Crisis in Education
II: Burning Down the Barn
Rising costs and expanded plants have left the nation's universities with serious deficits. Most schools have upped their tuition, making students carry part of the load. Some colleges have cut their staffs. But a sizable dollar shortage still remains, and to meet it many universities are going directly into business.
Over 40 percent of college investments are now in business and real estate; 20 years ago the figure was 15 percent. Economists think this trend of universities into business is dangerous--a recession would be almost fatal to institutions that have invested in risky marginal firms. Businessmen complain that some universities are using their status as "charitable institutions" to avoid Federal corporation income taxes.
Educational institutions now operate enterprises ranging from dairy farms to printing plants. Each of these supposedly has to do with education; university dairy farms make better dairy farmers, and university presses print scholarly works which would otherwise go unprinted.
Some schools, however, have abused their tax-exemption privileges. Such abuse has generally taken two forms: either colleges own and operate commercial establishments that are in no way or only remotely connected with their education affairs; or schools buy properties and lease them back to the seller. Both of these maneuvers avoid the 38 percent corporate income tax because they are in the "charitable institution" category; both are legal because of the loopholes in present tax laws.
The first practice has been condemned by many college officials, and most colleges have kept out of this kind of activity. One of the best-known examples of this abuse is the case of the Mueller Spaghetti Company, owned by New York University. Though it competes directly with other spaghetti companies, this company pays no tax.
The second practice, known as the "sell lease," has been steadfastly defended by many university officers. Many businessmen have complained that the seller-lessee gains an unfair advantage because he is dealing with an educational institution and avoiding Federal taxes. Such accusations, however, would be hard to prove statistically.
Some kind of corrective legislation seems almost inevitable. But a sloppily-drawn measure would punish innocent universities as well as the guilty ones. Congress will have to be careful in wording the laws, so that it does not, in University Treasurer Paul C. Cabot's words, "burn down the barn to kill the rats."