Endowment Tax is Unsound Public Policy By Stuart Nachbar At Isnare.com Ezine Articles

I just read in the May 19 Christian Science Monitor that a Massachusetts legislator proposes a 2.5 percent tax on college endowments over $1 billion. The Commonwealth State has nine such institutions including Harvard, MIT, Williams, Boston College, Amherst, Wellesley, Tufts, Smith and Boston University; all of them are among the most selective schools in the United States.

State representative Paul Kujowski, sponsor of the endowment tax legislation believes these institutions have accumulated an exorbitant amount of wealth while retaining their non-profit status. I can believe that Representative Kujowski did the math, and found that Harvard alone would pay $850 million on $34 billion of their endowment and MIT $250 million on their $10 billion; a smart politician knows a cash cow when he sees one.

But this legislation is a dumb idea.

For one thing, many donors who support these universities do not live in, and therefore do not pay income tax to the State of Massachusetts; they pay taxes to their state of residence. Why should their contributions be taxed by a state where they have no right to vote? That's very much like a commuter tax, another policy I revile.

Secondly, these institutions are major investors and employers in Boston and the other cities where they do business. They already pay payroll taxes and payments in lieu of property taxes. They also employ young people in part time jobs, more so than most large private corporations. They lend professional expertise to state government and of course, in their most important role, produce tax paying citizens. And a college closing can be devastating to its community, including alumni who are trying to advance in their careers; their academic credentials get called into question or, they become more difficult to verify.

Finally, as far as the public knows, the monies raised from this policy would go into the state's general fund; they would not be assigned to an education-related purpose. For instance, Massachusetts governor Deval Patrick has proposed free community college as a post-secondary education option. If the proposed endowment tax were dedicated in a direction like this, it might be more palatable to the best endowed private colleges, which are not in a position to take many transfer students. But this is similar to the "luxury tax" in Major League Baseball, where the teams with the highest revenues subsidize those with the lowest to improve competitive balance. This doesn't work with colleges: the institutions that would subsidize the less endowed schools would have little to no say over their management — in fact, they might be subsidizing mismanagement when they could have put the money to better use in their endowment.

I have no doubt that the progress Representative Kujowski's proposed legislation will be closely watched by other state legislatures in years to come, especially California, Texas, Pennsylvania and New York. In addition to Massachusetts, these states have the most institutions in the Billion Dollar Club. The difference is that there are public institutions with endowments of $1 billion or more in those states — the Massachusetts schools in the Club are all private - so such legislation might prove to be less popular elsewhere. This progress of this legislation will also be watched in Congress, which might look at a similar tax.

In that case, the opposite of progress might be Congress.

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