All revenue from this tax would be restricted to be used only for that municipality’s public school district, according to the bill’s sponsors. In the capital, the tax could generate as much as $160 million for public schools in Providence alone if each school in the city was taxed the maximum, or 2% of its endowment.
Dan Egan, president of the Rhode Island Association of Independent Colleges and Universities, said endowments are largely made up of donor funds, which are “tied to donor intent,” among other sources of funds. He said it’s the university’s obligation to spend it as it sees fit, and that having an endowment tax on what might be donor funds could impact local fundraising.
Egan joked, “Will donors who want to give to Rhode Island universities then just give across the border, to say UMass Dartmouth?”
Liz Clark, vice president of policy and research at the National Association of College and University Business Officers (NACUBO), said her state laws guide and protect donor agreements with institutions to care for and manage the funds needed for its charitable purpose.
Although there has not yet been a state endowment tax, the wealthiest private colleges and universities have a federal endowment tax. In a tax reform package that former President Trump signed into law in 2017, schools must pay a 1.4% tax on their net investment income if their endowment is worth at least $500,000 per student. But this is a federal tax, and the revenue generated by this tax will fluctuate from year to year depending on market conditions and investments.
NACUBO, Liz Clark wrote in an email, is “strongly opposed to the federal excise tax on endowments because it diminishes the charitable resources available for financial aid, research, academic support, public service and innovation”.
Universities were outraged by the federal tax in 2017, as were higher education institutions in Rhode Island after lawmakers outlined their plans for a local tax that would allow host cities to impose a tax of up to 2% on school endowment. But foundations have long paid a 1% or 2% tax on net investment income. From 2019, all foundations are expected to pay a standard tax of 1.39% on net investment income.
These endowment taxes are therefore similar to the way the government has long taxed private foundations.
A look at Brown and his $6.9 billion endowment
Brown, which has just started paying this tax to the federal government, generated a 51.5% return on its endowment in 2021. The university is now subject to excise tax for the current fiscal year 2022 and will be based on the gains made this year. (which will not be published before the end of this fiscal year). Brown’s endowment is approximately $796,000 per student.
Brown’s $6.9 billion endowment is by far the highest in Rhode Island and has returned more than 50% in 2021, yet is the lowest in the Ivy League. Ten years before its record earnings, in 2010 the school reported an endowment of $2.3 billion and in 2001 an endowment of $1.4 billion.
Yet Brown’s endowment is invested globally in stocks, bonds, private companies and real assets. And against 134 peer colleges and universities, as reported by Cambridge Associates, Brown’s endowment achieved rankings that are broken down (in the top 5 percent) over 1, 3, 5, and 10-year periods.
Endowment payments are used in a variety of ways and contribute annually to Brown’s operating budget ($194 million in 2021, which has supported scholarships, scientific research, Education Fund payments for Children of Providence and “many other strategic priorities”) through more than 3,000 separate accounts established for a wide variety of purposes, said university spokesman Brian Clark.
In most cases, with the exception of “unrestricted funds” – which amount to approximately $960 million – which by law must be used for the original purpose designated by the donor who made the original gift . Clark said a significant portion (about 32% in 2021) of the fund goes to Brown’s financial aid budget each year.
Clark said endowment funds are spent on essential work that benefits both Providence and the state of Rhode Island, and opposes any effort to tax the fund.
“Endowments are not kept in reserve to be drawn down occasionally or on a rainy day. In fact, raising thousands of restricted, donor-nominated funds that constitute an endowment supports a large and growing part of our operations, providing a large portion of annual revenue and enabling us to have a positive impact,” he said. he said in an email to The Globe.
He said the university injects more than $200 million in research spending into the local economy each year and has invested more than $225 million in the jewelry district. The school is also a leading employer, including for the 4,700 local residents who work there.
But Charlie Eaton, a sociology professor at the University of California, Merced, studies endowments and said there’s nothing about endowments that makes this tax “unworkable”.
“There is an argument that these institutions benefit from public infrastructure and state and local government resources. They should therefore make substantial contributions through taxes or other agreements,” said Eaton, who recently wrote “Bankers in the Ivory Tower: The Troubling Rise of Financiers in US Higher Education. “Especially if these schools are not providing education to many local students [from Rhode Island] from diverse and disadvantaged backgrounds.
In the 2021-22 academic year, 405 undergraduate students are from Rhode Island, or about 6.6% of Brown’s undergraduate students in the United States, according to Clark.
The proposed tax, led by Rep. Morales, was the second piece of new legislation that he said would “take [these institutions] financially more responsible to the communities that host them. In addition to taxing endowments, Morales also introduced a bill that would allow host cities to charge property taxes on higher education institutions that are currently tax-exempt.
Providence Councilman John Goncalves, who is a Brown alumnus and supports both bills, said that while local universities contribute in “countless ways,” their simultaneous harm is never quantified, due to their constraints and their demands on limited municipal services, the demolition of historic buildings. housing stock, the impact on rising rents and property taxes, and their historic displacement of people who once lived in the communities that the institutions seem to take over.
These proposed taxes “can allow us to compel our universities to deepen their commitments and ensure that we ease the crushing burden that our taxpayers have borne for far too long,” Goncalves said.
Do other states implement an endowment tax?
Other states have toyed with the idea of taxing large endowments in the past.
In 2018, former Massachusetts Democratic gubernatorial candidate Jay Gonzalez proposed a 1.6% tax on all private nonprofit college endowments over $1 billion. The proposal would have impacted nine institutions at the time and generated approximately $1 billion in annual revenue, which Gonzalez also proposed to use for K-12 education, but also for public higher education and public transport budgets. But Gonzalez lost to Governor Charlie Baker in the general election, and a Massachusetts staffing tax never came to fruition.
Eaton at Merced said other states, such as Connecticut, have also proposed similar taxes, but none have been enacted.
In some cases, Eaton said, proposals for such taxes have resulted in new deals between a wealthy institution and its host state or city. Brown is paying $4.4 million into two memorandums of understanding, but both are due to expire in 2023.
“For a place like Brown to be exempt [from the endowment tax], they would need to dramatically increase the number of students they enroll from disadvantaged backgrounds and from Rhode Island,” said Eaton, who gave the example of the University of California at Berkley, which has a percentage higher number of undergraduates who receive Pell scholarships than the Ivy League combined. “It could be standards [the state] could demand to be exempted.
“These schools and their leaders have a lot of attraction and influence in their communities. As such prestigious and world-renowned institutions, they avoided these taxes,” Eaton said. “Yet this [endowment] the tax is consistent with a change in the way we think about elite schools and their endowments…and how they should pay more.