It’s hard to imagine how deeply the policies of the Trump Administration will affect America’s colleges and universities. As a group, these institutions are already undergoing substantial disruption.
The old financial models under which most of higher education operate no longer work. The current path for many of them is not sustainable. Many institutions face rising costs, deeper financial aid discounts, and dismal demographics.
From Taxes to Immigration, Federal Policies are Hammering Higher Ed
This is a time when enlightened state and federal policy could make an important difference, resetting the balance that would offer breathing space for colleges trying to handle disruption. Policies could even provide new opportunities for the most innovative institutions, those who are using disruption to become more sustainable over the long term.
Drawn from different arenas, four policy directions illustrate how the wrong federal initiatives can wreak havoc on the American educational community.
Federal immigration policy: Immigration changes, proposed or underway, have two important and debilitating effects on American higher education. First, the drop in foreign student applications cuts off a supply of the “best and brightest” global students into American universities. On a graduate and professional level, such policies diminish the pool of qualified professionals who add diversity and depth to the applicant base and form a pool of potential subsequent hires. Fewer international students decreases the revenue available to colleges and universities whose financial models depend on full-pay students to offset the deep financial aid discounting now heavily practiced on most campuses.
Tax on endowments: On its surface, the proposed tax on endowments may seem noble. Federal officials want to make the money more available to offset high tuition sticker prices by forcing the wealthiest colleges and universities to increase scholarships to students. The problem is, of course, that many of these institutions already have the most enlightened and generous financial aid policies. An endowment tax would penalize these schools for being successful at using fundraising and endowment investments to support their existing scholarship aid and funding the resources and offerings that make them such attractive institutions.
The argument makes no sense. Generally, an endowment must make some amount above its annual spend down and the rate of inflation in order to grow at a reasonable speed — perhaps somewhere around seven percent today.
What happens in the years when the endowment returns falls below the break-even rate as it has most years recently (and sometimes quite dramatically)? Further, what is the incentive for colleges and universities to build their endowments with private support to a point where they subject their efforts to additional federal taxes?
Finally, how much would the proposed endowment tax actually contribute back to the U.S. Treasury? Is it deficit reduction or politics at play? It’s not so much that 50-100 colleges are affected — out of about 4,700 schools nationwide — it’s more a question of why? Is the endowment tax an example of government policy determined by anecdote and polling?
Tax on graduate tuition waivers: Does it make any sense to tax scholarship money? If not, then why does the Republicans’ proposed tax bill include a tax on graduate tuition waivers? Much of the existing student debt about which politicians complain is acquired when students earn graduate and professional degrees. Why increase their debt burdens?
Elimination of tax deduction for interest on student loans: Under the current tax code, students save as much as $2,500 annually via the deduction on student loan interest. While only the House tax proposal contained this provision, there is always a danger that mischief can occur in conference deliberations. Politicians on both sides of the aisle have identified student debt burdens as an area of significant and growing economic concern. Why pass legislation that will make the situation worse?
In previous years’ tax and higher education funding bills, colleges and universities worried about the level of funding for student grants and loans like the Pell Grant and the Perkins Loan Program. They diligently watched any effort to impinge on their tax-exempt status. And they took active positions on issues of daily concerns, like the burden of state and federal regulations.
But this year’s legislative proposals are substantively different. Federal policies are beginning to intrude into who and how we educate our students, where we draw our students from, and how colleges can continue to make themselves affordable.
It has long been assumed that given declining discretionary ability, the federal government would increasingly turn to regulation to enforce its policies. But now, the efforts seem more directed at reshaping our cultural environment through policies that cut across race, nationality, and wealth.
College and university leaders need to watch the tax bill’s conference deliberations closely. It’s a confusing and troubling time as we watch politics, money, and cultural preferences collide in the name of tax reform.
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.