The tax-exempt endowments of colleges and universities are coming under scrutiny in a presidential election year where the cost of higher education has become a top issue.
Leading Republican tax-writers in Congress have sent questions to 56 private institutions with endowments of over $1 billion, giving them until April 1 to respond. The answers they receive could lead to legislation.
{mosads}The letters — which were sent in February and signed by Senate Finance Committee Chairman Orrin Hatch (R-Utah), House Ways and Means Committee Chairman Kevin Brady (R-Texas) and Ways and Means Oversight Subcommittee Chairman Peter Roskam (R-Ill.) — stated that many colleges are raising tuition at rates above inflation despite having large and growing endowments.
The five private colleges with the largest endowments in fiscal year 2015 were Harvard University ($36.4 billion), Yale University ($25.6 billion), Princeton University ($22.7 billion), Stanford University ($22.2 billion) and the Massachusetts Institute of Technology ($13.5 billion), according to the National Association of College and University Business Officers (NACUBO) and the Commonfund Institute.
Private colleges are generally established as nonprofits, which means their endowments are tax-exempt. Unlike private foundations, there is no requirement that the colleges spend a minimum percentage of their endowments each year.
Critics have denounced the schools as hoarding cash, and lawmakers are taking note of that argument.
“Depending on the current practices that schools report, we could potentially see legislative efforts to ensure that greater emphasis is placed on using funds to directly further the charitable purpose these tax preferences are designed to advance,” a spokesman for Roskam said.
Once the data is reviewed, lawmakers might propose legislation requiring schools to spend a minimum percentage of their endowments, or impose limits on what endowment funds can be used for.
Ways and Means member Tom Reed (R-N.Y.) is working on legislation that would require colleges with large endowments to spend a minimum portion of their endowment earnings on grants to students. The timing of that bill is up in the air, as it will depend on how long it takes the committee to review the endowment data.
And while the details are in flux, a summary of Reed’s bill states that it would apply to schools with endowments over $1 billion and require at least 25 percent of endowment earnings to be spent on grants. If an endowment were non-compliant for three years, tax-exempt status would be lost.
The legislation might also require that donors to college endowments designate at least 25 percent of their contributions to tuition-relief grants before they can claim a tax deduction.
Reed — whose district includes Cornell University, which is partly private and has an endowment of about $6 billion — said he is working on the legislation to help reduce barriers to students getting an affordable education.
“It is a disservice to the next generation of Americans to continue to allow them to struggle, when we could so easily address the problem of out-of-control costs by making simple changes to our tax code,” Reed said. “I care about ensuring fairness in higher education and ensuring we can allow every child to succeed in higher education and not be held back due to costs.”
Colleges say much of their endowments can only be used for specific purposes due to restrictions imposed by donors. They also argue that they already spend a great deal of resources to make attendance more affordable.
A study of 812 public and private colleges released in January by NACUBO and the Commonfund Institute found that the investment gains of endowments dropped significantly on average in fiscal year 2015, and that most schools still spent a greater dollar amount from their endowments than they did during the previous year.
“Our colleges already do so much with regard to student aid,” said Karin Johns, director of tax policy for the National Association of Independent Colleges and Universities (NAICU), which represents private, nonprofit schools.
Johns said the when private citizens make donations to endowments, the federal government has no right to say how the money should be used. “It’s not their role,” she said.
This isn’t the first time that endowments have been scrutinized on Capitol Hill.
The tax reform proposal put forward in 2014 by then-Ways and Means Committee Chairman Dave Camp (R-Mich.) would have taxed the endowments of colleges with assets of at least $100,000 per student. And in 2008, then-Senate Finance Committee leaders Chuck Grassley (R-Iowa) and Max Baucus (D-Mont.) also sent letters to colleges with large endowments seeking information.
Dean Zerbe, who was senior counsel for Grassley at the time and now is national managing director of alliantgroup, said it takes time to make significant tax changes like the ones floated for endowments.
“This would be a major change. It doesn’t turn on a dime,” he said. Zerbe added that lawmakers learned from the previous round of letters that university endowments are not actually tied up by donors to a great extent.
Endowments are also getting attention at the state level. In Connecticut, Democratic lawmakers have offered legislation that seeks to tax Yale. One bill would impose a 7-percent tax on unspent endowment investment returns, while the other seeks to expand the amount of property on which the school pays taxes.
The effort to tax Yale’s endowment earnings led Florida Gov. Rick Scott (R) to call for the school to move to his state, an offer it politely declined. Connecticut Gov. Dan Malloy (D) opposes the legislation to tax Yale, according to The Connecticut Mirror.
In testimony before a Connecticut General Assembly committee, the president pro tempore of the state senate, Martin Looney, said the legislation is mild compared to what could come from Congress.
But Richard Jacob, Yale associate vice president for federal and state relations, said at the hearing that the school already makes annual payments to the city of New Haven, where it is located.
“The proposed taxes on Yale would diminish the University’s ability to carry out its charitable mission and to enable and support growth in New Haven,” he said.