Cornell may have posted a subpar return on its endowment this year, but it still ranks among the country’s 90 universities with billion dollar endowments. As these mega-endowments and college tuition continue to grow, politicians are once again eyeing them as a source of tax revenue and a source of relief for families and students trying to afford tuition, drawing the special attention of Ithaca area House Rep. Tom Reed (R).
Reed, a member of the House Ways and Means Committee, drafted a bill which would require universities with endowments greater than $1 billion to payout a specific proportion in financial aid to low-income and middle-income students. Reed suggested setting this percentage at 10%, though it is not finalized, and making the law binding by revoking these endowments’ tax-exempt status should they not comply. Reed also stated he wanted to change the tax treatment of donations to universities by making unrestricted gifts more tax advantageous than ones which come with spending restrictions from the donor.
According to an Inside Higher Ed article, Reed was quoted saying the goal of his plan is for students to eventually “pay zero dollars in tuition.”
Taxing university endowments has long been the envy of Congress. Collectively, university endowments in this country amounted to nearly $500 billion in 2014, according to a NY Post article, which called the biggest of endowments at Harvard and Yale “obscene amounts of tax- free cash”. To many, top university’s professionally managed endowments draw little distinction from hedge funds and other taxable entities.
One of Reed’s other proposals is to require public disclosure of salaries of employees earning more than $200,000 at all colleges and universities that participate in federal student aid programs.
Cornell President Elizabeth Garrett, however, disagrees with Reed and those who want to tax and regulate university endowment spending. She called the plan “misconceived” because donations to endowments are often restricted in use by the donor, and the University has a legal and fiduciary obligation to heed the donor’s instructions.
“Their [Reed and members of Congress] hearts are in the right place, but their methods won’t succeed for the goals they have in mind,” Garrett told Bloomberg.
Reed responded to Garrett’s statements by issuing a statement which reads in part:“We understand exactly how endowments work. We are going to use our position on the ways and means committee to change the tax policies that will prevent universities from hiding behind archaic laws which hurt our students and their families.”
Universities “are profiting in the billions of dollars in tax free income on these endowments,” the statement continues, according to Bloomberg. “It’s only fair that they put some of that profit into lowering, and in many cases removing, all tuition costs of going to college.”
While few can argue that they don’t want to see college tuition come down, Reed’s proposal is statist and unbecoming of a member of the Republican Party. Government should not use the tax regime as a way to punish taxable entities for specific behavior, especially when the entities being punished are a narrowly defined sector or unit of the economy. Even if it makes sense that Cornell and peer institutions should devote more endowment dollars to financial aid, if we acquiesce this authority to the government we open the door to much, much more. If , for example, private individuals or corporations didn’t make certain spending or charitable contribution decisions conforming to a one-size-fits-all standard promulgated by legislators and bureaucrats, should they too be punished by increased taxes?
Now, this is not to say that the other facet of the proposal—to review the tax-exempt status of university endowments—is without merit. While no champion of small government and free markets would ever advocate for increased taxation on anybody, it is increasingly apparent that even though universities are technically not-for-profits, their endowments enjoy a tax status privilege not enjoyed by most other investors—many of whom are investing their savings to afford paying university tuition bills.
Reed’s proposal would also be more palatable if it focused specifically on public universities, but in which case it should be the states that pass such laws, not the federal government.
It’s a thorny issue, with lots of high-running emotions, or perhaps political posturing, that can cloud the judgement of even conservatives and proponents of small government. Regardless of how the tax regime may or may not change, mandating specific expenditure percentages is unacceptable.
