New tax has left higher ed....

The new tax on Harvard

Although scrutiny of wealthy college endowments has grown in Congress in recent years, the reality of a new tax has left higher ed leaders reeling.

By MICHAEL STRATFORD and BENJAMIN WERMUND

The Republican tax bill directly targets the nation’s elite private universities — including Harvard, Yale and Princeton — with a new levy aimed at multibillion-dollar endowments that have never before been taxed.

Under the bill headed to President Donald Trump’s desk the most well-to-do private universities would have to pay a 1.4 percent tax on earnings from their endowments, which are largely built on donations from prosperous alumni and enhanced by investments. Although scrutiny of wealthy college endowments has grown in Congress in recent years, the reality of the new tax has left higher education leaders reeling.

The list of colleges probably subject to the tax is like a roll call of the nation’s most elite private schools — Stanford, Amherst, MIT, Rice, Dartmouth, Notre Dame. Stanford’s endowment, for example, totaled $24.8 billion as of Aug. 31, according to the university. Harvard’s tops $37 billion.

Rep. Tom Reed, a New York Republican on the House Ways and Means Committee who has long advocated for taxing large endowments, said the new tax is intended to force colleges to open their books in a way they never have before.

“Hopefully through this process we bring more transparency to the issue,” Reed said. “I think it’s only fair to the American taxpayer." The endowments are accumulating tax-free dollars, he said, and lawmakers should "ask the hard questions of accountability and oversight to say, 'We want to know where the money is going, and we’re going to stand with the American taxpayer.'”

Colleges and universities in the GOP line of sight are hurrying to make sense of exactly how the new tax code would hit their campuses beginning just weeks from now.

Here's how the tax would work: Any private university with endowments worth $500,000 per student or more would have to pay a tax of 1.4 percent on the endowment's earnings. Depending on how the numbers are run, higher education groups estimate that about 30 colleges would be subject to the tax. The Joint Committee on Taxation has said it expects the tax to raise a hefty $1.8 billion over the next decade.

Beyond the endowment tax, many more schools would have to revamp their accounting for different business units on campuses. And all nonprofit colleges would have to adjust to changes in the GOP tax plan that they say would reduce the incentive for philanthropic giving.

The doubling of the standard deduction under the plan would lead to far fewer taxpayers choosing to itemize their taxes, meaning they wouldn’t be able to take advantage of the deduction for charitable giving. In other words, fewer people would get a tax break for making a gift to a university or other nonprofit organization.

That means some colleges are making an urgent push to connect with donors before the end of the year, warning that their ability to take advantage of the charitable deduction may go away next year under other provisions in the tax bill.

It is the endowment tax, though, that is the GOP plan’s most direct hit on higher education. While it would be aimed at the nation’s wealthiest private colleges, nearly every university in the nation is on edge, worrying about whose endowment might be next.

"To our knowledge, this is the first time that philanthropic endowments have ever been taxed," University of Texas at Austin President Gregory Fenves said. "Once the precedent is set ... it may start out small, but over time, it could grow."

There’s still much uncertainty at colleges over how exactly the IRS plans to implement the new tax on private endowments.

Some schools hovering around the threshold of the new tax are in the dark about whether they’d end up having to pay. That’s because it’s up to the IRS to issue regulations that spell out exactly how it would measure the university assets that qualify a school for the new tax. The legislation, for example, excludes endowment funds that are used to carry out a college’s tax-exempt purpose but doesn’t define what that is.

“It’s going to have to come down to a very complicated formula” written by the IRS, said Karin Johns, director of tax policy for the National Association of Independent Colleges and Universities.

“They’re going to have to come up with categories of what they consider an educational purpose,” she said, noting that most colleges would argue their entire endowment is used to carry out an educational purpose.

But it’s not yet clear how the IRS will define the term — and whether it will include, for example, building a campus library, or whether it applies only to money spent directly on student aid.

“It’s hard for our colleges to prepare for it,” she said. “We’re going to have to wait and see.

“It’s really just more of a punishment because they don’t like our sector,” she said.

Reed acknowledged that the IRS will have to clarify more about how the new tax is implemented. “Clearly the legislative action is going to get the ball rolling in the right direction and bring in more transparency to this issue,” he said.

Many universities fear the ball is now rolling toward them.

Mike Fitts, president of Tulane University, a private university in New Orleans that would not be hit with the endowment tax, said he nonetheless thinks it "will ultimately create a precedent and lead to taxation of nonprofits."

"I understand we have views about 'the rich.' ... The difference here is endowments are not wealth for individuals. They're wealth for an institution and a cause," Fitts said. "Where will that principle lead?"

Vanderbilt University Chancellor Nicholas Zeppos said he fears it opens the door for taxes to be targeted against nonprofits for political purposes: "How does that affect freedom and liberty and private institutions?"

"We live in a very contentious time," Zeppos said. "When you start crossing those lines — they will tax other charities. ... It's only a matter of time before someone else gets in and says, 'Now it's your turn for your institutions.'" Vanderbilt would likely not be subject to the tax.

Colleges and universities, meanwhile, are also worried that the tax overhaul would reduce the incentives for charitable giving to their campuses. Doubling the standard deduction, for instance, means that millions fewer taxpayers would itemize their taxes and be eligible for the charitable deduction.

“It’s going to make it more difficult for colleges to raise private support,” said Brian Flahaven, senior director for advocacy at the Council for Advancement and Support of Education, which represents campus development and alumni offices.

The biggest hit to philanthropic giving in higher education, Flahaven said, would likely be on middle- to high-middle-income individuals, those earning roughly in the range of $100,000 to $500,000, who make annual gifts to their alma maters — rather than the major, blockbuster gifts to universities that often are planned out for years.

Universities would also lose a special provision that allows them to dangle tickets to college athletic events in exchange for tax-deductible gifts. Donors would no longer be able to write off 80 percent of the value of those seats.

Some colleges are trying to make an extra effort in the coming weeks to connect with those donors, warning that their ability to take advantage of the charitable deduction may go away next year, he said.

“Anecdotally, we’ve heard institutions are reaching out to their annual fund donors to encourage some of those donors to give now and consider giving a larger gift” before Dec. 31, Flahaven said.

Elsewhere on college campuses, officials will be grappling with changes to how the GOP tax overhaul would tax the “unrelated business income” of universities and other nonprofit organizations.

Under the changes, nonprofit organizations would now have to account separately for each business unit that produces “unrelated business income” rather than combining them all together. The shift would mean, for instance, that a university’s profits from its dining facility could not be offset by losses in its housing operations — which could increase its tax liability.

“It’s going to create a new level of complexity,” said Liz Clark, senior director of federal affairs at the National Association of College and University Business Officers.

“Congress has moved remarkably fast on this legislation,” Clark said. “Colleges and universities are going to have to scramble to meet some of the new requirements of the law.”