Debate Over Taxing Endowments Misses How Similar Public and Private Universities Have Become

Finance
Posted By Derek Johnson on May 24, 2016 at 9:41 am
Debate Over Taxing Endowments Misses How Similar Public and Private Universities Have Become
Graduation at Yale University, the school is the target of a Connecticut bill that aims to tax the endowments of wealthy private nonprofit universities

Much has been made over two Connecticut bills that propose taxing the endowments of private universities within the state as well as their commercial property. Setting aside some important caveats (the endowment bill was limited to colleges with endowments over $10 billion – Yale is the only university in Connecticut which meets this definition), these proposed bills reflect a burgeoning movement across the country urging states to soak their richest private universities of their hefty tax-free endowments.

The logic behind this movement is twofold: at a time of great economic uncertainty for all but the very rich, elite Ivy League universities are sitting on billions of dollars of tax-free money that could be used for better public purposes. Furthermore, private nonprofit universities should not get the same tax-exempt benefits as public universities, because they are two different entities.

Are public and private nonprofit universities that much different?

Historically, the easiest way to define and differentiate between a public and private university has been the extent to which they are publicly subsidized. But in an era where state governments have dramatically cut back on higher education budgets and nearly 90 percent of four-year private university students rely on federally subsidized grants and student aid, how much longer will this definition continue to hold?

Large endowments were also a major separator, with private universities typically relying far more on the good will of private donors and foundations than their public counterparts and leaving themselves open to capture by agenda-driven billionaires. But as the George Mason Law School episode demonstrates, public colleges are also very much in the business of accepting large private donations these days, and public universities now make up nearly half of the 40 richest universities in the world.

The more pertinent question is this: from the perspective of the average student, is there any meaningful difference (other than tuition) between a public college and a private nonprofit one? Additionally, with the rise of the for-profit college industry casting dark clouds over the reputation of the entire higher education industry, are public and private schools really more different than they are alike?

A recent study by two Johns Hopkins University professors argues that not only do modern public and private research universities have more in common than we think, but that these two groups have been slowly but deliberately converging their curriculums, community outreach and fundraising and recruitment strategies over the past few decades:

“Although the privatization of the public university is a much-discussed phenomenon, less appreciated is the opposite but equally significant trend in the United States – the ‘publicization’ of private universities,” write authors Ronald J. Daniels and Phillip Spector.

By this they mean private universities have steadily “take[n] on many new roles and responsibilities long associated with the mission of public research universities,” such as concerted efforts to enhance diversity on campus and in school faculty, social welfare and outreach partnerships with the local communities that house their facilities and online education. The authors find “ample evidence of movement toward a single model of higher education in the United States that blends elements of two previously distinct institutions.”

Higher education at a point of inflection

Right now, the higher education industry finds itself in need of change: core elements of the current system, like federal student aid and cost of attendance models were built in the 1940s, 50s and 60s to serve student populations and a job market that are remarkably different today. College is no longer an option but rather a necessity for the vast majority of Americans, and the college population as a whole has gotten more diverse in nearly every sense of the word, serving increasing numbers of previously shut out minority groups and older Americans.

As this on the ground reality has gradually taken hold, the country continues to be deeply enmeshed in the old system, most notably by helping to saddle a generation of Americans with more than $1 trillion in future college debt. While there have been notable and important tweaks to acknowledge some of these realities, the overall process remains remarkably similar to the one used by your parents and their parents. Suffice it to say, the policymakers who designed the Higher Education Act in 1965 did not foresee the demand and cost of college education skyrocketing to the levels we see today.

Policymakers and experts at virtually all levels understand this, but there is no easy or realistic solution to the problem. Many have suggested breaking from the all-inclusive university model and opening up federal student aid to low-cost credentialing “microdegree” and online programs offered by private companies or nonprofits. You can find elements of this proposal in the platforms of presidential candidates from Jeb Bush and Marco Rubio to Hillary Clinton.

But there is real danger that this approach would simply inject a wave of new uncertainty about the overall quality and return on investment that comes with a higher education. National and regional college accreditation agencies are already under fire for not effectively regulating the student outcomes and quality of the for-profit industry. While there are certainly some microdegree programs and credentials that provide value, it’s unclear how many would be capable of surpassing even the very low bar set out by accreditors. Trump University (actually a private Limited Liability Company) would have potentially been eligible to accept forms of federal student aid under this scenario.

Democratic Senator Bernie Sanders has advocated moving away from the federal student aid model, proposing a tax on Wall Street to pay for subsidies that would eliminate the price of tuition at public colleges and universities. While large numbers of younger Americans are warm to the idea, Sanders’ proposal has been largely shunned by Democratic Party leadership and has virtually no support within the Republican Party. With Clinton all but certain to win the Democratic nomination, Sanders’ plan is not likely to gain traction anytime soon.

Private nonprofit and public institutions more similar than different

The greater the changes to the higher education landscape, the more similar than different public and private universities begin to appear. There remain real and legitimate differences. In-state tuition at a public university continues to be far lower than that of a private school, and public colleges must deal with government regulations and state lawmakers in a way that private universities don’t. Still, their missions, forms of governance, institutional goals and the students they serve are all similar in ways that separate them from the newer for-profit and private educational industries vying for competition.

Yes, private nonprofit universities do not pay taxes on their endowments or their property, but they also don’t receive billions of dollars in state funding that public colleges receive despite having similar missions, standards and student populations. While wealthy Ivy League schools with piles of cash like Yale or Harvard are not great standard bearers for this argument, there are hundreds of private universities that don’t have the kind of endowments held by some public institutions like the University of Texas ($25.4 billion endowment) or the University of California ($13.1 billion endowment).

Taxing the endowments of wealthy private universities while leaving similar public colleges unscathed fundamentally misunderstands how alike these two institutions have become over the years. As Alex Bloom of the American Council for Education put it in an interview with The Fiscal Times, The key phrase for both groups is “nonprofit” and all the legal implications and obligations it carries.

“Nonprofit colleges, by definition, have to put revenues toward public purposes. This is different from what companies do with profits,” said Bloom in an interview with The Fiscal Times. “How would you tax university endowments in a way that would raise a significant amount of revenue without harming these institutions that are really a jewel in the crown of this country, that generate educated students [who] build long-term economic growth and innovation? I don’t see how you could.”

Derek Johnson
Derek Johnson is a writer, journalist and editor based out of Virginia. He received a Master’s degree in Public Policy at George Mason University and a bachelor’s degree in Communication from Hofstra University.

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