Adding together the $151 million in income tax savings to the $94 million in capital-gains-tax savings, the estimated $100 million in tax-induced gifts and the $75 million in research overhead, we get $420 million; dividing by 7,731 students, we get more than $54,000 per student.

$54,000 Versus $2,000

Do the same exercise for the College of New Jersey, and it appears that the school at most receives less than $600 per student in federal benefits annually. True, the college also gets state subsidies. Yet that adds up to only about $1,000 per student a year, so the total state and federal subsidies per student are less than $2,000, not even 4 percent of Princeton’s level.

Students get some government financial-assistance benefits at both schools. But even adding everything in, total direct and indirect governmental subsidies at the College of New Jersey are still less than a tenth of what they are at Princeton. Moreover, tuition payments (clearly a private form of financing) constitute more than 70 percent of the College of New Jersey’s total funding, substantially more than at Princeton.

Because Princeton is a school attended by predominantly wealthy and moderately affluent students, and the College of New Jersey has more lower- and middle-income kids, it is worth noting that public policy is subsidizing the “rich” more than the poor. This may explain why Daniel Bennett and I are getting statistical results suggesting that increased college participation now appears to be associated with falling, rather than rising, income equality.

In 2002, Meg Whitman, now the chief executive officer of Hewlett-Packard Co. and a former CEO of EBay Inc., made a $30 million gift for what is essentially a luxury dorm (Whitman College) at Princeton that probably netted her a tax break of $10 million or so. Less opulent residences at the College of New Jersey lack such rich private funding. One could argue that this is the equivalent of building public housing for the rich.

The example contrasting an elite university and a state school is not isolated. Go to Chicago and compare either the University of Chicago or Northwestern with the Chicago campus of the University of Illinois. Or go to California and compare Stanford University with nearby San Jose State University, and the same picture would emerge.

What should be done? I am somewhat surprised that the Occupy Wall Street crowd is not making a case for ending tax exemptions for elite higher education. One option the protesters might propose would be a progressive tax scheme, permitting full exemption of donations, dividends and capital gains at poor schools; no exemptions at wealthier ones; and perhaps even a tax on that income at extremely rich universities such as Harvard, Yale and Princeton.

Matching Grants

One could even level the playing field a bit by using some of the increased tax revenue to finance matching grants for donations to poor schools such as the College of New Jersey. Simpler yet: End federal tax exemptions at colleges and universities.

To me, income inequality is an overrated problem in American life, and has even propelled the American entrepreneurial spirit. Yet it remains true that, considering all federal government policies, including tax exemptions, the rich schools have benefited more than the poor ones -- a regressive social policy that many would argue is inconsistent with using higher education as a tool in promoting the American Dream.

(Richard Vedder directs the Center for College Affordability and Productivity and teaches economics at Ohio University. The opinions expressed are his own.)

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    Richard K Vedder at RVEDDER1@OHIO.EDU

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