It’s time to target rich tax breaks for private colleges

Stanford University is among California private colleges benefiting from tax exemptions and subsidies.
Stanford University is among California private colleges benefiting from tax exemptions and subsidies. Bloomberg News file

It’s that time of year when taxes are due and when many Californians are confronting the anxiety of the college admissions process. Most will attend the state’s public universities, which are suffering from years of cutbacks. How can we lighten the burden on taxpayers while helping to improve the success of students in our public colleges?

In a recent study, we show that not all private universities are truly private. Many of the richest universities in the country, sitting on hundreds of millions or even billions of dollars in tax-exempt endowments, receive government tax subsidies that dwarf the appropriations received by public colleges.

For example, in 2013, Stanford’s endowment of nearly $19 billion generated more than $63,000 in annual taxpayer-funded subsidies for each student. Each student at UC Berkeley received $10,500 in taxpayer support, while those at Sacramento State received only $4,800 each.

Stanford and other private nonprofit universities also gain from other tax laws. According to the Santa Clara County assessor, in 2013, Stanford and its hospitals had one of the state’s largest property tax exemptions – close to $8 billion. At the average county property tax rate, this is the equivalent of an additional $6,100 taxpayer subsidy for each student.

Do taxpayers send their own children to Stanford? With an acceptance rate of just 5 percent, the answer is most likely no. And only about 16 percent of students receive federal Pell grants, aimed to low-income students.

Given this flow of money, the average taxpayer is subsidizing the education of students in this selective private university to a far greater extent than they are supporting the education of their own children at less selective public institutions.

Organizations are granted tax-exempt status because they are providing a public benefit. But how does the public really benefit when their children are almost certain not to be admitted and where low-income students are so poorly represented?

Rather, our complicated tax code creates “welfare for the wealthy,” where money flows automatically to rich colleges while public ones have to fight for appropriations in legislatures, where they must compete against other legitimate public priorities.

This is not to imply that these endowments are without benefit to those employed by or attending private institutions. Hefty endowments help support operations and research, provide financial aid and give access to campus cultural events.

However, this does not mean that the status quo is acceptable. But how can public universities share in the billions that donors give to private institutions?

Rather than providing free community college by taxing the rich – an Obama administration plan that will never pass Congress – we believe a more politically feasible approach would be to impose a low excise tax on wealthy private university endowments.

This tax, which could be offset for financial aid provided to students, could be invested in proven support services that could lead to more students getting through community and regional colleges. In 2014, an excise tax of 0.5 percent to 2 percent on the eight California private universities with endowments of more than $500 million would have generated nearly $600 million.

We should use the money that could be generated by reforming tax policy to provide real opportunities to students attending California’s public colleges.

Jorge Klor de Alva is president of Nexus Research & Policy Center in San Francisco. Mark Schneider is vice president of the American Institutes for Research in Washington, D.C.