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The Haas Institute Releases a Brief on the Growth of Tax Benefits for Wealthy Private College Endowments

The paper provides new historical data on exponential endowment growth since 1977. It also estimates an average annual federal tax expenditure for endowments of $20 billion as of 2012 by accounting for a new tax expenditure overlooked in recent estimates.

APRIL 2017/ BERKELEY, CA: The Haas Institute for a Fair and Inclusive Society released a new research brief on the radical growth of wealthy endowments since 1977, and of their cost to taxpayers. Entitled “The Ivory Tower Tax Haven” the report details how endowment growth at these colleges was supported by $20 billion in annual federal tax expenditures as of 2012.

The $20 billion federal price tag involves three tax expenditures that involve tax deductible donations to endowments, untaxed endowment investment returns, and a complex new financial strategy known as indirect tax arbitrage in which private colleges use tax exempt municipal bond borrowing in place of endowment assets for capital projects. The $20 billion annual cost is an improvement on previous estimates that have not included the $6 billion cost of indirect tax arbitrage.

Eaton also argues that the federally subsidized growth of endowments contributed to new organizational inequalities in U.S. undergraduate enrolling institutions. For example, private institutions in the 99th percentile for endowment wealth per student increased their annual spending per student from endowments by 751% from $9,724 in 1977 to $92,736 in 2012. At the same time, these wealthiest schools have kept flat the overall number of undergraduates and the share of undergraduates from low-income households.

“With private endowments doing so well, one has to ask if federal tax subsidies might be better used elsewhere,” said Eaton. “For example, we could nearly double the $28 billion in federal funding for Pell Grants by redirecting the $20 billion in federal tax expenditures on endowments.

“In an era where education is a key path to higher wage jobs and an active citizenry, we need to steer our precious federal tax dollars towards expanding equity and empowerment,” says Wendy Ake of the Haas Institute's Just Public Finance Program. “The Ivory Tower Tax Haven" suggests we should ask if endowment tax subsidies could be put to better use in support of higher education for every American who wants it.”

Download the report here.

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Wendy Ake
Just Public Finance Program
Haas Institute for a Fair and Inclusive Society
Tel: 510-642-3326

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The Haas Institute for a Fair and Inclusive Society at UC Berkeley is a research institute bringing together scholars, community stakeholders, policymakers, and communicators to identify and challenge the barriers to an inclusive, just, and sustainable society in order to create transformative change.

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