First They Came For Harvard ...

New Tax Target -- Those Fat Endowments
by
Gregg Ballou

Look out Vermont (number one in tax burden), Massachusetts (twenty-fifth in tax burden) is coming for our title.  Our southern neighbor is trying to commit stately suicide by taxing Universities with endowments over $1 billion at a rate of 2.5% per year.  Under this scheme, the tax bill for Harvard alone would be $840 million a year in delicious, consequence-free tax money. 

Personally I'm appalled at the idea. 

If Massachusetts goes through with this tax, approximately 62 cents of my annual alumni donation to Harvard would end up in the state's coffers and I feel like I've given Massachusetts enough for one lifetime. 

One of Harvard’s most celebrated faculty members is as incensed as I am and argues that that Harvard should simply leave if this one goes through.  And he volunteers to be among the pioneers, opening the new Harvard South campus.

Still, the Vermont governing class – operating on the theory that a robust dose of taxation never hurt anything -- will no doubt be studying the Massachusetts initiative very closely.   Simply tax Middlebury's ample $1 billion dollar endowment at 2.5% and, presto, the state’s recently lamented $25 million shortfall disappears.  And there is no need to single out Middlebury.  Several Vermont colleges have endowments in the millions and they surely wouldn't mind the state taking 2.5% to spend on things like financial aid for college students, medical research, and the arts.  Especially the arts.  Big evil universities never spend enough on the arts.

Comments

[SPS]

IMHO, universities made a huge, staggering strategic error when they decided to bulk up their endowments and raise tuition through the roof at the same time. The result has been to call in to question the 'public good' function of the endowment system. What good is an endowment if tuition is increasing at near double-digit rates? My sister-in-law worked at Harvard corporation (manages the endowment) as a secretary and the fund managers walked home with $10-$20 million each every year and this was 15 years ago. Hard to see where the public good is going when Harvard was charging up to $45k a year (until they changed their policy earlier this year).

People tend to forget that tax-free status is not a right, it is meant as an off-set to public goods. If universities are not using their endowments in ways that benefit the public, why should they get a free tax ride?

I don't necessarily support the Mass proposal, but I think the legislature is right to raise the question.

[Gordon Smith]

I don't like new taxes of any kind, either, but I understand the reasoning here. Why do they need a Billion dollars? The politicos are just asking them to spread it around a little more, to reduce the cost of a college education for all, which I thought was the reason for endowments anyway - to return as scholarships to the worthy.

[Mike Gardner]

I hate to say it but if endowments are to continue to enjoy tax free status they ought to be required to return x% back to future scholarships, research, etc. There is a similar structure for other corporations that enjoy beneficial tax status such as REITS and royalty trusts. Tax free status was granted as part of a philosophy that Universities and non-profits in general were giving back to their communities. When that fails to be the case they ought to have that priviledge revoked and play by the rules that everyone else plays by.