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Will Congress penalize colleges that increase tuition?

Senator Charles Grassley of Iowa will serve as chairman of the Senate Finance Committee during the upcoming 115th Congress. Senator Grassley’s decision to lead the Finance Committee may have important consequences for the nation’s colleges and universities. Grassley, a Republican, has criticized increased tuition charges in the face of the pronounced, tax-free growth of many college endowments.

In light of his prior statements and the current political environment, a Grassley-led Finance Committee may scrutinize higher education endowments. On the committee’s agenda could be legislation aimed at the tax benefits such endowments enjoy and the benefits of tax-exempt entities more generally.

Grassley has in the past suggested that college endowments be subject to regulation similar to that applying to private foundations. Private foundations are required to distribute annually an amount equal to at least 5% of their net incomes. A foundation that fails to meet distribution mandate must pay a penalty tax.

Some commentators have urged Congress to penalize a college or university endowment in this fashion if the school the endowment supports does not control its tuition costs.

Last year, the Republican-controlled Congress imposed a tax on certain large academic endowments. However, the tax is a flat 1.4% tax on endowment incomes. The tax is not directly tied to tuition levels: An educational endowment that spends more of its income on scholarships pays the same tax as a school with an identical endowment that spends less on scholarships.

It is likely that a Grassley-led Finance Committee will consider changes to directly regulate the tuition levels of endowed educational institutions. That consideration will take place in a Congress in which Republicans only control the Senate and House Democrats will have to choose either bipartisan cooperation or confrontation with the Senate.

An educational endowment that spends more of its income on scholarships pays the same tax as a school with an identical endowment that spends less on scholarships.

Another area potentially subject to further view by a Grassley-led Finance Committee is the tax treatment of donor-advised funds. Today all private foundations pay to the federal Treasury a tax of 1% or 2% of their incomes. Donor-advised funds do not pay this tax.

For all practical purposes, donor-advised funds are the functional equivalents of private foundations. A donor-advised fund is an account sponsored by a public charity such as a community foundation or a charity established by a commercial investment firm like Vanguard or Fidelity. Donor-advised funds are marketed by their sponsors as substitutes for private foundations. Someone contributes to a donor-advised fund sponsored by a public charity with the understanding that his funds will be separately earmarked and that he will advise the sponsoring organization how to invest and distribute these earmarked funds and the income they produce. While donors technically just advise about the tax-exempt funds they create with tax-deductible dollars, in practice, that advice is the equivalent of the control that the creators of private foundations exercise over their foundations. A Grassley-led Finance Committee might consider extending the existing tax on private foundations’ incomes to donor-advised funds.

On many subjects, a Republican-controlled Senate and a Democratic-controlled House will have difficulty finding common ground. However, the tax treatment of higher education endowments and donor-advised funds could be one area where bipartisan agreement is achievable in the 115th Congress.

Featured image credit: University Museum, Harvard Campus, Cambridge, Massachusetts by Rizka. CC BY-SA 3.0 via Wikimedia Commons.

Recent Comments

  1. Barry

    It’s the great get a college education gold rush. This sounds like maybe a start towards change..

  2. Gregory Tzanetos

    A general remark, here, might concern the taxation (or even, partially, the exception of taxation) of those contributions referred to the development of a general good of public interest, namely referred to the space of the public good which is in the interest of all in a society. In such case, the general aim of development of the public good would need further specification counted; a) by the development of the object (of the public good) and b) by the equivalence of the value of income from the work which corresponds to the offered public good, so that the object to be addressed to the many, if not to all in the society. The two terms secure the condition of freedom in the offer and requisition of the public good, so that: The freedom in the offer and requisition to maintain the benefit of all in the society; showing, in fact, the freedom of consumption of the public good to be based on the balance between:

    -the maintenance of the offer (by the development of the object) so that the specific benefit of the public good to be available by freedom of the consumption, in such condition and price which would make the object spare to all in the society (for example, the spare object of the education as public good); so that the given capacity, by the offer, to maintain the availability of the object to all in condition of freedom, by affluent of the offered object in the respective products and services of the public good; or at least to maintain the availability of the object to those who desire to take the advantage of the specific offer, or to those who justify, by specific reason, their expectation of the offer -;

    and

    – the maintenance of the requisition, by the value of income from the work representing the many in the society, in order (the many) to retain their capacity in the consumption; while the development of the object of public good would widen further the space of freedom in the consumption, in order the capacity to be given to all to acquire the shared object of products and services of public good as space of freedom of the community.

    After all, concerning the taxation of contributions (as, for example, donations) in the space of the public good, if something was countable in the reality of the society, that could (or should) be counted on the maintenance of the offer and requisition of the public good for the benefit of all. Thank you for reading this. Gregory Tzanetos.

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