Taxing Higher Education

Note: This story was updated on December 14 to reflect the progress of the tax legislation.

When the House of Representatives passed its tax bill late last month, provisions that would have had a direct impact on higher education in the United States were met with scrutiny, anxiety, and action by students and universities. The Senate bill, which passed in early December, did not include many of the most concerning provisions, and the final bill, agreed to by House and Senate Republicans and now nearing a vote, preserves the tax-exempt status of graduate student tuition waivers and does away with the House bill's most serious impacts on higher education.

But the changes that were floated during the tax rewrite still raise questions about why lawmakers seemed willing to target higher education — and how colleges and universities can do a better job of demonstrating their value to taxpayers.

Before the final bill was agreed upon, we spoke with James Soto Antony, who directs the higher education program at the Harvard Graduate School of Education, about the ramifications of the proposed tax changes and the significance of the legislative debate for higher education leaders.

Why is it thinkable to consider policies that could prevent people from pursuing higher degrees, potentially damaging America's entrepreneurial, research edge?

It is hard to understand why the House bill taxes, or takes aim at, deductions intended to support students. Their proposed treatment of tuition/fee waivers as unearned income would clearly present a burden to students. We will have to see what elements make it into the final legislation as things develop. But, in all, students and universities were right to be anxious, and higher education is not out of the woods yet. Either way, both tax plans have elements that will require universities to figure out how to work within the new tax structure to support students and their institutions.

It is also worth noting that regardless of the provisions that may come to pass and impact graduate education and students, we still need to recognize that we’ve not been doing a good job diversifying graduate and professional school programs. Women remain catastrophically underrepresented in virtually all science, engineering, technology, or mathematics-related areas of study. And, of course, most graduate and professional school programs in all areas of study suffer from poor participation by students from historically underrepresented racial and ethnic backgrounds.

I don’t want to minimize the potential impact of these tax bills on the inclusivity of graduate education, but I also think it is important to keep in mind that graduate education still remains largely inaccessible to many low-income, first-generation students.

Why haven't universities made a better case for themselves as to the worth of higher education in general?

Why this has happened in the first place is unclear, but perhaps represents a fundamental misunderstanding by lawmakers of the importance of these funding mechanisms not just to students, but also to the whole research enterprise. Much lobbying is occurring, but I fear that the lack of debate surrounding the tax bills and the seemingly fast pace it is proceeding through Congress will not allow rational heads to prevail. Universities have a lot of work to do helping lawmakers understand the essential nature of the university mission, and why what is being proposed is so potentially damaging.

Perhaps higher education shoulders some of the blame here — we have not been, as a collective, strong enough in our efforts to educate the public overall, and lawmakers more specifically. Clearly, there is need for greater coordination of messaging. Of course, higher education has been under assault at the state level for decades. Public colleges and universities have endured dwindling support, with some of our flagship public universities now receiving less than 10 percent of their operating budgets from their respective states.

The truth is that mistrust of higher education is nothing new, and the tendency of lawmakers to view higher education as a private good, rather than something promoting greater society, has been around for a long time. These tax bills are more of the same.

So, what are the takeaways for current leaders (or aspiring leaders) in higher education? How might they need to adjust how they run and lead their institutions?

One big takeaway has to do with how we talk about higher education and its impact on society. Future leaders will need to become stronger in their abilities to present, in understandable language — and, preferably with compelling narratives, metrics, and data — why higher education matters to the betterment of society.

There is a general mistrust of the “educated elite” among many in our nation. Far too many believe a college education, let alone a graduate or professional degree, is indulgent and unnecessary — not something we should financially support as a society. Of course, people forget where their doctors, teachers, lawyers, engineers, scientists, architects, city managers, and so forth learn to do what they do.

When someone needs a doctor to save their child’s life; or a lawyer to handle an important legal issue; or wants the products of good engineering, such as clean water to drink, town or city infrastructure that works, transportation that is reliable, or digital technologies that make life easier and more enjoyable, they rarely connect those things to higher education. We need to get better at showing people in our society why higher education has made their lives better, even if they themselves did not go to college or university.

But higher education, in my opinion, has responded poorly to the shifting sands, which signaled growing mistrust of how higher education was using public resources. Our poor response was characterized by our not taking seriously enough the calls for increased accountability for public resources being committed to higher education. We failed to mobilize as a unified collective to help our state and federal lawmakers understand not only what society was getting for its investment, but why we should continue to invest in higher education. Higher education needs to do a better job of constantly promoting itself, talking about what it does well.

We need to also realize, however, that this work is never easy and will never be completed. Education, overall (and by this I also mean K–12) is in a constant battle to justify itself and the public investments made. Everyone purports to be an expert on education, and everyone seems to have some notion about how “to fix the broken system” of education. Higher education is not immune to this criticism. We need to work harder to help frame the narrative with real data, rather than let opinions dictate policy and legislation.

Many institutions of higher education rely on charitable donations and gifts from alumni, philanthropists, and those who want to invest in research. What impact would the tax plan have on those who might consider giving to colleges and universities?

This is true — many universities rely on charitable donations to fund important work. According to a recent article in the Chronicle of Higher Education, the bill calls for doubling the standard deduction for taxpayers, and reducing the number of people who can itemize their charitable contributions. Obviously, this has the potential to reduce giving.

Much is being written, also, about the proposed tax on investment earnings for endowments. It is crucial to keep in mind, however, that the proposed tax is not aiming at all college and university endowments — just the biggest ones at private institutions: the proposed 1.4 percent tax on investment earnings by endowments at private colleges that enroll at least 500 students and have assets of $250,000 per full-time student. The tax would affect fewer than 70 universities.

That is obviously bad for Harvard and would be severely damaging to the important work it does as a university, much of which is supported by endowment monies. But it is also important to keep in mind that, as of now, this is not an across the board assault on endowments at all colleges and universities. That said, one should worry about whether this opens the door for future taxation of smaller endowments, too.

One perspective to keep in mind is this: according to the IRS, private foundations are exempt from federal income tax because they are charitable or “section 501(c)(3)” organizations. However, under the heading “Excise Taxes,” a foundation's investment income is subject to a 1 or 2 percent excise tax. For example, the Bill and Melinda Gates Foundation actually pays these taxes; the foundation owed over $40 million according to its 990 public filing for the fiscal year of 2015. So, the question that some in Congress might ask is, why should the largest private university endowments not also be subject to taxation on investment income? It will be important for universities to present cogent arguments as to why the investment income on their endowments should not be taxed similarly.