Donors, Colleges Worried About Legislation to Curb Tax Breaks

Donors, Colleges Worried About Legislation to Curb Tax Breaks

A proposal to curtail the tax benefits associated with gifts made to the wealthiest colleges has alarmed donors and institutions alike, Bloomberg reports.

Initially put forward by Rep. Tom Reed (R-NY) in early 2016, the proposal calls for the wealthiest colleges to direct 25 percent of their annual endowment income to financial aid for middle- and working-class students — or lose their tax-exempt status. The plan would apply to the roughly one hundred institutions with endowments exceeding $1 billion, and Reed — vice chair of President-elect Donald Trump's transition team — is calling for those schools, where annual costs can top $60,000, to offer steep discounts to families with annual incomes of between $24,000 and $145,000. The proposal also would require all universities receiving federal aid to provide more disclosure about administrative salaries and perks and file "cost-containment plans" designed to keep tuition increases below the inflation rate.

Lawmakers from both parties have long pushed for colleges to spend more on financial aid and reduce their costs, while colleges argue that donors often place restrictions on their gifts, making it difficult, from a legal standpoint, to shift those funds to other priorities. "This kind of restriction will not address the cost of higher education," University of Southern California president C.L. Max Nikias told Bloomberg. At USC, which has a $4.6 billion endowment, Oracle Corp. co-founder Larry Ellison's recent $200 million gift in support of a cancer research center would not be fully deductible under the Reed plan.

"I understand donors' intent, trying to control where money goes," said Reed, who also seeks to increase the deduction for gifts in support of middle-class financial aid. "At the same time, we have a college cost crisis. In order to get through the crisis, these are the hard decisions we have to make."

Some donors worry, however, that Reed's approach will shortchange other urgent needs. Washington University trustee Andrew Bursky and his wife have in the past made gifts to their alma mater — which has a $6.5 billion endowment — in support of financial aid. They also pledged $10 million for cancer and auto-immune research, but without the tax break, they might have given $6 million, the cost of the donation. "Let's not dis-incentivize those who are prepared to give," said Bursky. "I'd hate to sacrifice, in my case, medical research that holds the promise of dramatically changing the human condition. Unintended consequences can be severe."

Janet Lorin. "Rich College Donors' Big Tax Break Is Suddenly in Danger." Bloomberg 01/05/2017.