Passage of Senate Tax-Reform Bill Leaves Colleges Scrambling

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Update (12/2/2017, 3:07 p.m.): This article has been updated with analysis and comment from higher-education groups and university presidents.

College leaders are bracing for major changes in the nation’s tax code that could weaken their financial footing by undermining charitable giving and placing new tax burdens on institutions with valuable endowments.

College leaders spoke out in near uniformity against the Republican lawmakers’ plans, which received a major boost over the weekend. “At a time when our economy is demanding more education for more of our citizens, we cannot erect new barriers for the millions of Americans who need affordable higher education,” wrote Margaret Spellings, president of the University of North Carolina system and a former education secretary, under President George W. Bush.

If the main goal of the tax bills is to spur economic activity, said Marjorie Hass, president of Rhodes College, in Tennessee, then Congress would better accomplish that goal by investing in colleges and universities.

“It’s very disappointing that higher education is not being seen as an important aspect of growing the economy,” she said.

The U.S. Senate passed its version of the tax changes early Saturday morning. Its bill, which would lower the corporate tax rate from 35 percent to 20 percent, could add a trillion dollars to the federal deficit over the next decade, according to an analysis by Congress’s Joint Committee on Taxation. Only one Republican, Sen. Bob Corker of Tennessee, voted against the bill, along with all 48 of the chamber’s Democrats.

Congressional leaders must now decide whether to form a conference committee to harmonize the Senate bill with the legislation passed last month by the House of Representatives. Another possibility is that the House would simply vote to accept the Senate’s version before sending it to President Donald J. Trump, who is expected to sign the bill.

While there are significant differences between the two bills, both contain measures that would decrease the number of taxpayers who are eligible to itemize charitable donations. That is a major concern for small, private colleges, which do not receive state appropriations and depend heavily on gifts to pay for financial aid and other costs.

James Mullen, president of Allegheny College, in Pennsylvania, is also concerned about a proposed tax on endowment earnings, which appears in both bills. Allegheny College, which enrolls about 2,100 students and has an endowment of $210 million, is far from meeting the threshold for taxation established in the Senate bill — an endowment value of $500,000 per student. But the idea of transferring private charitable donations to the federal government would set a troubling precedent, Mr. Mullen said.

Steven DiSalvo, president of St. Anselm College, in New Hampshire, said a proposal in the House bill — taxing the tuition waivers that colleges provide for their employees — would also be a problem. That measure, which would also tax the tuition waivers of graduate students, does not appear in the Senate’s version of the bill.

At St. Anselm and other colleges, the benefit applies to children of employees and is extremely important in recruiting talented workers who would be able to earn much higher salaries in the corporate world, he said.

“I don’t see how any of this is going to help us thrive as academic institutions going forward,” Mr. DiSalvo said.

Taxing the tuition waivers that graduate students receive as research and teaching assistants has sparked widespread concern and even protests from those students.

Public colleges, too, have major concerns with the tax bills. “This is simply wrongheaded,” said a written statement from Ted Mitchell, president of the American Council on Education. While the Senate’s version of the tax legislation is less onerous than the House’s bill, he said, it still has the potential to “make college more expensive and undermine the financial stability of higher-education institutions.”

Eliminating or limiting the amount of state and local taxes that can be deducted could also have a negative impact on higher education, said a written statement from the American Association of State Colleges and Universities.

The long-term impact of increasing the deficit could also make higher-education programs vulnerable to future cuts as Congress looks at reauthorizing the Higher Education Act, warned Ms. Hass, of Rhodes College. “They’ve looked under every rock” to limit the increase in the deficit to “only $1 trillion,” she said. “Student aid is extremely vulnerable now as reauthorization is being considered.”

Here’s a rundown of the components in both bills that would affect higher ed:

Graduate-Student Tuition Waivers

The tuition waivers many graduate students receive would be taxed under the House bill, the measure that drew the most vocal opposition from college leaders, who said treating the waivers as income was nonsensical and would deeply discourage enrollment in graduate school.

The Senate bill would leave graduate-student waivers untaxed, meaning the measure’s chances of inclusion in the final bill are far from certain.

Taxing Other Students

The House bill would eliminate the deduction, of up to $2,500, for interest paid on student loans; the Hope Scholarship Tax Credit, worth up to $2,500; the Lifetime Learning Credit, of up to $2,000; and the $5,250 corporate deduction for employee education-assistance plans.

The Senate bill would not eliminate any of those benefits.

Tax on Investment Income

Both the House and Senate versions of the tax-reform bill include a tax on the investment income of a select group of colleges. The House bill would tax about 65 colleges — those that enroll at least 500 students and have assets of $250,000 per full-time student. Here’s a list of those colleges.

Meanwhile, a late amendment to the Senate bill narrowed the pool of colleges that would be taxed, to those that have assets of $500,000 per full-time student. That would translate to fewer than 30 institutions. (The Senate rejected a last-minute amendment that would have carved out an exception for Hillsdale College, which rejects federal funds and is popular among conservative lawmakers.)

A version of this measure is likely to be included in the final law.

Business and Sports

Both the House and Senate bills include a 20-percent tax on compensation in excess of $1 million paid to any of a nonprofit organization’s five highest-paid employees. The measure would apply to colleges as well as teaching hospitals and even to college and university foundations.

Originally, the Senate bill contained provisions that could have required colleges to pay taxes on royalties that they earn from licensing their logos. That provision appears to have been removed in the final run-up to the bill’s passage. But the bill still would eliminate the 80-percent deduction that fans get to take for “seat-license fees” paid on tickets to sporting events.

Another provision would prohibit colleges from using a loss in one unrelated business to offset a gain in a different such business, potentially increasing their overall tax burden.

Overall Charitable Giving

Both the House and Senate would double the standard deduction for taxpayers who donate to charity, a measure that observers expect will discourage giving. College leaders have feared that a chill on donations would deal a blow to their fund-raising operations — an insult added to injury, given states’ disinvestment in public colleges.

Future Funding Hurdles

A report released on Thursday by the Joint Committee on Taxation found the Senate’s bill would add more than $1 trillion to the deficit. The House bill was projected to cost $1.4 trillion. That has raised concerns from observers who predicted that future efforts to reduce the deficit through federal spending cuts could target higher-education programs.

Correction (12/2/2017, 8:31 a.m.): A previous version of this article incorrectly stated that the Senate bill included a tax on royalties from colleges’ use of their logos. That provision was removed at the last minute.

Adam Harris is a breaking-news reporter. Follow him on Twitter @AdamHSays or email him at adam.harris@chronicle.com. Eric Kelderman writes about money and accountability in higher education, including such areas as state policy, accreditation, and legal affairs. You can find him on Twitter @etkeld, or email him at eric.kelderman@chronicle.com. Andy Thomason oversees breaking-news coverage. Send him a tip at andy.thomason@chronicle.com. And follow him on Twitter @arthomason.