Taxing Wealthy Colleges Would Do More Harm Than Good

Could be you.

Photographer: Emile Wamsteker/Bloomberg

America's universities have become behemoths -- the result of swelling donations, rising tuitions and growing anxiety among parents that their children cannot succeed without college degrees. None are flourishing more than the most elite private schools, eight of which have endowments of $10 billion or more.

QuickTake College Endowments

These riches have set some members of Congress, state legislators and local residents thinking: Why are these enormous cash piles left untaxed and unregulated? The short answer is that it would undermine the good work that universities do to educate generations of Americans and energize the economy.  

In some ways, it's understandable that policy makers see endowments as ripe for picking, or micromanaging. College tuition has risen more than 500 percent over the past 30 years. At elite private schools, the sticker price, including all fees and housing expenses, can easily top $65,000. A handful of universities -- enrolling about 5 percent of students -- hold half the nation's total endowment money. This makes people, especially students and their parents, wonder why tuitions need to keep rising.

It's also why Representative Tom Reed, a New York Republican, wants to make rich universities spend at least 25 percent of their annual endowment income on financial aid, or give up their tax-free status.

Connecticut lawmakers, for their part, are debating legislation that would levy property taxes on any college in the state with an endowment above $10 billion -- in other words, just Yale University, which sits on the nation's second-largest hoard at $25.6 billion. At the local level, homeowners in Princeton, N.J., are challenging the tax-exempt status of their local Ivy League school in hopes of cutting their own property taxes by a third.

These proposals overlook the many ways in which universities already strongly provide for the public good. If home prices and property taxes are sky-high in Princeton, it's largely because the university adds value. Through levies and voluntary payments, it also provides about $11 million of the local government's $62 million budget.

The federal government has ample temptation to tax private endowment profits. Assuming a 35 percent tax rate, the revenue would amount to about $11.1 billion, according to a congressional estimate, and presumably that could be funneled into student aid. But the government is already deeply involved in student aid through loans and Pell grants (and thus has encouraged the rise in college costs). Who's to say it would spend the money any better than the universities themselves do?

Another problem with new taxes or spending mandates on private universities is the slippery slope. After all, colleges aren't the only institutions with endowments in the billions. Should the Mayo Clinic or other big nonprofit hospitals be taxed as well? Should wealthy museums? What about rich religious institutions or public universities? (The University of Texas system's endowment is bigger than Princeton's.)

Beyond temporary fiscal relief for cash-strapped governments, it's unclear what social good would come from collecting taxes on endowments. Tuition would not come down. Universities say they would be forced to trim student aid and staff jobs. And if donations were no longer tax-deductible, benefactors might take their money to other causes.  

The government's one legitimate interest is to get universities to be more transparent about how they invest and spend their money. After all, the public supports private colleges in various ways -- not least through the subsidies they derive from their tax exemption and from the deductibility of benefactors' donations. Then there are the considerable public dollars and government contracts devoted to university research. In return, these ordinarily secretive schools should be expected to give the public a better sense of why they need to raise tuitions and just where student aid goes.   

Thus it's unfortunate that many have responded begrudgingly or incompletely to a letter Congress has sent to 56 private universities requesting detailed data on their endowments.   

Elite schools like to keep their books to themselves. But opening them to reasonable review would be better for everyone than having the government reconsider its generous tax exemptions.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.