Buried among the 979 pages of Congressman David L. Camp’s tax reform plan lie 42 lines that could cost Harvard tens of millions of dollars in endowment taxes. Unveiled in late February, section 5206 of the amendment details a proposal for a 1 percent excise tax on net investment income for some private colleges and universities.
Only private institutions of higher education with endowment assets of at least $100,000 per full-time student would be affected by the proposed tax. Harvard, with its $32.7 billion endowment and about 21,000 students across the University, would qualify, along with roughly 18 other institutions in Massachusetts, including five seminaries, according to Richard Doherty ’76, president of the Association of Independent Colleges and Universities in Massachusetts.
While legal experts say Camp’s plan is highly unlikely to become law, they said it deserves recognition as a substantive effort to reform the tax code and helps renew and old debate about the tax-exempt status of institutions of higher learning.
Professor of the practice of law Stephen E. Shay, a former deputy assistant secretary for international tax affairs in the U.S. Treasury Department, said that Camp deserved credit for producing a “specific and detailed” draft with “numbers that could all work together.”
“[Camp’s plan] certainly doesn’t have the support yet of the Republican caucus or is supported in any formal way by members of the [Ways and Means] Committee,” Shay said.
He said that Camp had two main objectives in his legislation—to reduce the top individual income tax rate to 25 percent, as well as to abolish the alternative minimum tax. The Joint Commission on Taxation estimated that the repeal of the AMT would cost the government more than $1.2 trillion over the next 10 years.
“Because of these huge revenue losses, the rest of the bill tried to make up that revenue,” Shay said.
Howard E. Abrams, a Law School professor who focuses on tax law and policy, said the section 5206 proposition would not be “a huge hit by any measure” and “should not be considered a policy-based decision in any serious sense.”
Noting that it only taxes a small portion of the endowment’s net investment income, “The line in the plan is based purely on revenue,” Abrams said. A nonpartisan review of Camp’s plan indicated that the endowment tax would increase revenues by $1.7 billion over the next 10 years.
Law School professor Daniel I. Halperin, who wrote a journal article entitled “Does Tax Exemption for Charitable Endowments Subsidize Excessive Accumulation?” in 2008, said he supports the endowment tax from a policy point of view. He said that large endowments are “high[ly] concentrated” in a few institutions and that the tax would curb the current “incentive and bias for accumulation” for charities that maintain funds for the future.
The University, along with peer institutions and associations, has reviewed Camp’s draft legislation. “We...are encouraged that the House Ways and Means Committee has been open to hearing about the potential impacts of its provisions on endowment-supported institutions,” University spokesperson Kevin Galvin wrote in an email.
This proposal is not the first challenge to Harvard’s tax-exempt status. In 2009, legislators in the Massachusetts House of Representatives proposed a 2.5 percent tax on university endowment assets exceeding $1 billion. Although that tax did not pass, Doherty said that there have been similar measures attempted in Massachusetts each year since then.
While Doherty acknowledged that these types of proposals are unlikely to become law in the near future, he said that they should remind higher education institutions to not take their tax-exempt status for granted.
“They need to consistently communicate with legislative leaders and members about the reasons they have a tax exemption and the public goods that they provide,” he said.
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