Although the Ivies and other elite colleges and universities in the U.S. are financial titans, they are registered with the Internal Revenue Service as 501(c)(3) charitable nonprofit organizations. As a result, their vast property holdings are exempt from taxation in all 50 states. The rationale for this status is that higher education is an inherent public good. At least that has been the assumption under which this country has long operated.
But this argument has increasingly been called into question by events over the last few years, culminating in the headline-making responses by university presidents to a recent congressional panel. It’s clear by now that what transpires on many campuses is more indoctrination than education. As Wall Street Journal columnist Peggy Noonan put it last month (quoting CNN’s Fareed Zakaria), colleges “have gone from being centers of excellence to institutions pushing political agendas.” Since that is the case, such institutions don’t deserve their special treatment. They have not held up their end of the bargain.
Colleges can’t continue to avoid most taxes while failing so spectacularly to serve the public interest.This state of affairs may explain in part what New York State lawmakers hope to accomplish where higher-ed tax policy is concerned. A bill introduced last month by Queens Assemblyman Zohran Mamdani would eliminate enormous property-tax breaks for Columbia University and N.Y.U., both of which have expanded to become among New York City’s top-10 largest property owners. Yet, whatever their motives, lawmakers are sending a not-so-subtle message that these institutions can’t have it both ways. They can’t continue to avoid most taxes while failing so spectacularly to serve the public interest.
Sadly, New York State is an outlier. In 2018, the Tempe City Council approved an Omni Hotel and Conference Center project that would pay no property taxes because it is located on land owned by the Arizona Board of Regents, which oversees Arizona State University. Other states have made similar bargains. In many parts of the country, the best that can be hoped for at present is that officials pressure private universities to make voluntary “payments in lieu of taxes” (PILOT) or similar annual donations.
The amount of PILOT payments depends solely on negotiation, since cities have no legal leverage. This obviously works in favor of colleges and universities because of the flexibility it gives them to respond to rapidly changing events. When the payments are generous, they go a long way toward building goodwill between town and gown. Nevertheless, regardless of how much revenue is collected, it will never satisfy everyone. The president of the National Association of Independent Colleges and Universities argues that schools shouldn’t have to pay more than they already do. On the other hand, student activists at Cornell University maintain that the school’s agreement to pay $4 million annually through June 2039, with adjustment for inflation, is insufficient.
Until now, the focus of reformers has largely been on taxing endowments, which have grown by 500 percent or more in the last 40 years at the most elite private universities. The Tax Cuts and Jobs Act of 2017 introduced a 1.4-percent tax on university endowments at some very wealthy schools. A bill proposed by Senator Tom Cotton would go further by imposing a one-time, six-percent tax on the 2022 value of 10 university endowments. Endowment taxes have great intuitive appeal, but the political will to institute them broadly may not yet exist.
This brings the issue back to where we are today. What would the academic landscape look like down the line if institutions were taxed on their property? New York City serves as a model. It is estimated that Columbia University and N.Y.U. would lose $327 million in tax breaks under such a circumstance. That amount would then be distributed to the City University of New York, the largest urban public university in the country, with 225,000 students on 25 campuses throughout the city.
It’s hard to distinguish between higher education’s commercial activities and its strictly educational ones.This reform, however, is not a sure thing, as such exemptions are part of the state constitution. As a result, voters would have to approve the change on a statewide ballot. How they will vote may depend on how any change would affect their own property taxes.
Then there is the difference between private and public colleges and universities where real estate is concerned. With the exception of the University of California and the State University of New York, most public universities and colleges own less land than private ones. Why should one sector be treated differently than the other in taxation? It has been argued that public institutions deserve different taxation simply on the basis of being public, but they create a burden on police and fire (for example) that is just as heavy as their private counterparts.
Finally, it’s hard to distinguish between higher education’s commercial activities and its strictly educational ones. In North Carolina, many higher-education entities, both private and public, are engaged in land-use that is clearly commercial. For example, the Carolina Inn at Chapel Hill provides rooms for members of the UNC Board of Trustees, but it also rents out space for weddings and parties.
Or consider what is happening at Harvard University, which today is the largest landholder in nearby Allston, Mass. The land Harvard owns is not solely devoted to residence halls or science labs for students, as the Harvard Crimson has noted. It also contains hotels, for example, which have little to do with the university’s educational mission. Yet Harvard’s real estate is exempt from property taxes. To placate Allston residents, Harvard has designed its own PILOT program, which donates $25 million to the Alston-Brighton Affordable Housing Fund. But the amount is a pittance compared with what the university would have to pay if its exemption were abolished.
Change comes slowly in higher education, particularly when funding is involved. When PILOTs emerged about a century ago, they were anathema to purists who believed that colleges and universities were not businesses and shouldn’t be operated as such. Arguments to the contrary—that colleges deliver a service, have employees, and compete for market share—fell on deaf ears then. They still do today.
Higher education is at a crossroads. Marquee-name colleges and universities will survive, but even they face challenges. A spokesman for N.Y.U. said it best: Repealing property tax exemptions would be “extraordinarily disruptive” and would require rethinking “much of the way” the university operates. Higher education can complain that what is being proposed is unfair, but pressure is building for a different taxation model.
The reality is that PILOT is an anachronism. It may have been enough of a sop in the past to mollify critics, but no longer. The financialization of higher education has corroded its mission to educate students. It’s time to treat what is going on as the business it is. Anything less than that makes a mockery of the truth.
Walt Gardner taught for 28 years in the Los Angeles Unified School District and was a lecturer in the UCLA Graduate School of Education.