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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.

By Staff writer of The Christian Science Monitor / May 20, 2008

With nine of its colleges and universities boasting endowments above $1 billion, Massachusetts is now center stage in the emerging national debate over whether wealthy schools are doing enough to justify their tax-exempt status.

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The reason for the spotlight: a first-of-its-kind proposal to tax those large endowments in the Bay State.

It has caught the attention of some members of the US Congress because it goes well beyond discussions there that have so far focused on increasing transparency and pushing well-endowed schools to spend more to offset costs.

"Two things are on a collision course: The public anxiety about the cost and affordability of college is very, very high, while [wealthy institutions] ... are sitting on what appears to be huge pots of money," says Patrick Callan, president of the National Center for Public Policy and Higher Education in San Jose, Calif.

The Massachusetts proposal would impose a 2.5 percent tax on the portion of endowments above $1 billion.

"There is an exorbitant amount of wealth that has been generated with these endowments, especially in the case of Harvard and MIT," about $35 billion and $10 billion, respectively, says state Rep. Paul Kujawski (D), who proposed the tax plan in part because the state is facing a $1.3 billion budget gap. "When is a nonprofit considered not a nonprofit?" he asks.

The precedent it could set worries college officials.

"It's terrible tax policy and it's terrible public policy," says Richard Doherty, president of the Association of Independent Colleges and Universities in Massachusetts. "It to some extent ignores the tremendous contributions to the Massachusetts economy that the private colleges already generate."

The nine schools with endowments over $1 billion employ nearly 27,000 people in Massachusetts, who collectively earn $4.5 billion, Mr. Doherty says. He adds that the state has to spend less of its budget on higher education than other comparable states because of the abundance of private colleges here. Faculty and students also offer voluntary services worth millions of dollars.

Boston College spokesman Jack Dunn says the tax "would hurt the very individuals that the legislators presumably are trying to help: the people in their districts who need financial aid to attend these schools." He characterizes the nearly $1.7 billion endowment as "modest" but says that BC admits students without regard for their ability to pay – and then meets their full need for financial aid. The tax would make that need-blind policy unaffordable, he says.

Another concern is that donations would decline, Doherty says, "because people would understand that their donation could well be subject to a 2.5 percent tax."

"The notion that education is a charitable not-for-profit activity has deep roots in our country," says Matt Hamill, senior vice president of the National Association of College and University Business Officers (NACUBO) in Washington.

Endowment numbers

Endowments' average rate of return: 17.2 percent

Average spending rate (percentage of the endowment contributed to operating and capital budgets): 4.6 percent

Average spending rate for endowments above $1 billion: 4.4 percent, down from 5.3 percent in 2003, the high for the past 10 years

The number of endowments topping $1 billion: 76, including some public universities such as University of Michigan and University of Virginia

Top three endowments:

Harvard: $34.6 billion

Yale: $22.5 billion

Stanford: $17.2 billion

Source: 2007 Endowment Study, National Association of College and University Business Officers (NACUBO)

Figures are for fiscal year 2007.