Higher Education Gears Up to Fight GOP Bill's Tax on Endowments

By Josh Mitchell and Douglas Belkin Features Dow Jones Newswires

Universities are ramping up efforts to defeat a Republican plan to tax private-college endowments and other proposals that would hit their finances, as they confront a building wave of resentment against higher education.

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Separate measures proposed in Congress earlier this year -- some with bipartisan support -- would demand universities pay back part of the loans on which their graduates default, and for schools to produce vast amounts of new data so consumers can better gauge the value of college degrees.

The proposals are testing the might of the powerful higher-education lobby, which has defeated recent efforts to increase government oversight. Republican lawmakers are empowered by a shift in attitudes toward higher education. A Wall Street Journal NBC/News poll this summer showed majorities of key groups -- including young people under 34, men and those who define themselves as white working class -- think college isn't worth the cost, a reversal from four years earlier.

Student debt totals $1.3 trillion, according to the New York Federal Reserve, and tuition has climbed at triple the rate of inflation over the past decade, according to the Labor Department.

"There certainly has been a string of bills that betray a kind of structural antipathy toward higher education," said Barmak Nassarian of the American Association of State Colleges and Universities, a lobbying group in Washington. "I suspect it's payback for rising costs and alleged opacity of outcomes and run-of-the-mill complaints that have been escalating over the years."

Perhaps no measure better represents the populist pushback than the House Republican tax plan, which calls for a new 1.4% excise tax on the annual investment earnings of the largest private-university endowments. The tax would apply to private, nonprofit schools with at least 500 students and endowments equal to at least $250,000 a student, under an amendment adopted by a House panel this week.

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That would affect about 66 schools, including Harvard, Princeton and Yale universities, according to New America, a think tank. Harvard's endowment, the largest in the country, exceeds $36 billion. The measure would increase tax revenue by between $2 billion and $3 billion over 10 years, according to the congressional Joint Committee on Taxation.

Republicans and other critics of colleges have criticized universities for socking away billions of dollars in endowment money that they say would be better used to reduce tuition and provide more scholarships.

"There is an absurd amount of inequality when it comes to the value of college endowments," said Doug Webber, an associate professor of economics at Temple University.

Mr. Webber, who thinks the tax would have a negligible effect on college finances, said he doesn't support the measure but understands the motivation behind it: "This is recognition that if you're going to hoard all this money and it's just kind of sitting there and not being spent on students, we should actually tax it."

College and university endowment assets totaled $516 billion in 2014, according to a 2015 report of the Congressional Research Service, but those funds were concentrated among a small group of schools. About 11% of institutions held 74% of all endowment assets. On average, those assets earned a rate of return of 15.5% in 2014.

The higher-education lobby has begun pushing back against the attacks, according to Karin Johns, director of tax policy for the National Association of Independent Colleges and Universities. The lobby's most significant advantages are that most lawmakers' districts are home to colleges and that many schools are large employers and regional economic engines. Some, like Bryn Mawr College, Haverford College and Swarthmore College, have supplied talking-point memos to their alumni, asking them to call or write their local representatives that the bill will harm students, colleges and American global competitiveness.

Calls from university presidents to elected officials often stress that endowments are already used to provide tuition assistance.

"Endowment support is critical when we make new initiatives or support students from low-income backgrounds," Princeton University President Christopher L. Eisgruber said.

He said the GOP tax provision would cost the school between $20 million and $30 million annually. Princeton's endowment fund ranked fifth among all universities at $22.2 billion as of June 30, 2016, according to the National Association of College and University Business Officers.

Other provisions of the GOP plan would hit some of the longstanding perks associated with higher education. For example, it would repeal a law that allows employers to cover up to $5,250 in tuition for employees without it being taxed as income. Likewise, it would end an exemption on free or reduced tuition for university employees, their family members, and graduate students who teach at schools. The changes would effectively raise the cost of attending college and graduate school, university groups say.

It is far from clear whether the provisions, along with the broader tax bill, will become law. Congressional Democrats have vowed to oppose the tax overhaul bill as well as the provisions affecting higher education.

In May, a bipartisan group of senators -- including Sens. Elizabeth Warren (D., Mass.) and Orrin Hatch (R., Utah) -- proposed a bill to overturn a federal prohibition on tracking the educational and employment outcomes of college students. Last month, four Senate Democrats introduced legislation known as "risk sharing," which would require colleges to cover a portion of unpaid loan money when a high share of their former students default.

Higher-education lobbyists say they expect the measures to be included in higher-education legislation that could be unveiled later this year.

Write to Josh Mitchell at joshua.mitchell@wsj.com and Douglas Belkin at doug.belkin@wsj.com

(END) Dow Jones Newswires

November 10, 2017 07:14 ET (12:14 GMT)