Tuesday, December 1, 2009

Closer to home: taxes on tuition?

As noted in my last two posts on proposals to tax cosmetic surgery, governments at all levels are digging into the sofa cushions to find much needed revenues to staunch free-flowing deficits.

As I also noted in those posts, taxes on cosmetic surgery are a pretty abstract and far-removed topic from my own personal experience. I've never had any, do not anticipate having any, and I certainly don't intend to become a professional providing such services, tax or no tax.

However, this article in today's Wall Street Journal addresses another new tax proposal that hits a lot closer to home: the Mayor of Pittsburgh wants to tax college tuition revenues for colleges located in his fair city.

The mayor does not claim that colleges are "sinful," to use CPA Stacie Clifford Kitts' term, but rather that (A) they get a lot of free city services and (B) they own a lot of valuable property that is tax-exempt and therefore they don't contribute their fair share to the cost of providing those services. (According to the WSJ, 40% of the property in Pittsburgh is exempt from taxes, and a good share of that, though not all, belongs to colleges, universities, and affiliated organizations.)

Ahem, well, now, taxing college tuition, that hits a lot closer to home for me! I teach at a private liberal arts college, my husband teaches at the state university, and we have two daughters, one attending an out-of-state private liberal arts college and another daughter attending a private research university. All four institutions are tax-exempt, and we have personally benefited from a number of government subsidies for higher education throughout our lives.

For example, we've made donations to our own alma maters that were tax deductible, my husband and I got subsidized student loans when we were in college and later got to deduct the student loan interest when we paid it back (and some of that debt even got cancelled thanks to provisions that allowed college professors to cancel 10% a year on some loans), and we've used 529 savings plans to fund our daughters' undergraduate tuitions. And of course, tuition bills would likely have been higher if colleges had not been tax-exempt, but rather had been subject to property taxes, sales taxes, and corporate income taxes. And that's really just the tip of the iceberg.

For example, we're also grateful for the fact that the National Science Foundation, i.e., the US taxpayers, are paying for the cost of our older daughter's graduate education in mathematics, as it did for mine in economics. (One interesting difference between then and now: my living stipend from NSF was exempt from federal income tax back in the 1970s, while hers is subject to federal income tax now. I think the current policy is quite justifiable, but that's another topic altogether.) Taxable or not, both my daughter and I are grateful for the government's support of our graduate education and we hope that over our lifetimes, we'll give back some measure of the government's investment in us!

Indeed, I'm grateful for the many benefits we've gotten from public funding devoted to education at all levels, preschool through high school, college and beyond. Although my daughters homeschooled for most of their K-12 education, I feel that we have benefited in many ways from raising our family in a community that provides good public education for its children.

So how do we feel about a tuition tax? All over the country, mayors in other cities with lots of tax-exempt property such as Schenectady (where I teach) and Albany (where my husband teaches) are certainly watching the situation in Pittsburgh quite closely.

Cities are struggling to pay their bills, and there's a limit to how much more property taxes the remaining taxable property owners can be asked to bear. Are all the tax-exempt property owners, including colleges and universities, contributing their fair share to the community? It's a reasonable question to ask.

Colleges are struggling too. They've been hit by a triple whammy: endowment income is down, alumni giving is down, and financial aid needs of students have increased. But it's also true that private taxpayers are struggling too! There are homeowners in the city who have lost their jobs and businesses with revenues down--they're not going to find their property tax burden easy to bear either.

I don't know a lot about Pittsburgh, but Richard Rusczyk, who knows it better than I do and whose judgment I respect, says that a tuition tax on institutions such as Carnegie-Mellon and the University of Pittsburgh would be "slaughtering the goose that laid the golden egg," because those institutions are responsible for the economic vitality of Pittsburgh's economy.

There might not be a decent-sized city in the country that owes as much to its universities as Pittsburgh does. Pittsburgh's response -- tax 'em while you got 'em. I wonder what sort of answers you'd get if you were able to get politicians to honestly answer the question, "Where does wealth come from?"

