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AGB Alert: Letter to Congress on Tax Reform

Nov 14, 2017

Dear Chairman Hatch, Ranking Member Wyden, and members of the Senate Finance Committee:

We write on behalf of the member governing boards of America’s public and independent colleges and universities to express our concern over the Senate version of H.R. 1, the Tax Cuts and Jobs Act. Although the Senate version appears to preserve current tax code benefits to students and institutions, university and college boards must continue to raise important concerns over other provisions in the bill that will negatively impact those same students and institutions—specifically provisions that will lead to declines in charitable giving, the repeal of state and local tax (SALT) deduction, a new excise tax on endowments for several colleges and universities, changes to the tax provisions on unrelated business income, and the removal of advance refunding of bonds.

Our organization, the Association of Governing Boards of Universities and Colleges (AGB), is the premier organization centered on governance in higher education. AGB provides leadership and counsel to member boards, chief executives, organizational staff, policymakers, and other key industry leaders. In serving over 1,300 member boards representing 1,900 colleges, universities, and institutionally related foundations that are comprised of over 40,000 board members and senior administrators, AGB strives to continuously advance the practice of governance by designing and encouraging best practices and advocating nationally on issues that affect higher education.

Governing board members serve as fiduciaries for our nation’s colleges and universities, entrusted with the legal authority to establish and oversee all major policies, including oversight of institutional mission, academic quality, and financial health. This means that boards have responsibilities for the stewardship and protection of their institutions’ human, physical, and financial assets, and hold these assets in trust for both current and future generations. Unfortunately, provisions in the Senate’s version of H.R. 1 would negatively affect several constituents of higher education, particularly students and employees, and nearly every aspect of college and university mission, finances, and operations. As such, responsible fiduciaries cannot support the Finance Committee’s version of H.R. 1 as currently written, and therefore AGB must oppose it.

The provisions that will have major negative repercussions for colleges and universities, and that we oppose, are these:

Charitable Giving

The Senate bill doubles the standard deduction for individuals and couples. While many would benefit, this change would also decrease the number of taxpayers who itemize from 30 percent of taxpayers to just 5 percent and reduce the value of the charitable deduction for most individuals and families. The Indiana University Lilly Family School of Philanthropy found that increasing the standard deduction and lowering tax rates could result in as much as a $13 billion reduction in charitable gifts. By diminishing incentives for private citizens considering charitable gifts and donations to colleges and universities, the Senate version, much like the House legislation, could lead to a significant drop in giving. For both private and public colleges and universities, private donations are often crucial to funding operations vital to institutional mission.

Endowments

The Senate bill proposes an excise tax on investment income for private college and university endowments with assets valued at $250,000 or more per student. While limited to roughly 70 institutions, this tax would significantly impact how these institutions spend endowment funds and would set a dangerous precedent for taxing institutional endowments in the future. Endowment funds are used to support student financial aid, scientific research, and other critical mission-related activities. Under the new provision, large amounts of endowment dollars would be redirected to the U.S Treasury and away from the hardworking students who need it.

Repeal of State and Local Tax (SALT) Deduction

The elimination of the deduction for state and local taxes could have a significant impact on state budgets. The state and local tax deduction assists state and municipal governments fund public services including funding for public colleges and universities. Many localities, already facing budget constraints, could also cut higher education funding that supports grants, tuition assistance, or other forms of direct assistance to students. State support in higher education has been declining over the long-term and this provision will likely exacerbate this issue, raising the cost of college for students and families.

Revised Taxes on Unrelated Business Income (UBIT)

Colleges and universities would be subject to additional UBIT obligations under the Finance Committee’s proposal for a range of new services and activities, including: treating name and logo royalties as unrelated business income and computing unrelated business taxable income separately for each trade or business in a so-called “bucketing” fashion. The licensing income at some schools goes directly to academic services and student aid, which will, therefore, reduce money available for these activities. The “bucketing” proposal, which requires all losses and gains to be calculated by activity rather than in the aggregate (something not applicable in corporate taxation), would result in disparate treatment for nonprofit organizations by holding them to standards and rules not applicable to corporations.

While colleges and universities should pay taxes on unrelated business activities not related to their educational, research, and community service missions, they should not be held to special standards that result in a higher tax burden that is not imposed on any other sector or industry. In addition, recordkeeping and reporting guidelines must be fair and not unduly burdensome. Unfortunately, these provisions will result in increased costs and regulatory burdens on many colleges and universities, which would mean fewer resources that can be devoted to student financial aid and other educational resources.

Tax-Exempt Bonds

While we are pleased that the Finance Committee bill drops the House provision that denies private institutions access to the tax-exempt bond market, we are concerned that the Senate bill would disallow the use of advance refunding of bonds for both public and private colleges and universities. The ability to refinance existing debt through advance refunding enables institutions to significantly lower the costs of needed capital projects.

Reforming our national tax system is a noble endeavor, and we thank you again for the improvements you have introduced to the House version, especially in regard to student-based tax incentives. Unfortunately, the Senate version of H.R. 1 still contains provisions that will prove detrimental to our nation’s students and families and will undermine colleges’ and universities’ financial stability. Therefore, the bill cannot merit the support of the Association of Governing Boards.

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