A proposed tax could force Hillsdale College to pay up to $700,000 a year to the federal government.
As part of the Republicans’ $1.5 trillion tax package, a new endowment tax would make private, nonprofit colleges and universities pay 1.4 percent on their yearly endowment income if the endowment is equal to $250,000 or more per student. It would affect nearly 70 institutions nationwide, including Hillsdale College and much of the Ivy League. The House passed the bill on Nov. 16, and the Senate voted Wednesday along party lines to open debate on the tax plan. A vote on the bill could occur by the end of the week.
Hillsdale’s current endowment is $548 million, which breaks down to approximately $364,000 for each of the college’s 1,507 students — surpassing the $250,000 minimum.
Based on how the law defines an endowment’s income, Patrick Flannery, vice president for finance and college treasurer, estimated Hillsdale could pay as much as $700,000 a year if the legislation passes. The college operates on a $121 million annual budget.
“Even a half million dollars per year, that’s enough to have an impact on how much money you can get distributed to general operations for the college,” Flannery said. “It’s something that we will have to think about: How are we going to make up for that?”
For now, Flannery said the college is waiting to see what Congress decides.
Matthew Spalding, associate vice president and dean of educational programs for the Allan P. Kirby Jr. Center for Constitutional Studies and Citizenship in Washington, D.C., said the tax comes in response to a general outrage among members of Congress that schools with large endowments are using much of them, not to benefit students, but more like investment funds.
“At that point, that endowment becomes something different,” he said. “If there is to be an endowment tax, it should only apply if the amount in the endowment fund exceeds that which is needed to support exempt purposes, such as direct asset use or providing financial support for students.”
Spalding added that a broad perception that much of academia support a liberal agenda may also contribute to the support behind the proposal. An overwhelming majority of Hillsdale’s endowment supports scholarships, academic programs, and faculty, Flannery said.
He became aware of the intended tax days prior to the plan being introduced in the House on Nov. 2, and he has been in discussion with members of Congress since then. College President Larry Arnn joined him in some high-level meetings prior to Thanksgiving break.
Spalding said he opposes the tax in general on principle. He said the taxation of endowments to influence universities sets a dangerous precedent that threatens their independence.
“In general, there should be an area of activity outside of government reach that serves higher purposes of society beyond that reach, and private education has long been one of those,” Spalding said. “If the federal government establishes a tax on endowments for colleges, I fear there are other activities that under another Congresses and other administrations government will tax and by doing so regulate, and that could be more threatening to Hillsdale.”
Adding to that, the legislation does not exempt non-Title IV institutions, such as Hillsdale, that do not receive government money. A majority of the universities and colleges affected by the tax, however, do take federal subsidies. At some of these private, nonprofit schools, they account for up to 70 percent of their income, according to Spalding.
Princeton University, whose $23.8 billion endowment is one of the largest in the country (Harvard University has the largest with $37.1 billion), received $420 million in tax breaks on its endowment income, federal research grants, and capital-gains exemptions in 2011, according to The Atlantic. That year, its endowment was $17 billion and accounted for almost half its nearly $1.4 billion operating budget.
“Since Hillsdale receives no federal funds or grants whatsoever, Hillsdale’s position is distinguishable on policy grounds,” Spalding said. “Hillsdale and other colleges that are not taking the federal government’s money should not be subject to a tax on an endowment that was raised from private sources
Spalding said he has made several suggestions to policymakers, including removing the tax entirely, rewording it, or inserting an exemption for schools that refuse government subsidies. He also said an alternative to the tax is to cut the number of government subsidies going to these institutions.
Arnn agreed in an email: “The government subsidizes a thing with one hand and then taxes it with the other. Why did they not simply decrease the subsidies? What they do carries the implication that only the government can get bigger.”
An overwhelming majority of the endowment is to support academics, Flannery said. Half is for scholarships, a quarter is for academic programs, and 15 percent is for faculty chairs.
Flannery added that only about 0.2 percent of Hillsdale’s endowment goes toward “nonacademic” purposes. This piece is for awards for students and faculty such as Professor of the Year and the Emily Daughtery Award for Teaching Excellence, which are presented at spring and fall convocations respectively.
“But I could argue that 0.2 percent is academic in nature,” Flannery said. “It helps people.”
Every year, Hillsdale spends about 5 percent from its endowment, slightly above the more popular 3 – 4 percent, Flannery said.
“The main reason for that is that we want students going here today to benefit as well as be able to save enough for the students down the road to benefit,” he said.
With the endowment tax, however, the college could pay the equivalent of 27 full-tuition scholarships in taxes each year.
Spalding said that would be harmful, though the college could manage it. Its creation, however, opens up the opportunity for future Congresses to change the tax amount and threshold, which could cause problems in the future. He added that it may also deter other institutions from growing and enlarging their endowments, as well.
If it comes to removing the endowment tax or passing the tax-cutting bill, however, Arnn said he does favor the plan.
“I hope they pass the bill, even with that stuff in it,” he said. “It is a still step in the right direction.”
Flannery said the idea of an endowment tax has been floated for several years, and he said he thinks now that it is in the tax plan, it is unlikely to disappear.
Spalding, however, is hopeful for its removal if the bill goes to a conference committee between the House and Senate. He said many congressmen were unaware that the tax would affect institutions such as Hillsdale before he spoke to them.
“I am cautiously optimistic that this will get corrected in conference, if it gets to conference,” Spalding said, “but they are all very aware that Hillsdale is harmed by it.”