Rick Seltzer reported recently in Inside Higher Education on a complex decision by Princeton University to settle litigation with neighboring homeowners who argued that the University was a profit-making institution and therefore subject potentially to millions of additional dollars in taxes annually.

Arrangement Doesn’t Settle Issue of University’s Tax-Exemption Status

The arrangement created an uncertain future, neither affirming Princeton’s tax-exempt status nor forcing the University to admit that its tax-exempt property should be taxed. Princeton already pays taxes on some commercial properties and voluntarily keeps others on the tax rolls. Further, Princeton also makes voluntary contributions to local municipal government, including areas like police, trash collection, and the maintenance of private roads.

Princeton notes that it is the largest taxpayer in the Borough of Princeton, with an $11.1 million property tax bill. The lawyer representing the residents who sued argued, however, that Princeton’s payments should be closer to $30-$40 million annually, if the University were fully taxed.

It’s at this point where the residents’ argument against Princeton becomes more complicated.

They argue that Princeton operates a number of profitable commercial ventures in areas including, but not limited to, real estate rentals, for-profit hedge funds, office and hotel development, and commercial television, among other activities. They asserted: “since at least 2005 Princeton University has distributed approximately $150 million in profits to faculty…and continues to do so.”

Issue Strikes at Heart of How Research Universities Operate

The residents’ argument against Princeton takes the battle beyond the tax exemption of campus property and strikes at the very heart of how research universities operate.

Let’s examine this “point in time” moment that both Princeton and its disaffected neighbors face.

Tax Exemption Permits Higher Education to Flourish

Tax exemption is a kind of gold standard that has permitted a decentralized American higher education system to flourish. Tax exemption is granted because American colleges and universities perform a public good, creating both educated citizens and a capable and trained work force.

Private colleges and universities enjoy tax exemption because it relieves the government of educating more of its citizens through alternative, publicly-supported means.

Princeton sits at the top of the pecking order among colleges and universities in part because its endowment makes it possible to offer the type and quality of education that Princeton’s students enjoy. But the endowment – and related income earned annually elsewhere – relieves the state government of New Jersey of the cost of creating and sustaining the outstanding education made possible at Princeton and an unparalleled research facility at Princeton and in the surrounding towns.

Ask any town official without a Princeton if they would like to have one among them. Most would say “yes.”

The question of Princeton’s continued tax exemption is broader than the immediate needs of the Borough of Princeton, the property values that would not be created in its region without Princeton’s presence adding to the tax base there, or even the economic vitality of the state of New Jersey.

It is at its heart a question of what American society needs and values. Does Princeton work because law and economics have created something special that defines what will fuel America’s intellectual, economic, and global presence?

If so, Princeton would be well advised to make its case after a thorough review of what it does, how it explains itself, and how these explanations translate into action.

It’s easy to reject what an appropriate tax bill should be because it is impossible to define the value of academic buildings against which there are no comparable facilities in the for-profit world. What is critical is that Princeton continues to define its relationship carefully and cordially within its region.

To do so, Princeton must look closely – as it seems to be willing to do – at what services its stakeholders draw from the Borough to determine a base contribution that should be made. It must determine what properties are central to its educational enterprise – protect them – and be willing potentially to negotiate in a reasonable way on additional tax payments for non-core, non-academic facilities and programs. As it does so, it must also prepare an argument that supports academic research universities on how best to imagine which research activities might be taxable and which should not.

Town & Gown Are Both Stewards of Public Trust

Like the municipalities in which they reside, both sides must be careful stewards of public money and the public trust, now significantly eroding in the political quagmire and knee jerk social media responses undermining American institutional direction. It’s a silly and pointless argument otherwise. Both sides must define a “test of the reasonable” and put in mutually agreed safeguards to shift the argument toward productive engagement.

Details of Princeton Settlement Can Provide Lessons

It may be that Princeton bought time to let opinions settle and figure out how best to move forward. But at the end of the day, most of American higher education is not really like Princeton – not even remotely. The arguments made in this case are not replicable elsewhere. The differences in scale, institutional type, purpose, and endowment size between Princeton and most of higher education, whether public or private, is enormous.

There is a common lesson, however, to take from the Princeton settlement. America’s colleges and universities are educational enterprises and economic engines that anchor regional economies. Higher education officials should do everything possible to make the case for why that’s possible and why it matters to America.