Taxing Private Endowments? A Bad Idea All Around | Eastern North Carolina Now

    Publisher's note: This post, by Bob Luebke, was originally published in the Education section(s) of Civitas's online edition.

    A few weeks ago, I wrote about why I thought President Obama's Community College Proposal was a bad idea. His plan to provide up to two years of free tuition to community college students who maintained a 2.5 G.P.A would cost $6 billion a year, is ill conceived, and based on fallacious assumptions. As usual, no details were provided as to where the money would come from.

    Until now. And those details pose their own problems.

    A new study released Monday recommends tapping large private university endowments to improve student outcomes. The authors of the study say an excise tax on college endowments worth more than $500 million could raise $6 billion and not impact individual gifts to institutions. In addition, an institution's tax would be offset by the amount of money the school provided for student financial assistance. To do that the study proposes a sliding scale excise tax (0.5 to 2.0 percent), with the rate rising as the size of the endowment grows. Tax deductions for donors would remain in place. But to assure the proposed tax does not impact the amount set aside for financial aid for low and middle-income students, the proposed tax will be offset annually by the amount the school sets aside for student financial aid.

    Taxing large endowments is not a new idea. Taxing only large private endowments, however, is a new twist. Variations on this theme surface every few years, with most of the ideas gaining popularity in tough economic times.

    This is a bad idea for several reasons. First let's look at the argument for taxing. It goes something like this: . Appropriations can come in the form of financial aid, research grants or even possibly capital appropriations. By far the larger subsidies come from the fact that private institutions are exempt from paying state, federal or local taxes. For instance, they pay no property taxes on land and buildings. In addition, income earned by endowments' investments is also not taxed. The problem is so bad, authors of the study contend, that:

    Average taxpayers are subsidizing the education of students in the better endowed and more selective schools to a far greater extent than they are supporting the education of their own children, most of whom attend broad-access public institutions.

    In other words, the argument boils down to: "The rich private schools prosper, while the public institutions struggle. It's not fair. Taxing rich schools and using the money to provide a free education to community college students is the fair thing to do."

    Not so fast. In addition to showing that class envy is alive and well, it's a flawed argument. The study provides a pile of data that shows tax subsidies compared to endowment size, purportedly to show a cumulative massive tax subsidy to well-off institutions. However, the analysis fails to include the other side of the equation: the tangible benefits that private schools offer individuals and the communities in which they operate. The existence of private schools saves local, state and federal government money. In other words, what would it cost a local community or state if it had to educate additional students and provide additional jobs for those employed by private schools? According to the authors, there is only one side to private school equation — and that is cost. In this short-sighted view, there are no benefits.

    Taxing private endowments is a bad idea because it assumes America's education problems are primarily financial. America spends more on education than any nation on earth. Results have failed to match the investment. Taking money from large private university endowments and giving it to community colleges sends the signal that our higher education problems are financial. Such thinking is incorrect and obscures the far greater problems of college curricula, ill-prepared students and wasteful spending.

    Moreover, taxing endowments of private schools is based on a false dichotomy between private and public institutions, and denigrates the contribution of private institutions to the public good. The authors propel their study by saying Harvard, Yale and Stanford really aren't public universities; they are well-off private institutions that do not need public subsidies. In this case, they consider the tax-exempt status of private university endowments a "subsidy." Public university endowments are also tax exempt.

    But because a university is privately owned, the authors argue, they shouldn't receive the same tax exempt status of public schools because private schools don't serve the public.

    Schools or colleges — whether they are private or public — educate students to be good, productive citizens. In that sense they are serving a public purpose, regardless of type of ownership.

    History is replete with religious organizations, fraternal and civic groups that have formed colleges, schools, hospitals, orphanages and social service organizations dedicated to building a better community or society. These organizations have furthered the public good with little or no public funding.

    Indeed, private institutions — including universities — serve many public purposes. They enrich their communities and educate and mold students to be contributing members of society. Can anyone rightly say these organizations weren't serving the public good and therefore should not receive the same tax treatment of their endowments that government-owned universities enjoy?

    Let's stop with the silliness and drop the idea of taxing private endowments and educational institutions. Doing so destroys ideals we have worked hard to cultivate in education and philanthropy. We don't need any more ways to encourage the growth of the state and weaken civil society.

    It would also distract us from the real problems in education, including community colleges. Declaring war on private institutions to fund President Obama's community college proposal is a policy that does more harm than good. The sooner we realize it, the better.