Authors: Jorge Klor de Alva and Mark Schneider
Organization: Nexus Research and Policy Center
Summary: Following on some of their own 2011 analysis of public spending and tax subsidies, as well as a 2012 analysis by the economist Richard K. Vedder, the authors base this new report on the direct and indirect tax benefits that flow to the wealthiest private universities.
Most of the benefits, they say, result because endowments are exempt from capital-gains taxes. Mr. Klor de Alva, president of the Nexus center, and Mr. Schneider, a vice president of American Institutes of Research and president of College Measures, highlight the ways these “invisible” tax breaks disproportionately flow to elite private colleges like Princeton University (which they calculate as getting the equivalent of a $105,000-per-student subsidy) compared with the modest subsidies that flow to other private and public institutions that serve higher proportions of low-income students.
By comparison, they calculate the direct and indirect per-student subsidy to Rutgers University at $12,300, to Rider University (a private institution with a modest endowment) at $500, and to Essex County College at $2,400.
(Because they did not have information on actual endowment returns for the institutions they studied, the authors used the one-year change in value of endowments as a proxy, an approach that they say was a conservative estimate of the actual investment income.)
The authors say they initiated the study in response to President Obama’s call for free community college. They argue that rather than putting more public money into making two-year colleges free, which they call “a reform of uncertain value,” policy makers should focus public resources on the broad-access institutions that serve lower-income students.
To accomplish that, they argue for a “more politically palatable and potentially bipartisan” alternative to President’s Obama’s tax package — an excise tax on endowments valued at more than $500 million. Their proposed tax of 0.5 to 2 percent would be offset by the amounts colleges provide for financial aid.
The study analyzed the tax benefits and public appropriations accruing to the 10 richest colleges in 10 different states. It then compared the benefits at those 10 to the benefits that accrued to medium- and lower-endowed private colleges in each state, as well as to the public flagship, a public regional college, and a community college. In all, the tax subsidies of 60 institutions are compared.
Bottom Line: While this inequity argument is hardly new — Sen. Charles Grassley, Republican of Iowa, for one, has been making it for years — the data in this study could give new fuel to the debate, especially if Congress ever takes up the issue as part of its discussions on tax reform.