Let’s tax college endowments to pay for students’ education

In 2016, the 50 richest universities in America owned $331 billion in endowment wealth, a figure roughly three times the size of California’s entire state budget last year — and ten times the estimated net worth of President Donald Trump. Seventy-five percent of that wealth was held by less by four percent of schools, including such elite institutions as Harvard University, whose endowment was $34.5 billion in 2016), Stanford ($22.4 billion), Princeton ($22.2 billion) and Yale ($25.4 billion).

These outsized sums made college endowments a ripe target in the House GOP’s tax plan, which proposes a 1.4 percent excise tax on the nation’s largest endowments. Though only about 70 schools would be subject to the levy as currently contemplated, it would raise an estimated $3 billion over 10 years.

As a piggy bank for financing lower personal and corporate tax rates, an endowment tax is a terrible idea, and colleges are right to protest. But as a mechanism for correcting some of the current inequities in higher education, endowment reform is well worth pursuing.

{mosads}Here’s the right way to tax endowments: (1) as a way to force more schools to open their doors to low-income students; and (2) to help level the field for non-degree postsecondary credentials, which currently get short shrift. In particular, as PPI has proposed, a modest endowment tax should fund federal student aid for Americans seeking non-degree occupational credentials, such as commercial drivers’ licenses and IT certifications, for which Pell grants are now largely unavailable.

Though a growing number of jobs now require more than a high school diploma, many well-paying careers do not require a traditional four-year degree. An IT worker with entry-level certifications, for example, can earn $18 to $25 an hour, with the potential to move up quickly, while certified welders can earn as much as $62,100 a year.  Electricians made a median of $52,720 in 2016 and can earn as much as $90,420. In fact, according to the National Skills Coalition, 53 percent of all jobs in 2015 were so-called “middle-skill” jobs like these, which require specialized post-secondary training but no college degree. 

Current higher education policy, however, neglects the demand for and the potential of these opportunities. While the federal government now spends nearly $80 billion on grants and tax breaks for college, most workforce programs don’t receive a cent of federal aid. As a result, many workers seeking to boost their skills or restart their careers — and who don’t want or don’t have the time or money to earn a college degree — can’t afford short-term training programs that could move them ahead. 

Bipartisan legislation, sponsored by Sens. Rob Portman (R-Ohio) and Tim Kaine (D-Ohio) and supported by a broad coalition of organizations, would fix this imbalance by allowing high-quality workforce programs to accept Pell grants. A stumbling block, however, has been lack of funding for this expansion — a problem that an endowment tax could remedy.

Second, a properly structured endowment tax could help force colleges to spend more resources aiding low-income students — a duty many elite colleges have neglected despite the generous tax subsidies they’ve enjoyed to grow their wealth. The University of California-Berkley’s Haas Institute calculates that the federal government spent $19.6 billion in 2012 to subsidize college endowments, including on tax deductions for donors and exemptions on investment earnings.

While some schools, such as tuition-free Berea College in Kentucky, do dedicate much of their wealth to poorer students’ needs, far too many schools are more hoarders of privilege than engines of opportunity. 

Stanford’s Raj Chetty, for example, finds that students from the top one percent of households are 77 times more likely to attend an Ivy League school than someone from the bottom fifth and that the share of low-income students has not grown over time. In 2015, a New York Times op-ed by Victor Fleischer noted that Yale had spent $480 million on fees for hedge-fund managers — compared to $170 million it spent on tuition assistance and fellowships.

The GOP’s current proposal is too crude, making no distinctions between the Bereas and the Yales. A better approaches is that of Republican Rep. Tom Reed (R-NY), who proposes to tax only those schools failing to spend a minimum amount of their endowment dollars on financial aid; or of American Institutes of Research Vice President Mark Schneider, who would allow schools to credit the money spent on student aid against their tax liabilities. Under either plan, schools like Berea would be largely if not completely exempt — as they should be. 

Predictably, colleges are going all out to protect their riches, and given current GOP disarray, the schools are likely to win. Alternatively, whatever tax survives will not be directed to benefit less privileged students. Either outcome would be a wasted chance to expand opportunity for more Americans.

Anne Kim is a senior fellow at the nonprofit Progressive Policy Institute (PPI) and senior writer at the Washington Monthly.