The tax reform legislation passed by Congress has generated considerable support; it also has raised some alarm. One troubling precedent is an excise tax imposed on the endowments of private, nonprofit colleges and universities. The proposal had been changed several times to narrow the number of colleges and universities affected, but, I would argue, that even if your alma mater is unaffected, the principle of this tax will have destructive consequences on every taxpayer and that the precedent set by this tax will be a pattern applied to the rest of the colleges and universities in the country.
First, the tax on endowments is based on a false premise that endowments do not benefit students or their education. I took a look at a number of private college endowments in Wisconsin and found that 56 percent of the annual distributions from their endowments were dedicated to student aid (scholarships), while an additional 23 percent went for instruction and academic programming. In other words, a total of 79 percent is evidently of direct benefit to students. A case can easily be made that allocations for research, technology, faculty development, and academic facilities also benefit students. But, not to quibble, it is evidently true that endowments principally benefit students. The tax on endowments does not take funds from students and channel it back through another governmental program such as Pell Grants. Instead, the tax revenue simply goes into the U.S. treasury, with the students the big losers.
Second, it is critically important to understand where endowments come from. College and university endowments are primarily composed of gifts and inheritances from private citizens who believe in excellence in higher education and in educational opportunity for students today and tomorrow. Most such private gifts are given with restrictions on their purpose and use. Endowments are not “slush funds” for administrators to use as they will, but contracts between the institution and the donors. One of the most important provisions of the US Constitution of 1787 was to provide security in the enforcement of contracts and to allow citizens to exercise their own judgment in the disposition of what is their own. Alexis de Tocqueville’s seminal book, Democracy in America (1865), identified both voluntary action of private citizens and a widespread commitment to education as two of America’s greatest strengths. The tax on university endowments undermines both private charity and higher education.
Third, if Wisconsin is going to be competitive in the Knowledge Economy and address current and future workforce shortages, we need to significantly increase the educational attainment of our working age population. Re-appropriating private investment in education hurts students and taxpayers alike. We will not grow educational attainment by taxing funds supporting educators.
Finally, there is an issue of fairness. For now, only private, nonprofit colleges and universities’ endowments will be affected. Some of the largest endowments in the United States are at public institutions. Just as I said above with regard to colleges and universities not now touched by the current version of the bill, the precedent for singling out private, nonprofit colleges will inevitably be extended to public universities as well.
I hope that a better understanding of the topic and facts surrounding the use of endowment resources will lead to a better result.
Rolf Wegenke, Ph.D.
President, Wisconsin Association of Independent Colleges and Universities