Monday, May 19, 2008

Taxing Harvard

Like many other states, Massachusetts has a long term budget problem. That encouraged one legislator to argue that a way to solve the state's budget problem is to tax higher education endowments that exceed a billion dollars. Representative Paul Kujawski said "When is a nonprofit not a nonprofit because of the wealth they are acquiring? It's mind boggling that one entity not paying taxes has $34 billion. How do you justify that? When people can't afford to live. How do you justify not taxing them?"

The initial estimates of the revenues from this proposal are pretty large. The best estimate I have seen is that if implemented the tax would raise $1.4 billion, or about 5% of the state budget.

Inside Higher Education, had an article from a Associate Economics Professor at Smith who agreed with Representative Kujawski. But he went one step further, suggesting that while the tax would hurt the non-profit entities proposed to be taxed that a better way to do it would be by taxing tuitions. Piling on to this free-for-all is Wick Sloane, a former CFO at University of Hawaii and now at Bunker Hill Community College who said "These schools have generated huge cash flows but are not doing their civic duty."

The idea is bad tax theory and even worse social theory. On tax theory, there are two justifications for creating this new tax - the first is simple, the state needs the money and following the Willie Sutton theory of public finance the proposal comes out because it is perceived as an easy source of revenue. I can see a rationale for some Payments in Lieu of Taxes (PILOTS) which are collected by local agencies as an assessment of the cost of providing services to non-profits. But in the case of these universities using the logic of who provides what to whom, the state should owe them some of their tax revenues based on the contributions that these colleges and universities offer to the state. Is there any doubt that Massachusetts would be a lesser state economically if those colleges and universities were not there. The second tax theory notion in this proposal is some perverted theory of equity, we can allow non-profits to operate but they should always be below some theoretical level of resources, regardless of their scope or mission.

The social theory defect is even more compelling. Sloane's comment is absurd. How do you measure the civic contribution of a major university? Certainly not with an arbitrary scale based on total resources. Beginning with DeTocqueville our heritage recognized a vibrant non-profit sector as a way to provide public services from non-governmental sources. That offered the governmental sector competition, which is good. But it also allowed a variety of approaches to an area like education which offered benefits consumers of education and research. Indeed, places like Harvard generate huge cash flows. But they also offer huge public benefits. Who should measure that? If you think about it the managers and board of each civic institution should. These boards are charged with something that is hard to imagine in many public agencies, their role is to protect the financial and programmatic integrity in PERPETUITY. That is an order that the trustees of governmental programs, like Social Security, have not lived up to.

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