A large part of my answer would be, "From the minds of the most energetic, creative, intelligent people of society," which is a nontrivial part of why I do what I do now. We've avoided the Malthusian nightmare in large part because the world's geeks have outstripped our capacity to consume. It may not always be thus, but I hope it continues that way as long as possible. Pittsburgh has been a small microcosm of this -- their universities have spawned thriving CS and medical industries that have helped Pittsburgh avoid the fates of Buffalo, St Louis, Detroit, and other industrial cities. Leeching on these universities seems extremely short-sighted and counterproductive.

There aren't easy answers. Taxing tuitions might burden the universities, but a city that deteriorates because it can't afford to pay for essential services is also a problem for the universities located there. Higher crime could drive away more prospective students than a 1% tuition tax. On the other hand, some of the articles I've read about Pittsburgh's mayor raise interesting questions about his priorities for public spending.

Whatever the right answer for Pittsburgh, it is a question that local governments have been asking for decades. Are the tax-exempt property owners in our city contributing their fair share to the city?

Many colleges, universities, and other nonprofit institutions such as hospitals, churches, and museums create a great deal of value for their communities. Some pay voluntary "payments in lieu of taxes." Many colleges generate substantial amounts of tourism from parents of current and prospective students as well as alumni who visit and patronize local hotels and restaurants, generating significant tax revenue. The city also gets tax revenues from college students and employees who shop at local businesses.

The college where I teach provides thousands of hours of community service by its students, including mentoring schoolchildren, preparing tax returns at our Volunteer Income Tax Assistance (VITA) program, building Habitat for Humanity houses, and renovating playgrounds in a crime-ridden area.

The college where I teach has invested heavily in improving a troubled neighborhood adjacent to campus and now offers free tuition to residents of that neighborhood who are admitted to the college. For students from the neighborhood who are unable to meet requirements for freshman admission, the college will pay the students' tuition at the local community college for the first two years, in the hopes that the students may be able to transfer as juniors. This has attracted families who care about their children's futures to move into the homes and improve them. The college also purchased a run-down bar and grill that was a neighborhood trouble-spot with frequent late night street fights, and turned it into a showcase community center that provides tutoring programs for local children and also houses our tax site. The college has given employees low-interest mortgages to buy homes in that same troubled neighborhood. Crime statistics are down and the quality of life in the neighborhood has visibly increased over the past two decades. It's still a place where I'm careful at night, especially when I'm the last one to leave our VITA site late at night, but it's a lot safer than it used to be.

The college also provides many free public lectures and concerts and exhibits available to the entire community, and the faculty make outreach visits to local schools to share their expertise. Private property located near the college is therefore more attractive to buyers and thereby generates more tax revenue.

Are we contributing our fair share to the City of Schenectady? Are colleges and universities in Pittsburgh and all across the country contributing their fair share to their local communities, in view of all the implicit and explicit subsidies they receive?

It's definitely a fair question for society to ask that tax-exempt institutions provide a clear accounting of the value they provide to the taxpaying public.

Some of the more egregious bed buffaloes in our tax code that benefit higher education deserve greater scrutiny and possible revisions to the tax code--for example, when donors give large donations largely at taxpayer expense thanks to gifts of appreciated assets or certain kinds of exotic charitable unit trusts.

Shareholders have incentives to carefully scrutinize for-profit institutions. Watchdog organizations, think-tanks, and public auditing agencies carefully scrutinize public organizations, though they could certainly use more scrutiny. The nonprofit sector deserves greater scrutiny as well. Are we delivering adequate public value in exchange for all the tax breaks we get?

What's sauce for the goose is sauce for the gander....or should I say, what's sauce for the cosmetic surgeons is sauce for non-profit institutions. We all deserve a careful look at the value we are returning to society in exchange for the subsidies we receive.

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