Should huge college endowments pay tax?

A Massachusetts proposal, the first of its kind, would impose a 2.5 percent tax on the portion of endowments above $1 billion.

from the May 19, 2008 edition

Page 2 of 2

Page 1 | 2

This feature requires a newer version of Macromedia Flash Player and javascript-enabled browser.

Reporter Stacy Teicher Khadaroo discusses a proposal to tax college endowments that exceed $1 billion.

One idea gaining ground in congressional discussions would be to require colleges to spend at least 5 percent of their endowments each year, which private foundations already must do.

Lynne Munson favors that idea. She is studying endowments as an adjunct fellow at the Center for College Affordability and Productivity in Washington, and she says that higher-education officials sometimes exaggerate how much endowments are restricted by specific requests from donors. At private colleges, an average of 45 percent of endowment funds are unrestricted, she says.

Aggressive investment has led to high returns on endowments for the past 10 years, Ms. Munson adds. "Colleges and universities have had at least a decade to come up with a strategy for ... putting those monies to work for students, families, and taxpayers, yet they've neglected to do so," she says.

Congress's scrutiny of higher-education costs appears to have already prompted some good news on affordability. Harvard and at least two dozen other schools have created policies in recent months to increase grant aid for students or to cut tuition.

Those moves have pleased Sen. Charles Grassley of Iowa, the ranking Republican on the Finance Committee, says press secretary Jill Gerber, but they "are likely just a drop in the bucket." Hundreds of schools have large endowments, and "even schools with smaller endowments should still look at whether they can do more to help with affordability," she says.

The Massachusetts tax proposal has "changed this debate quite a bit" in Washington, says Mr. Zerbe. "If the universities aren't forthcoming, there will be a rising frustration level," and more members of Congress might think about looking at a tax, he says.

But the relationship between tuition and endowments isn't so clear-cut, says Mr. Hamill of the college business officers association. "There's been a tendency to think of an endowment as like a giant checkbook ... and the reality of managing an endowment is significantly different," he says. "The government is not going to be a good regulator of this issue."

1 | Page 2