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September 8, 2013

Should Colleges and Universities Be Taxed?

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In a recent op-ed for the Wall Street Journal, James Piereson and Naomi Schaefer Riley argued that we should "treat universities like for-profit enterprises" and remove their tax-exempt status. Richard Vedder, Ronald Ehrenberg, Roger Kimball, and Daniel Bennett respond below. 

Richard Vedder:

In an email to me shortly before he died, Milton Friedman said "a full analysis...might lead you to conclude that higher education should be taxed to offset its negative externalities." He's right. Elite so-called "private" colleges like Princeton actually receive far more financial benefits from governments per student than so-called "state" universities (special tax treatment of private donations, favorable tax treatment of endowment capital gains, federal research grants, etc.) And for what purpose?

We are over-invested, not under-invested, in higher education. Many college graduates are taking low- skilled and low-paying jobs. The relationship between state government spending on higher education and economic growth is negative, not positive. Students are studying and learning little.  Schools, including Princeton, are spending vast amounts becoming mini-luxury resorts, with fancy housing, spectacular recreational facilities and the like. At the minimum, these commercial activities should be taxed.

One of the basic principles of taxation is that taxes should promote neutrality --treating everyone the same. Used car dealers provide useful services and are taxed; universities provide useful services as well --and also should be taxed. A school with two million dollars a student in endowment like Princeton can well afford a measly few million dollars annually in taxes --relieving the burden on the mostly less affluent citizenry.

Richard Vedder directs the Center for College Affordability and Productivity, teaches economics at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.

Ronald G. Ehrenberg:

In recognition of their social obligation to act in the public interest, many private not for-profit academic institutions have informally, or increasingly through formally negotiated agreements, made payments in lieu of taxes (PILOTs). Typically these payments are much lower than the tax payments that the institutions would have made if their properties had been taxed at the going area tax rate. As financial conditions of local governments worsen, increasing pressure comes to bear on the institutions to pay their fair share of the burdens they place on the localities for various public services.

Focusing on the large endowments of the wealthiest private universities, as James Pierson and Naomi Schaefer Riley have done, leaves one with the impression that the typical private academic institution is flush with easily allocated extra revenues. Nothing could be further from the truth. The typical private not-for-profit academic institution is heavily tuition-dependent and any increase in its costs (which larger PILOTs would require) would have to be passed on to its students in the form of higher tuition levels or reductions in service levels. Given our social goal of expanding access to higher education and reining in tuition increases, requiring the vast majority of private nonprofit academic institutions to dramatically increase their PILOTs would have substantial social costs. In designing such policies, where does one draw the line?

The debate over PILOTs often neglects the benefits a community receives from having a private academic institution in its midst. Institutions often do economic impact studies that describe their benefit to the local economy, including contributions they make themselves to support other local nonprofit institutions, and then add in the benefits that residents receive from the museums, art galleries, theaters, concerts, speakers, athletic events, and the like that the institution provides to community members. When one lives in a college town, like I do, one quickly realizes how different the locality would be without the university.

Finally, what about our states' public higher-education institutions, whose property is also tax exempt? Connecticut understands that the state imposes costs on taxpayers in communities with lots of state property and provides some payments in lieu of taxes to help the communities. Connecticut and Rhode Island similarly both do this for nonprofit private academic institutions. Of course in the current economic environment, this is not the time to urge states, or for that matter, the federal government, to provide funds to localities that have large amounts of tax exempt private or state properties in them; doing so would simply shift financial problems to a different governmental level.

Ronald G. Ehrenberg is the Irving M. Ives Professor of Industrial and Labor Relations and Economics at Cornell University and Director of the Cornell Higher Education Research Institute (CHERI)

Roger Kimball:

Like the Lord's house, the higher-education bubble is a domicile with many mansions. Multiplicity limns the limit of that analogy, but it is important to remember that the higher-education bubble is not a single dirigible. The first thing most people think about when they hear the phrase is the obscene cost of a college education today. That, indeed, is the most conspicuous part of the gaseous extrusion.  But there are many other mephitic elements at play. One is the degradation of what goes on in the classroom, a combination of dumbing down, on the one hand, and politicization, on the other. "Politicization" is a big, Latinate word, hard to conjure with. But you know it when you see it. It's the malign carnival of anti-American, environmentally sensitive, sexually polymorphous, racially inflamed nonsense that somehow got substituted for a serious study of the liberal arts at most colleges and universities. 

Piereson and Riley shed light on another distended chamber: the one marked public accountability.  When the institutions we have entrusted to preserve and transmit our cultural legacy betray that trust by actively attacking that legacy, responding to criticism with cynical appeals to "critical thinking," then the public which supports those institutions will have second thoughts. And when those institutions have accumulated tens of billions of dollars through a decades-long campaign of bilking parents and alumni and exploiting their charitable status to enrich themselves, not their students, then those second thoughts will naturally turn to legislative redress.  There is no reason that a Yale or Princeton or Harvard, engorged with billions, should enjoy the status of tax-exempt entities.  Laws that were intended to help needy institutions that performed an important public service survive should be rethought when those institutions are no longer needy and are no longer, or are only incidentally, in the education business they were originally enfranchised to perform.

Roger Kimball is editor of the New Criterion.

Daniel Bennett:

Exempting colleges from taxation has been among the most persistent higher-education policies. Originating in the colonial era, governments had limited revenues such that granting America's first colleges land and exempting them from property taxation provided an indirect means of subsidization without incurring a fiscal expenditure. This policy has been universally adopted and extended to exemption from income taxation. To the extent that society historically desired to invest collectively in universities, tax exemption made sense as an infant industry policy.  It has not been without costs, as the fiscal burden of public finance has been transferred to other economic activities, distorting the natural allocation of resources, crowding out private enterprise and leading to an over-investment in higher education. 

It has also enabled universities to profitably stray from their mission of providing education and conducting research, both arguably public goods, into the realm of commercial enterprise. Most colleges are also in the entertainment, finance, foodservice, healthcare, real estate and marketing businesses -hardly public goods. Five universities had a combined endowment exceeding $100B in 2012. At a conservative 5% annual return, this translates into income of $5B and a $1B subsidy, if tax at the 20% capital gains rate, for institutions whose average endowment exceeds the market capitalization of firms such as T. Rowe Price, Valero Energy and Whole Foods. Exempting universities from taxation is older than the nation itself, but the policy's usefulness has passed. The commercial interests of universities should be taxed in the same manner as other private enterprises.

Daniel L. Bennett is a Ph.D. candidate in Economics at Florida State University and Senior Fellow with the Center for College Affordability and Productivity.

(Photo Credit: SUNY GCC)



Comments (4)

aed939:

For-profit universities should be taxed, but not not-for-profit universities.

Wyck Holland:

For tax purposes, the status of a university should be determined by the size of its endowment.

Ronald Pires:

Just so people are aware, the tax-free status of universities chartered by the Crown (most of the Ivy League colleges) prior to the American revolution is guaranteed by the Constitution. It would literally require a Constitutional amendment to be able to tax these universities. That said, these universities do pay voluntary taxes to their locales, as they want the fire trucks (etc.) to come when they are needed.

j011254:

Endowments over $100 Billion. And these institutions are tax exempt in all their activities? Universities should be mandated to spend a certain, minimum amount of their endowments each year in order to maintain their tax exempt status on their non-commercial activities. That seems only fair. After all, you didn't build that, someone else did, and at some point, you just make too much money and its time to redistribute some of it.

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