Statement of Sen. Chuck Grassley
Committee on Finance Hearing, “Education Tax Incentives and Tax Reform”
Wednesday, July 25, 2012
As we consider how tax incentives help students and families pay for college, we should consider whether and how these incentives also increase costs. A 2010 study by Nicholas Turner at the University of California-San Diego suggests that schools are reducing financial aid awards by the amount of tax benefits a student or family may receive.
In addition, a 2011 article in the Washington Monthly by Benjamin Ginsberg exposes the explosion in spending on administrators and support staff that are not directly involved in instruction or research. Such spending includes hefty increases in executive compensation and benefits.
Aside from getting a handle on rising costs and tax incentives for students and families, it is also important to consider the tax benefits that tax-exempt college and universities receive.
Just like tax-exempt hospitals, tax-exempt colleges and universities are exempt from income tax. They also have the ability to raise capital through tax-deductible charitable contributions and the issuance of tax-exempt bonds.
The Joint Committee on Taxation, in the document prepared for today’s hearing, indicates that the most expensive Federal tax expenditure for education is the charitable deduction at more than $32 billion. The tax exemption for bonds is the third most expensive at more than $18 billion.
The charitable deduction for sure fuels the growth in multi-billion dollar in college and university endowment funds. According to the most recent annual NACUBO-Commonfund endowment study, endowments with more than $1 billion in assets had a one-year rate of return of more than 20% and a ten-year rate of return of almost 7%.
So, even though they had a couple of rough years in 2007 and 2008, they are still doing great. Yet, despite their success and skyrocketing tuition, their payout rate hovers around 5%.
Part of their success results from their investment strategies. The same endowment study tells us that these endowments with more than $1 billion are sixty percent invested in “alternative strategies.”
Such investments include private equity, international private equity, mergers and acquisition funds, hedge funds, derivatives and energy and natural resources, including oil, gas, timber and commodities.
Aside from their lack of spending on students, it’s unclear whether such investments may also be contributing to the erosion of the tax base by sheltering otherwise taxable, commercial activity in tax-exempt entities. Commodity speculation is another issue that has been of concern to both me and Senator Wyden.
When it comes to tax-exempt bonds, it seems that the ease of borrowing is causing a race to spend without considering whether such spending adds to a student’s learning.
In a May 1, 2012, CNBC report, the Dean of Admissions at Pomona College suggests a $53 million investment in student housing is important because students are not making choices based on whether they are going to get a good education. The same report highlights other California colleges offering perks such as dorm rooms with ocean front views and cafeterias with gourmet food.
In addition, an April 30, 2010, Congressional Budget Office study suggests that colleges and universities may benefit from indirect tax arbitrage by using tax-exempt bonds to fund building and equipment while hoarding money to invest in the assets I just mentioned that provide a higher rate of return.
Bottom line – the incentives for students and families are not the only ones that should be reviewed in the context of tax reform. All education related tax expenditures should be examined to ensure that students and families, in addition to taxpayers, are getting the most bang for their buck.