Tax bill misses the mark on college endowments

According to new data from the Equality of Opportunity Project, there are more students today from the top one percent attending America’s most elite universities than there are students from the entire bottom-half of the family income distribution. A child from the top ten percent is 77 times more likely to enroll at these top colleges than a child from a family in the bottom fifth of income.

 

 

Under current law, colleges qualify for two types of federal tax benefits. The first, an exemption from corporate income taxes, is enjoyed by a wide array of entities that are not typical businesses: political organizations, lobbying associations of businesses, some sports leagues and insurance companies, and fraternal organizations, as well as schools, churches, and other typical charities. 

 

The bill drafted by House Republicans would impose a small tax on one type of income (investment revenue) from one type of nonprofit organization (colleges), while irrationally leaving untouched the same type of revenue at other nonprofits. If the other nonprofits were all noble charities like Habitat for Humanity, then that might make sense. But the nonprofits with tens of millions of dollars of investment income that would remain untaxed include lobbying groups for auto dealers, lawyers, and doctors, and numerous hospitals and health insurance companies. If the tax makes sense for colleges (which it doesn’t, really), then it makes sense for these other entities as well.  

And while some of the colleges targeted by the bill deserve a push, many do not. Yes, the usual suspects like Harvard and Princeton and Yale and Stanford are included. But so are colleges with more modest endowments, like Centenary College of Louisiana and Agnes Scott College. Those small schools will find sympathetic ears in Washington. What’s more, many of those less-well-known colleges do an admirable or excellent job enrolling needy students. At College of the Ozarks, for example, where students do work-study rather than paying any tuition at all, more than half of students qualify for Pell grants.

A well-designed approach would impose a penalty only on the institutions that are not enrolling enough low- or middle-income students, in turn ratcheting up the expectations over time. That penalty could be some type of tax on the endowment. But more appropriate would be to place a limitation on the second tax benefit that colleges get: the right to tell potential donors that the money they give is tax deductible, as Republican Rep. Tom Reed (N.Y.) has proposed. Tax-deductible donations are limited to the subset of nonprofits that qualify as “charities,” and it makes perfect sense to place some restrictions on those tax deductions at colleges that are uncharitably enrolling only the privileged.

As the president of Kenyon College told the New York Times, it is one thing for tax policy to make sure that colleges are providing access to education. The House tax bill, however, just imposes a tax with no policy objective at all.

Developing a smart, nuanced approach to nudging elite colleges through tax policy may not be realistic in the near future, while the House is considering the tax bill. That said, if a member of Congress wants to implement a better policy than what is now in the bill, they could require certain elite colleges to abandon admissions preferences for alumni and rich donors in order to keep taking tax-deductible donations.

 

Legacy preferences and “development” admits are the most odious, egregious aspect of elite college admissions. Nearly a third of students at Harvard are the children of alumni, and three-quarters of the top 100 colleges give preferences to alumni children, according to research by my colleague Richard Kahlenberg. (Of course, not all elite colleges give legacy preferences: MIT, for one, says it absolutely does not.)

At less-resourced colleges, building a multi-generational family commitment to college is probably harmless. But when a school is extremely selective and has a massive endowment, admission to the college is tantamount to a huge gift of connections to wealth, power, and a promising future. Letting someone buy an elite college seat for their child, or passing it down the family line like royalty, should disqualify a college from being treated as a charity.

The congressional author of a ban on legacy and development admissions at elite colleges might consider using Jared Kushner as Exhibit A. When Kushner was a high school senior in 1998, he applied for admission at Harvard. Officials at his high school were surprised, according to Daniel Golden, who told the story of the Kushner family college admissions strategy in a 2006 book (long before Jared married into the Trump family). 

 

“His GPA did not warrant it, his SAT scores did not warrant it. We thought for sure there was no way this was going to happen,” Golden quotes a school official as saying. “Then, lo and behold, Jared was accepted. It was a little bit disappointing because there were at the time other kids we thought should really get in on the merits and they did not.”

It turns out that Jared’s father, real estate developer Charles Kushner, had pledged $2.5 million to Harvard after meeting with the college’s president to discuss donating for—ironically—scholarships for low- and middle-income students. Jared’s younger brother followed him into Harvard a few years later, and his sister enrolled at NYU after their dad endowed a deanship there.

One cannot profess to support equal opportunity, while at the same time benefitting from a system that is neither equal nor ripe with opportunity. Merit and diversity, not wealth and privilege, should drive admission decisions. And federal policy should back that up. 

 

In theory, a tax bill could include provisions that would take meaningful steps to nudge universities to do more to serve Americans from across the socioeconomic spectrum. Unfortunately, the endowment tax in the current version of the House does not meet that test.