University of Kentucky law professor Jennifer Bird-Pollan’s in-depth examination of the Tax Cuts and Jobs Act of 2017 on the investment income of certain college and university foundations in the Pepperdine Law Review has potentially important implications for the underlying legal structure and practice of philanthropy in America.
Influential former Senate chief tax advisor Dean Zerbe told The Giving Review in April 2020 that “the college consumption tax was a big wake-up call. If those in training were surprised, ”he added,“ they just weren’t paying attention. People are just angry at colleges and universities down the line, from Harvard down. “
Specifically, the 1.4% tax, passed by a Republican-controlled Congress and signed by a Republican president, is imposed on private universities, the majority of which are U.S. students, with over 500 tuition fees and total assets in excess of $ 500,000 per student.
According to Bird-Pollan’s new “Taxing the Ivory Tower: Evaluating the Excise Tax on University Foundations” “[w]Although it is a relatively small tax, this new law is a first step towards researching the taxation of nonprofits on the huge sums of money they hold in their foundations. “
Bubbling anger
Even if the anger that Zerbe describes in the university context may not yet have been reached, there seems to be a bubbling dissatisfaction among many people with wealthy philanthropy in the USA – and increased, ideological dynamics for an aggressive philanthropic reform in the broader sense. Again, if those in establishment philanthropy – or big philanthropy or “wake philanthropy” – are surprised by it … well, they just don’t pay attention either.
“You could say that because this excise tax is focused only on income from investments and not on the income of the charity which is then invested in the foundation, it doesn’t go far enough,” Bird-Pollan notes.
If we believe that the rationale for collecting excise tax is the dislike of these wealthy universities for excessive accumulation, then perhaps we should pursue the rationale. Why do we only focus on universities? Could the same argument be used to impose a tax on hospitals? Museums? Other Wealthy Nonprofits? And why stop imposing a consumption tax of only 1.4% on income from the foundation? Why not tax any nonprofit income that is not reinvested in the nonprofit’s charitable causes? Given that the University Foundation Excise Tax of the Tax Act 2017 opens the door to the collection of taxes as an incentive to stop the excessive accumulation of wealth by nonprofits, we can imagine what else we might see, especially if this is from pushed by a legislator willing to tax the rich.
It is beneficial to pay attention to the way Zerbe relates and to imagine what might be considered, as Bird-Pollan does.
Attention and imagination
Bird-Pollan offers several helpful insights into such considerations. Among them: First, as she describes: “The decision not to tax the net income of nonprofits is a political decision of Congress and should be evaluated independently of the political decision to offer a tax deduction for donations to charities. ”
In other words, it is possible – probably preferable – to consider reforming the exemption separately and independently of the deduction. The reform can be limited to one thing and not necessarily include the other. Those protecting the withdrawal need not be automatically deterred from doing anything about the exemption.
Second, it is also possible to push ahead with the liberation reform in a targeted manner. “Rather than abolish the income tax exemption of these universities or levy taxes on university income at the rate levied on taxable corporations that generate investment income,” writes Bird-Pollan, “Congress chose an alternative model that reaches only a few dozen universities , exempts significant amounts of income and levies a relatively low tax. Perhaps we can see this as a step in the direction of the importance of taxing asset concentrations wherever they occur … “
In its current form, as she reports, the tax will only affect around 40 schools a year, and they are “among the richest and most powerful universities” in the country.
In other words, for the more aggressive proponents of philanthropic reform, there may be acceptable incremental progress.
But and thirdly, Bird-Pollan adds a caveat that Hawk reformers might like. “Unfortunately, the new tax arguably adds unnecessarily to the complexity of the Internal Revenue Code, as Congress could only have abolished income tax exemptions for these institutions and subject them to an existing tax system,” she notes.
Doors and discussion
Bird-Pollan’s main proposal is to “encourage universities to spend their investment income in furthering their charitable mission” by “taxing the amounts earned by the foundation with a tax on those spent on running the university or invested in capital investments Exceeds amounts used for the university’s charitable cause. ”And she expresses her susceptibility to a“ preference of current charitable activities over future ones, ”a philanthropic analogue that has long been part of the discourse on the policy and practice of granting funds.
The excise duties of the Tax Cuts and Jobs Act “open the door to a discussion about whether it is time to treat university foundations more like the private equity funds they are increasingly like,” concludes Bird-Pollan. “Perhaps this first step creates the conditions for a more solid discussion about the taxation of foundation funds in the coming years.”
And maybe other large charitable foundations as well. Along with other philanthropy reform options – and with the same seriousness that Bird-Pollan gives to charity – it is worth having a solid discussion about regardless of which party controls Congress now or in years to come.
This article originally appeared in the Giving Review on July 22, 2021.