Monday, May 12, 2008

Tax Harvard now! Not just its endowment, its entire dang operation.

Harvard University now has an endowment of $36 billion, far more than it will ever spend on, or can in any credible way be connected to, its "tax exempt purpose" of education. Especially when it is charging its Business School students as much as $77,000 per 9-month academic year, through $44,000 in tuition plus another $33,000 in board and fees (with the helpful warning that "fees may increase") ... charging Law School students $42,000 per year, plus the rest ... charging undergraduates more than $30,000 in tuition plus fees bringing their total cost to over $45,000, etc.

Private charitable foundations generally are legally required to distribute a minimum 5% of their assets annually to a charitable purpose, but university endowments are exempt from this rule. If Harvard had its endowment pay out only this minimum 5%, it would provide $90,000 annually for each one of its total of 20,000 students in all is schools -- which would seem a good deal more than the actual cost to it of educating them. Instead, while charging students up to $77,000 per year, it keeps growing its endowment relentlessly -- to the present $36 billion from "only" $12.8 billion just 10 years ago, an 11% annual rate of increase.

So just what is the purpose of this endowment? Apart from paying many millions of dollars in fees to its managers, and also doubtless obtaining many fine perquisites for university administrators (when you control $36 billion of investment funds you are gifted front-row-center seats to the opera, literally and figuratively).

Is the endowment really supporting Harvard's students -- or are the students' fees instead supporting the endowment? Inquiring tax law writers want to know. Specifically, the bipartisan leadership of the Senate Finance Committee (Max Baucus, D-Mont., and Chuck Grassley, R-Iowa) has requested (.pdf) that Harvard and 135 other, um, generously endowed universities explain the operation of their endowments (which under current reporting may be described as "opaque".)

And now Massachusetts state tax writers have gone even further....
During debate over the state’s budget for the 2009 fiscal year Monday, members of the Massachusetts House of Representatives considered imposing a 2.5 percent tax on assets exceeding $1 billion in any college’s endowment...

“Why do we want to tax the poor all the time, but we let off the hook the richest of the rich?” said State Rep. Angelo Scaccia, a Democrat ...

The sponsor of the proposal, Rep. Paul Kujawski, another Democrat, said in a telephone interview late Wednesday that “when you realize that you do have some institutions of higher learning where wealth has grown above and beyond where you really wouldn’t imagine, you say to yourself, ' When does a nonprofit stop being a nonprofit? How on Earth can they possibly utilize $35 or $36 billion?'"...

Kujawski’s proposal would have applied to 9 institutions ... with endowments over $1 billion (Harvard, Massachusetts Institute of Technology, Williams, Boston, Amherst and Wellesley Colleges, Tufts University, Smith College and Boston University) ...
Among Tax Court judges there is a long-time saying, "When a pig becomes a hog it gets slaughtered." Harvard could soon be leading a procession of sows from the trough to the abattoir of the tax collectors -- that's nine billion-dollar-plus university endowments facing their first prospect of a tax bill right there, thanks to Harvard. It won't be their last prospect (especially with the huge fiscal pressures that will be arriving soon). And it shouldn't be.

But let's go beyond the endowment issue and ask a more fundamental question: Why is Harvard tax exempt at all?

A question relevant to that is: how can Harvard charge students as much as $77,000 for a nine-month academic year? The answer to which is easy: because it can get it. But that easy answer makes the answer to "why is Harvard tax exempt?" very problematic.

The original purpose of the tax exemption provisions of the tax code was not to support the providers of beneficial services to society -- the services of providing food, clothing and housing to the masses are pretty darn beneficial to society, but tax exempt status is not awarded to farmers, grocers, haberdashers and building contactors.

The purpose of tax exemption was to support providers of socially beneficial services who, because they were not operated commercially, were at a handicap in attracting financial support. The country hospital or school that was financially handicapped because it could not attract investors as compensation received a break on its property taxes, income taxes and other tax bills, that enabled it to survive and be able to afford to pay its employees.

Does Harvard -- as it charges students up to $77,000 per year, grows a $36 billion investment fund, and has the nation's highest-paid professors/consultants -- strike anyone as being financially handicapped?

There is no such thing as a "non-profit" organization, despite constant use of the term. (Harvard's return on its $36 billion endowment very clearly is economic profit.) But the tax code does allow "tax exempt" status for entities that are operated "not for profit".

Is Harvard really operated on a not-for-profit basis? Or is it operated very for profit, with the profits distributed among its stakeholders -- its endowment managers, university administrators, tenured professorate class, etc. -- with the happy extra benefit for all of an archaic but very lucrative tax exemption?

As the Massachusetts legislator asks: "When does a nonprofit stop being a nonprofit?" It's a question many more will be asking in time.

More on this later, regarding universities and some other notable tax exempt organizations as well.