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Chuck Grassley's Crusade to Tax University Endowments

What should higher education expect from the new Senate Finance Committee chair?
Senator Chuck Grassley, pictured here in January of 2017.

Senator Chuck Grassley, pictured here in January of 2017. About a decade ago, Grassley started asking why, in light of the tax-free growth of many university endowments, college tuitions have spiked so dramatically.

There are innumerable reasons to scrutinize the newly appointed chairman to the Senate Finance Committee. Namely, it's a uniquely powerful position with a long reach into the federal government's strategies for taxation and revenue generation. And when Chuck Grassley (R-Iowa) assumes the role for the 116th Congress, few entities will pay closer attention to his every move than the nation's wealthiest colleges and universities.

About a decade ago, Grassley started badgering the financial gatekeepers of the ivory tower with what was surely seen as a meddlesome question: Why, in light of the tax-free growth of many university endowments, has tuition spiked so dramatically? The solution he bandied about raised administrative anxiety to an even higher level: Universities should be regulated, he suggested, much as private foundations are, with 5 percent of its income having to be distributed rather than reinvested in the endowment.

Politically speaking, the issue had a hard time gaining traction. Grassley initially turned his attention to the matter in 2008, when it was revealed that 76 universities had endowments over $1 billion. In response to what one legal scholar called a "colossal reserve of wealth," the Senate Finance Committee, of which Grassley was then a ranking Republican, requested detailed information from the nation's 136 richest schools. The left saw a witch hunt at work.

But what Grassley learned over the ensuing years raised some eyebrows in the committee room. To cite just a few examples, Harvard University's $32 billion endowment in 2011 generated a 21 percent return on investment (today it's at $37 billion with a 16 percent return); Yale University's $19 billion endowment reached a 22 percent return on investment in the same year (today it's $29.4 billion with a 13 percent return). The other 74 universities in the billion-and-over category saw similar gains, proportional to their investments.

At the same time, tuition costs have exploded. Between 2010 and 2011 the price tag for a four-year private college (non-profit) rose by 4.5 percent, and by more than 8 percent at public schools. Since 1986, the cost of higher education has gone up by 500 percent. On the other hand, as endowments have been expanding—again without taxation on its returns—university administrations have been proliferating alongside their salaries. Leading the expansion in administrative salary bloat were university presidents, whose median salary—for private schools—spiked 5.6 percent to $436,000 between 2012 and 2013 alone.

Despite the obvious concerns that these figures highlight—ones that would seem amenable to Democrats—Grassley's initial effort to turn a spotlight on the connection between university endowments and college tuition faltered as the 2008 recession sunk in. During the Obama years, Vice President Joe Biden and Secretary of Education Arne Duncan gave rising tuition costs articulate lip service but, overall, were happier allowing university endowments to rebound without the specter of taxation hanging over their heads.

But now, with the initiation of the new Congress, and the recession over, Grassley's finance committee will almost certainly revive its investigation into the matter. The nation's wealthiest universities should almost certainly expect to face some sort of endowment-related legislative reform. But what exactly will it look like?

A number of general responses are possible. Grassley and his gang will likely abandon the effort to equate higher education with private foundations—legally this move, with so many wealthy public institutions, could be a mess. But the Senate Finance Committee could suggest imposing mandatory distribution of endowment returns, taxation on endowment income, and better transparency about endowment spending.

There is, for the record, one legislative precedent to build on. In 2017, Congress took the mild step of imposing a 1.4 percent flat tax on endowment incomes. But this policy—as with the aforementioned options—lacked something critical: It was in no way linked to increased tuition costs.

According to Edward Zelinski, a professor of law at the Benjamin N. Cardozo School of Law at Yeshiva University, and author of The Ownership Society: How the Defined Contribution Paradigm Changed America, this might change. A Grassley-dominated finance committee will, he writes, likely "consider changes to directly regulate the tuition levels of endowed educational institutions."

The most precise explanation of what such a change might look like has come from Matt Willie, writing in the BYU Law Review. On the issue of what universities can expect with Grassley in charge, Willie argues that the most viable solution will "link an endowment tax to tuition rates."

Basically, as Willie lays it out, the government would tax the endowment income of wealthy universities only when "the endowment grows during the same year that tuition at the school increases by more than inflation." The upshot is both simple and elegant: Universities can continue to avoid taxation on endowment income as long as their tuition does not exceed inflation.

As a political move, this solution threads a needle. Namely, it defuses the left-wing criticism that Republicans are trying to gut American universities—long seen as bastions of liberalism—of their power by making them more accessible through government-initiated reforms.

Whether the next Congress will see it that way is anyone's guess. But Zelinski, for one, is hopeful. Acknowledging that faction is inevitable with a Democratic-led House and a Republican Senate, he writes, "the tax treatment of higher education endowments ... could be one area where bipartisan agreement is achievable [in Congress]."