Universities and Taxes

Universities and Taxes

Jeffrey Williams: Should Universities Be Taxed More?

If universities are operating more like businesses, should they pay more taxes?

This past winter Pittsburgh?s mayor, Luke Ravenstahl, proposed that the city institute a tax on college students. Called the ?Post Secondary Education Privilege Tax,? it would charge 1 percent of the price of tuition, so a student at Carnegie Mellon (where I teach) would pay $409 a year, at the University of Pittsburgh $133, and at a community college around $30. [See the Wall Street Journal, Dec. 1, 2009.] It was the first such proposal in the United States?and I doubt it will be the last.

The proposal was met with outrage from students and college administrators, and it took some of the burnish off Ravenstahl?s image (he had gained a lot of publicity as the youngest mayor in the United States when, because of the death of the incumbent, he fell into office a few years ago). But he was between a rock and a hard place, trying to remedy a shortage in city retirement funds and Pittsburgh?s perennial tax shortfalls. Despite its PR, the city has hemorrhaged population since its heyday as Steel Town. Only Cleveland’s and Buffalo’s losses can compare.

It seemed strange to go after students. According to student protesters, the tax proposal was based on a misperception and resulted in double taxation, since many students work and rent or own houses in Pittsburgh. They were not nonresidents siphoning off city services but already tax-paying citizens. We should bear in mind that, contrary to the image of the raccoon-coated college students, a vast majority of students are long past high school and work over twenty-five hours a week.

But that was the only card the city had, since universities are tax exempt, and Pittsburgh has wide swaths of property on nonprofit rolls, owned by University of Pittsburgh (and its massive medical plant), Carnegie Mellon, Duquesne, and a host of smaller schools. In my reading, it was a card game, presenting one of the few ways that Ravenstahl could leverage pressure on the universities. Much of the money they pay to the city is by voluntary agreement, and one agreement, which netted $3 million a year, expired two years ago without anything to replace it.

The student tax proposal withered away, as it should have, but it raises a few issues about universities and their tax status, which the IRS has also started looking at. Today, universities not only adopt the model of corporate management but act as hybrid institutions, spinning off profitable businesses. So what should their tax burden be? Do they sometimes abuse their exempt status when conducting profitable businesses?

In May, the IRS released a report on the ?Colleges and Universities Compliance Project? [IR-2010-58, May 7, 2010; see also ?Colleges as Potential Tax Targets,? Inside Higher Ed, May 10, 2010]. It pointed to a few areas where universities? exempt status got fuzzy, such as endowments. Questioning why some endowments were amassing huge fortunes, Senator Charles Grassley (R-Iowa) subsequently proposed that universities be required to spend a higher proportion of them, beyond the current average of 5 percent, for things like scholarships. Endowments are not supposed to be like hedge funds but for the furtherance of the university?s charitable mission.

The IRS also looked at ?unrelated business.? A business-like food service, though unrelated in some ways, falls under exempt status because it?s needed to provide for students. But the line seems rather hazy with other businesses, like advertising, from which many universities evidently make significant sums. The other issue that the IRS report focused on was executive compensation, which is supposed to be determined by an independent survey of similar nonprofits. Many universities seemed unaware of or ignored that rule and set compensation at their whim.

I think that we need to revise the tax code for universities. If they are hoarding their endowments like an investment bank, they violate the spirit if not letter of their exemption. And the boundaries between nonprofit and profit seem too porous. Carnegie Mellon, for instance, has a game center in a restricted building in a corporate park along the Monongahela River, where graduate students learn to program apps and make games. The games are then fed to private companies. Where is the line between the status of that building as an educational institution and the profit-oriented use of its results?

By adopting the mantle of business, as they now so often do, universities are hoisted by their own petard. If they advertise the economic value and use of their degree, then why would those receiving the service donate to them? It?s merely a business transaction, the payment of tuition for the courses needed to graduate. One does not ordinarily donate to businesses. I like shopping at Macy?s well enough, but I would not give them money to keep their stores going.

Liberal arts colleges often have high rates of giving because people had good experiences there. They espouse vague, humanistic values?of finding out about art and literature, of wandering and searching, of figuring out oneself, of learning?rather than business values. These values are why universities have a nonprofit status. Perhaps they should embrace them a bit more, rather than the current mindless rush to business.