Congress Eyes Tax Exemptions

A new report from the Congressional Budget Office questioned universities’ issuance of tax-exempt bonds, a method Harvard has employed to raise cash over the past years.

The study, released last Friday, raised the concern that the universities with large investment portfolios engage in “indirect tax arbitrage” by selling low-cost, tax-exempt bonds to finance some expenditures instead of spending endowment funds invested in high-yield assets.

The report was requested in 2007 by Senator Charles E. Grassley (R–Iowa), who has made greater oversight of nonprofits a hallmark of his tenure on the Senate Finance Committee, of which he is currently the ranking member.

Though Harvard has issued tax-exempt bonds as recently as January, which saw the completion of a $480 million bond offering, the potential implications of the report for the University remain unclear.

Suzanne Day, Harvard’s director of federal relations, said that the tax exemptions are integral to the success of American universities.

“It has helped to make our system and the research and teaching it offers the model for the rest of the world,” Day said. “Reviewing these programs periodically is appropriate.”

The University has over $6.5 billion in outstanding debt—though not all in the form of tax-exempt bonds—which it has used to finance capital projects such as Harvard Law School’s Northwest Corner Building, as well as to refinance other debt, according to a January report from Moody’s Investors Service.

On Friday, Grassley questioned whether universities’ broad tax exemptions effectively serve a social good.

“The federal government forgoes the revenue from tax-exempt entities in exchange for the social benefit from these institutions. This report raises questions for parents, students, and taxpayers about universities’ issuing bonds and going into debt when they have money in the bank,” Grassley said in a statement on his Senate website.

According to the report, nearly all of the 231 universities studied could be classified as conducting tax arbitrage under a certain definition, though their actions are permissible under current law.

No legislation is currently under consideration about the matter, and Grassley—who has previously pushed regulatory changes concerning endowment spending—indicated that the report’s findings required further thought.

—Staff writer William N. White can be reached at wwhite@fas.harvard.edu.