Rich Universities Fight to Keep Endowments Tax-Free

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By Colleen Murphy and Madi Alexander

Individuals may be able to deduct 150 percent of scholarship donations that support working-class students under a proposal from a House Republican tax-writer.

The idea of nudging individuals to give to scholarships instead of making restricted gifts—which can only be spent for specific purposes—is one way Rep. Tom Reed (R-N.Y.) hopes to attack the rising costs of a college education. Currently, donations to colleges and universities aren’t taxed—so an individual gets the same benefits for creating a scholarship fund or getting a family name etched on a new building.

“I recognize that if we want to encourage that in the tax code—and people are making these gifts based on tax determinations—we should encourage the gifts that, to me, go to the right purpose: either unrestricted or tuition reduction for working families,” Reed told Bloomberg BNA.

Under Reed’s plan, which is still being developed, unrestricted gifts are deductible by 125 percent and restricted gifts of more than $5,000 won’t be deductible at all, according to an updated proposal from Reed’s office. Reed, a member of the tax-writing Ways and Means Committee, hasn’t introduced a bill on the topic, but released a broad blueprint about college affordability and endowment spending Dec. 5.

But while the plan could draw some bipartisan support and fit into a broader tax code rewrite, it has some high-powered foes: the richest universities in the country. Some of those schools have spent money lobbying on the topic. They say they already fund scholarships and rely on endowment returns for their long-term financial health. Some of these institutions criticized an earlier version of Reed’s plan.

“From my perspective, I think you want to encourage people to be as generous as they can be as long as what they’re doing is supporting the education and research mission of the university, which is what makes the gift deductible in the first place,” Robert K. Durkee, vice president and secretary of Princeton University, told Bloomberg BNA April 17.

Encouraging certain kinds of donations is one of the planks in a plan Reed has been crafting for the last year, which also requires universities with endowments of more than $1 billion to funnel 25 percent of returns toward scholarships for working-class students or face tax penalties. Endowment spending averaged 4.3 percent in fiscal year 2016, a signal that the requirement could be a heavy lift for some schools.

The plan could be included in a Republican tax reform bill—and could be a lucrative pay-for to help fund it. While Reed’s fellow Ways and Means members say they haven’t committed outright to the idea, it is part of discussions now, committee Chairman Kevin Brady (R-Texas) told Bloomberg BNA.

‘We Just Disagree’

About two dozen universities with endowments of more than $1 billion lobbied Congress on endowment-related issues and their tax treatments in 2016, according to a Bloomberg BNA analysis of lobbying disclosures and the 2016 National Association of College and University Business Officers endowment study. Many of the schools didn’t return a request for comment.

Top among them: Harvard University, which spent around $550,000 lobbying in 2016—a drop in the bucket compared with its eye-popping $34.5 billion endowment, the largest in higher education. Harvard officials have tried “to generally provide information and insight into the critical role endowments play in fulfilling our academic mission,” a spokesman said in an April 17 statement to Bloomberg BNA.

Harvard President Drew G. Faust also made a trip to Washington earlier this year to meet with Senate Majority Leader Mitch McConnell (R-Ky.) and Minority Leader Charles E. Schumer (D-N.Y.) to defend the school’s tax-free status, a trip first reported by the Harvard Crimson.

Durkee, the Princeton official, said many people don’t spend time thinking about how endowments work, or view them as piggy banks instead of intricate mixtures of donations and investments that help support long-term goals. Princeton spent about $280,000 lobbying in 2016, according to disclosures.

“It’s not so much misunderstood, it’s just they’re not understood at all until someone says ‘Let me understand how these things work,’” he said. Durkee hasn’t met with Reed.

Cornell University—in Reed’s district in Ithaca, N.Y.— had an endowment of $5.75 billion in 2016 and spent about $310,000 lobbying on issues including endowment-related tax policy, according to disclosures. While the university is committed to making a degree affordable, and “the congressman’s goals align with” the university’s, “We just disagree on the most effective way of achieving those goals,” a spokesman said.

Conversations with lawmakers about endowment spending “have been positive and have fostered mutual understanding,” a Boston University spokesman said April 14. BU spent approximately $320,000 on lobbying in 2016, according to disclosures.

“Like everyone else, we are not sure in which direction the bill or debate is going, and we will stay engaged in discussion of the issue,” the BU spokesman said. BU’s endowment totaled $1.65 billion in 2016.

The California Institute of Technology in Pasadena, Calif., disclosed $100,000 in spending on its lobbying forms, although it was related to answering a questionnaire from Ways and Means about endowment spending. While officials are “concerned about the legislation,” none have met with Reed or other lawmakers on the issue, a Caltech spokesman said.

Coming Up

Reed told Bloomberg BNA he hopes his proposals will be included in the tax overhaul package; committee members said they plan to continue probing the issue.

Rep. Peter Roskam (R-Ill.), chairman of the Tax Policy Subcommittee, previously said he’s interested in altering the charitable giving deduction in tax code Section 170 to incentivize certain gifts, like those that fuel scholarships—along the lines of Reed’s plan.

Doing so would help combat one common response members receive from schools when discussing endowment payouts, Roskam told Bloomberg BNA: Universities often say that because donors set limits on where their gifts can be spent, it’s impossible to require a certain spending level.

“We’re continuing to look at that, because I think that can eclipse part of the challenge—that is, the natural limitations that endowments have based on donor restrictions,” he said.

Rep. Pat Tiberi (R-Ohio) told Bloomberg BNA he plans to meet with universities in his district on the topic, though he hasn’t done so yet.

Tiberi’s district includes Ohio State University, his alma mater, as well as Denison and Ohio Wesleyan universities. Ohio State has an endowment of about $3.5 billion, but didn’t list endowment-related lobbying in its disclosures.

With assistance from Laura Davison in Washington.

To contact the reporters on this story: Colleen Murphy in Washington at cmurphy@bna.com and Madi Alexander in Washington at malexander@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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