Phil Knight’s gift of $400 million to Stanford last month caused another eruption of questions that have been asked with growing intensity lately: How much more money do institutions with billions of dollars in their endowments need?
It’s not just the public that is asking questions; increasingly, it is members of the U.S. House and Senate.
Many people on both the left and the right find something bothersome in the seeming disconnect between the generous federal benefits tax-exempt colleges and universities receive and the way they use those benefits to accumulate tremendous wealth in the form of endowments while students and families struggle to pay educational debts.
At least psychologically, we connect nonprofit institutions with causes in need of largess. But colleges and universities with outsize endowments change our sympathy quotient, begging the question of why such wealthy institutions need so many tax benefits. Couldn’t or shouldn’t those benefits be more available to those more in need?
Grappling with these questions has led lawmakers, scholars, and policy makers to propose a broad range of solutions. But we need to differentiate between suggestions that are merely sensible and those that are sensible and can be put in place in the relative near term, given the current lack of consensus between Congress and the White House.
The best starting place lies in the tax code. One idea floated by lawmakers and others is placing an excise tax on the earnings of all endowments worth more than $1 billion, possibly with a sliding scale so that the very richest institutions pay more than those whose endowment hover around “just” $1 billion.
The problem with this approach is that it could harm charitable giving to endowments. After all, donors who give to a college don’t expect that any of that money will be channeled to the government through a tax. The idea might also be applied to other nonprofits with big endowments. After all, why treat large college endowments differently than those of big hospitals, churches, or foundations?
Another approach would be to change how donors are treated, instead of overhauling the rules for the colleges to which they give. Today, we encourage giving by offering tax deductions to people who support charitable institutions, regardless of those entities’ need for the money. The value of a donation to a particular donor varies depending on their tax bracket — the richer you are, the more valuable the deduction. But whether you give to a tiny food bank in your neighborhood, a well-heeled church, or a university with a billion-dollar-plus endowment, the tax rules remain the same.
Perhaps it’s worth turning that idea on its head: Amend the tax laws to create a sliding scale with respect to deductibility. Those who donate to small institutions where, say, at least 40 percent (pick your number) of students are needy enough to be eligible for Pell grants get a larger tax deduction (again, pick your number) than those who donate to institutions with endowments over X dollars. The goal is to “nudge” folks into giving to institutions that previously would not have expected their largess.
Through this approach, we could change donor behavior in large or small ways. We could give donors an incentive to expand the range of places they consider supporting, and perhaps how much they give. What’s appealing about this idea is that it supports America’s longstanding tradition of encouraging citizens to choose where they give.
One could create a variant of the above suggestion: Provide super-deductions for gifts made to institutions that meet certain qualifications, such serving a large number of minority students or having endowments below a certain dollar amount.
All of those approaches focus on changing federal tax law, whether aimed at institutions or donors. Regardless of how sensible they are, these proposals require legislative change, the likelihood of which is surely questionable in an age of political gridlock.
An idea that might be easier for Congress to swallow, or that could be put in place through regulatory action, would be to add requirements on what institutions with $1 billion-plus endowments must do to keep receiving federal aid, such as scholarship money or research grants. Colleges might be required, as part of a grant proposal, to commit to enrolling a minimum percentage of Pell-eligible students. The goal of such an approach would be avoid tampering with tax laws affecting donors or institutions — and to avoid redistributing an institution’s money outside the campus.
Several scholars and others have suggested ideas for reallocating revenue from endowments to an independent trust fund or similar entity designed to support less well-heeled institutions, in essence forcing contributions to be allocated for the benefit of students and institutions that are in financial need.
The problem with this approach is that it runs roughshod over a long-cherished ethic — that the money donors contribute to a specific institution stays there. And there would no shortage of disputes over the criteria for distribution.
Redistributive legislation of this kind has been enacted. For example, Vermont requires wealthy towns to help support education in less well-off communities through pooled property-tax revenues.
Another alternative for reallocating big endowments is to create a smorgasbord of options for colleges if they want to preserve their tax-exempt status. These might include collaborating with historically black or other small niche colleges. Bigger universities might consider exchange programs between institutions, with students and faculty from black colleges, for example, spending a semester at an “elite” institution in the same state, and vice versa.
While all these ideas have potential, perhaps as a start we should offer one based on civility and compromise that is also eminently feasible: Ask the institutions with gargantuan endowments what they think is just and fair in terms of their endowment spending in today’s world. Ask them what would best encourage them to pour more of their wealth into serving the common good. We might just be surprised by their answers. These institutions are, after all, home to some of the smartest minds in the nation. Let them give us their best thinking. At present there are 56 private colleges and universities with endowments of at least $1 billion. Surely they can contribute meaningfully to the discussion of ways to spend their own money.
Karen Gross is a former president of Southern Vermont College and has worked as a senior policy adviser at the U.S. Department of Education. She is now senior counsel at Widmeyer Communications.
