New York College Tax Exemption Bills Need Progressive Solution

In early December, lawmakers in the New York State Assembly and Senate introduced bills to allow for the repeal of property tax exemptions for private universities. The bills initially aimed to target those universities that would have owed at least $100 million in tax without the exemption, but would allow alteration or repeal of such exemptions more generally.

At first blush, this seems more than fair. New York University and Columbia University—the two that would be affected—have endowments of $5.9 billion and $13.64 billion, respectively. They have also each enjoyed more than $145 million in property tax savings annually.

But absent more broad reforms, the forthcoming property tax bills will simply be offset by hiking tuition.

A progressive tax solution instead would key university endowment taxes to tuition rates. This would force private universities to internalize the cost of property tax reform and simultaneously curtail rising tuition.

Ripple Effect

A new tax bill for private universities will simply mean the cost is passed along to students in the same way hiking property tax rates on landlords often effectively hikes rents on tenants. Universities don’t end up with double-digit billion-dollar endowments by regularly dipping into said endowment to pay operating expenses.

In the case of higher education, the principle of economic incidence extends beyond fiscal implications. At its extremes, it can act to shape or remake the socioeconomic landscape of university campuses.

When affected private universities raise tuition and fees, whatever the reason, they alter affordability and, absent some other intervention, the demographic composition of the student body. Increased costs will unquestionably deter some students from lower-income backgrounds, who are already underrepresented in universities.

Diversity Under Threat

This has broader diversity, equity, and inclusion implications. Following the US Supreme Court decision striking down affirmative action in university admissions, universities are clamoring to find ways to support diversity in their student body while not running afoul of the ruling.

The decision doesn’t speak directly to race-based considerations when it comes to financial aid or scholarship packages, as it speaks only to admissions. But all the same, we may see the shadow of the decision negatively impact efforts to promote diversity through scholarship packages.

Following the economic ripples out from the property tax stone cast, it will suddenly be more difficult to gain admission to prestigious private universities and will more expensive for many to attend. The students bearing the full cost of tuition themselves will feel the pinch most acutely.

Harvard University students walk through campus.

Photographer: Joe Raedle/Getty Images

Two-Pronged Policy Reform

The Tax Cuts and Jobs Act of 2017 introduced at the federal level a 1.4% tax on net investment income for those private universities with an endowment exceeding $500,000 per student. This approach, undertaken at the state level in conjunction with property tax exemption repeal, can help ensure a downward pressure on tuition to offset what will be an upward pressure in the form of new property tax liabilities.

A simple endowment tax, based on the extent tuition rises above a certain threshold, in conjunction with the planned property tax reform, would compel private universities to find ways to pay their property tax bill other than simply upending their incoming class of students and collecting the nickels that fall from their pockets.

Universities will surely raise concerns about financial strain and the operational challenges of this one-two policy punch—but it’s difficult to cry poor mouth when your wallet contains billions.

The key will be ensuring, through tax policy, that private universities see a dollar taken from students as less valuable than a dollar found elsewhere—either through reorganization or funding through their endowment.

The potential for some private universities to attempt to offset property tax expenses without hiking tuition by slashing scholarship, fellowship, and grant opportunities is one issue that will need to be accounted for. The way to foreclose this final avenue of externalizing costs to students is to define the student tuition cost for purposes of said threshold as the cost after scholarship awards and grants from the university.

Outlook

Properly setting the tuition threshold and corresponding endowment tax rates would be tricky. It also would necessitate zeroing in on the optimal rates at which a university isn’t motivated to raise tuition another dollar, as it would come with a corresponding $1.01 endowment tax bill.

Spending the tax revenue raised through these policy reforms would similarly require consideration. The New York legislature intends to use the revenue raised by Columbia and NYU property taxes to fund the public university system in New York City: the City University of New York.

This is an admirable goal. But it mustn’t be pursued at the expense of the student on the other side of the street who, in pursuit of the same advancement, is attending a private university.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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