Rich Schools, Poor Students: Tapping Large University Endowments to Improve Student Outcomes

By Jorge Klor de Alva

(EDITOR’S NOTE: The following was presented by Jorge Klor de Alva, President, Nexus Research and Policy Center, at the Texas Public Policy Foundation’s annual Policy Orientation to the Texas Legislature earlier this month on January, 7. Klor de Alva’s presentation was based on a recently revised study he produced with Mark Schneider [Vice-president, American Institutes for Research], also titled Rich Schools, Poor Students: Tapping the Large University Endowments to Improve Student Outcomes.)

In this report, we show that:

• Not all private universities are private. Many of the richest universities in the country, sitting on hundreds of millions if not billions of dollars in tax exempt endowments, receive through the tax laws government subsidies that dwarf the appropriations received by public universities and colleges.
  • For example, Princeton University’s tax exempt status generates over $100,000 per student each year in taxpayer subsidies, compared to the $12,000 per student taxpayer subsidy at Rutgers University, the state flagship; $4,700 per student at the regional Montclair State University; and at the nearby community college, Essex County College, $2,400 per student (see Table 1 below).

• Rich schools receive large tax-generated subsidies but enroll a disproportionately small share of low-income students, leading to a perverse pattern wherein the richer the school, the lower the percentage of low-income students served (see Figure 1 below).
  • This subsidy to the wealthy results from a tax code that hides the flow of money to the rich while public schools have to fight for appropriations in state legislatures, where they must compete against other legitimate public policy concerns.

• Providing free community college tuition by taxing rich individuals is neither politically feasible nor the best use of limited resources. On its own, such a program would result in yet more subsidies to the wealthy and would drive more students into schools that are already having difficulty leading students to successful academic and workplace results.

• Instead, a more politically viable approach would be to impose a low excise tax on private universities with endowments of over $500 million (see Table 2 below) and investing the revenue in evidence-based student support services proven to get more students successfully through community colleges. The proposed tax is modest (0.5 to 2 percent) aligning, as it does, with the range of tax rates to which private foundations are already subject.
  • In 2014 the 95 private colleges with such endowments educated less than 5 percent of total higher education students.
  • Given the extremely unequal distribution of endowments, over 84 percent of the over $5 billion in revenues would come from only 20 colleges, which last year educated fewer than 2 percent of the nation’s college students.
  • To help minimize the impact of the proposed tax, we recommend that the proposed tax be offset annually by the amount the school appropriates for financial aid to low-income, Pell eligible students.

• Through a charitable tax credit process the revenue raised from the excise tax would be for the benefit of students attending community colleges—institutions that are seriously under resourced yet responsible for training much of the nation’s workforce. We believe that this can be done in a revenue neutral manner that incentivizes corporations to strengthen their support of local community colleges. The new tax credit scheme would build on the tax legislation that created several types of tax credit bonds under the Internal Revenue Code.
  • The proposed taxing arrangement is revenue neutral because the revenue from the excise tax would match the amount offset by the tax credit gained by participating individuals or corporations. In effect, if a taxpayer gave, for example, $1 million to a community college the taxpayer would gain a percentage of credit against taxes owed. The total amount of extra tax credit allowed by the program would offset the amount of revenue raised by the excise tax on the large endowments.
  • In turn, the value of the tax credits would match the annual flow of money available to community colleges for qualified purposes. A competitive grant process would be used to ensure that selected community colleges applied the funds to support practices proven effective in promoting student success.
  • As was the case with the previous qualified tax credit bonds, administered by the Treasury Department and used to support a variety of educational and energy initiatives, these charitable tax credits can provide an attractive opportunity for corporations or others seeking to reduce their tax burden in a socially responsible manner.
  • Similar to the way Treasury issued the tax credit bonds to support specific activities that satisfied criteria set by rules, regulations or legislation, the tax credit would not be available to all. A panel of experts would be established with responsibility for judging the applications and making awards based on the conformance of the application to the established criteria.
  • The proposed tax credits can build on these past procedures to support the implementation of practices that are proven to benefit community college students.
    • First, Treasury would estimate the annual yield of the excise tax on endowments over $500 million.
    • Second, Treasury would fix the amount to be offset through the tax credits to equal that yield.
    • Third, the U.S. Department of Education (ED) would establish a panel of experts to determine the qualifying criteria and evaluate the proposals from community colleges. ED would then issue a request for proposals from community colleges. The call would specify that only activities with evidence that they are associated with student success—measured by indicators such as increased student progression, retention, completion, or job placement—would qualify for financial support.
    • Fourth, interested community colleges would help identify taxpayers interested in the tax credits. This effort would help promote links between colleges and corporations that are critical to resolving the current gaps between what is taught and the workplace skills and competencies that industries need.
    • Periodic evaluation of the effectiveness of the program would assure that it would be continually improved for continuous success.

In summary, access without success is not opportunity. And welfare to the wealthy through hidden subsidies is not good policy. This study shines light on the latter and proposes a revenue neutral way to apply money generated by reforming existing tax policy to provide real opportunities for success to community college students.

Table 1: Total Federal, State and Local Appropriations and Tax Subsidies* Per FTE Student, Endowment Size,** and Institution Type

* Does not include subsidies based on property tax exemptions.

**Based on 2013 endowments: high endowments (HE) average $1,570 million, medium endowments (ME) $15 million, low endowments (LE) $2 million.

Figure 1: Median Percent Federal Pell Grant Participation versus Average Taxpayer Subsidy by Institutional Type, 2013

Table 2: Proposed Annual Excise Tax Rates, Number of Colleges Affected and Expected Tax Revenue Based on 2014 Endowment Size

Source: 2014 NACUBO-Commonfund Study of Endowments