The New Tax Law’s Impact on Higher Education
“The power to tax is the power to destroy,” said the fourth Chief Justice of the United States, John Marshall. When one looks at the new tax code produced by the U.S. Congress, we can see how this quote rings a bell of authenticity when it comes to higher education.
Since the latest changes in the U.S. tax code were first proposed, it was clear that higher education was going to be one of the targets of Republicans in Congress. The overall objectives of these changes were to get the money needed to pay for huge tax cuts to benefit the financial base of their party – corporations and the wealthiest people in the country. Republicans in Congress want to make these cuts despite the fact that the new code would add about $1.5 trillion to the national debt over the next 10 years.
While the final bill had not been signed as of the time of the writing of this column, the following changes, which will affect higher education, were approved in the reconciliation bill between the Senate and the House of Representatives.
Reduction in charitable donations to higher education. The current bill would double the standard deduction for tax filers, cutting the number of people who would itemize their charitable contributions. This change will prove a disincentive for donations to colleges and universities. Further, given that in many states the law requires state tax rates to change with federal rates, that could lead to steep state budget shortfalls as tax revenues decline. Not only private colleges and universities will be affected by this, but public ones as well. Given the steady decline in state appropriations, more and more public institutions depend upon donations. Since a sizable portion of those donations comes in the form of scholarships, low-income students will be particularly hard hit. States that will be particularly affected by this measure are California, New York, and New Jersey. A more long-term effect of this measure is that with people paying fewer taxes at the state level, less revenue will go to support public higher education.
While the discussions on the compromise bill were taking place, many advancement officers at colleges and universities were reporting that donors were contacting them in order to make their future pledges this year in order to avoid surprises on how much of those donations they can deduct in the future. These preemptive donations signal a potential decrease in contributions in the future. Some project that the percentage of filers who itemize tax deductions will fall from 30 to 5 percent, which could translate into a $13 billion drop in charitable giving nationwide.
Tax on endowment earnings. There will be a 1.4 percent tax on the endowment earnings of the wealthiest (private) colleges with more than 500 students and $500,000 in endowment per student, accounting for about 30 elite universities.
Executive compensation. A 21 percent tax will be imposed on annual compensation in excess of $1 million paid to any of a nonprofit organization’s five highest-paid employees. This provision would apply to colleges, but will exempt medical professionals, such as medical faculty members who work at academic hospitals.
Tax on sports fans. This legislation would eliminate the 80 percent tax deduction that sports fans get to take for “seat-license fees” paid to buy tickets to sporting events, a major revenue stream to big-time college-sports programs, particularly in public institutions. Another provision would prohibit colleges from using a loss in one unrelated business to offset a gain in a different such business, which would increase their overall tax burden.
Some of the most draconian measures against higher education have been dropped, such as a provision to tax tuition waivers as income, the removal of the $2,500 deduction for interest paid on student loans, changes in the Lifetime Learning Credit (valued at up to $2,000), and the $5,250 corporate deduction for employee education-assistance plans. The Performance Activity Bonds, usually used for building projects, would still be available, and a proposed tax on the royalties from licensing a college’s logo (for athletic clothing, etc.) was also eliminated from the compromise bill.
It is interesting that Republicans, who believe that they came to earth to reduce taxes and cut the federal deficit, want to impose new taxes on higher education, all the while ballooning the deficit. Not even conservative economists believe the White House assertions that these tax cuts will pay for themselves. It is also interesting that conservatives, who for years have demanded a simplified tax code, have now produced a more complicated one.
Since the dramatic increase in the national deficit is seen as a forgone conclusion by all experts, it is not hard to see how, in order to diminish its effects, higher education will once again become the target for budget cuts at the state and federal levels. Such cuts would deepen the financial crisis of the sector and lead to increases in tuition and fees. And those increases will not be blamed on the irresponsible politicians who created them, but on the public colleges and universities themselves who, in turn, will be forced to reduce the quality of teaching. Increased class sizes, more classes taught by adjunct instructors instead of tenure-track professors to teach, and other measures will be seen as necessary to deal with diminishing state and federal funds.
Although some changes may be introduced at the last minute to tilt some senators into the list of “yes” votes for this bill, what I describe in this article is unlikely to be changed. In any case, the final vote is expected to take place on December 21, so stay tuned.
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The New Tax Law’s Impact on Higher Education