WASHINGTON -- Education officials and experts offered suggestions to a House subcommittee Tuesday on how to regulate private universities' multibillion-dollar tax-exempt endowments, including by making them taxable in some cases because of concerns about their use.
The House Ways and Means Committee's oversight subcommittee heard testimony from a five-member panel of officials from small colleges and nonprofit groups on rising tuition costs and how the playing field can be leveled between private and public universities.
Rep. Peter Roskam, R-Ill., chairman of the subcommittee, called the hearing an "educational experience" for members and the public and said he supports alternative funding arrangements for private schools.
The hearing, entitled "Back to School: A Review of Tax-Exempt College and University Endowments," came as lawmakers have called for those universities with the highest endowments to provide a portion of the profits earned from their investments to provide tuition relief to students.
"Given families' concerns and the big tax benefits colleges and universities get from taxpayers, the Ways and Means Committee believes it is important for us to keep learning about how these schools are working to fulfill their charitable and educational purposes," Roskam said.
Before the hearing, Roskam said the panel was "deeply concerned" about rising tuition costs, even when most colleges and universities enjoy significant tax benefits. Because private schools are not subject to endowment spending requirements, they can stow away millions of tax-exempt funds each year.
Schools such as Harvard University, Yale University and Princeton University each had endowments of more than $22 billion in fiscal 2015, according to the National Association of College and University Business Officers and Commonfund Institute.
Because private colleges are classified as nonprofits, their endowments receive tax-exempt status, and often fund capital projects using tax-exempt bonds.
Mark Schneider, the vice president and institute fellow for the American Institutes for Research, told the panel he believes that endowments should be taxed, admitting it is a controversial idea.
He suggested introducing a system of taxation that only applies to the richest private schools using a tax rate of between 0% and 2%. The money raised could be transferred to community colleges, which he said receive five times less public money than some of the wealthiest private schools. Schneider cited Harvard University, which had a $36.4 billion endowment in fiscal 2015 and earned $5.5 billion in endowment returns, as a school that attracts significant donations creating what he called a "cumulative inequality."
"Private universities are getting huge amounts of public money," Schneider said. "The unequal distribution of endowment wealth leads to a pattern where more affluent students attending richer universities get much more money from the taxpayer."
Sheila Bair, president of Washington College in Chestertown, Md., and the former chair of the Federal Deposit Insurance Corporation, another member of the panel, had a different suggestion.
"I can think of no better purpose for endowment income than scholarships," Bair said.
The panel also included Jeff Amburgey, vice president for finance for Berea College, a liberal arts work college in Berea, Ky. that is tuition-free for students.
Schneider said that under his plan, schools like Berea College would receive tax deductions as a reward for being tuition-free. "But if they're spending money on lazy rivers, they should be taxed," he said.
Rep. John Lewis from Georgia, the top Democrat on the panel, said he supports federal intervention to remedy skyrocketing tuition costs, which rose 260% between 1980 and 2014, according to the subcommittee.
"In light of the decreasing state support, it is more important than ever that the federal government helps to keep open the doors to higher education," he said.
But Rep. Danny Davis, D-Ill., another member of the oversight subcommittee, warned that any modification to current tax exemptions could have unintended consequences.
"Endowments are a truly useful resource," Davis said. "Institutions deserve their tax exemptions."
"Endowments are complex by themselves," he added. "Trying to adjust tax benefits for institutions could harm other endowments --- especially those with private foundations."
Losing tax-exempt status could not only make projects more costly, but could also jeopardize the status of outstanding bonds and adversely affect donations.
In February, Rep. Tom Reed, R-N.Y., a member of oversight subcommittee, said he was working on legislation that would require schools with endowments of more than $1 billion to pay 25% of endowment earnings to working-family students, or those whose family incomes fall between 100% and 600% of the poverty line.
Under Reed's proposed Reducing Excessive Debt and Unfair Costs of Education Act, any institutions that don't comply with the rules would face increased penalties over three years. For the first year of noncompliance, they would have a 30% tax, for the second year, a 100% tax, for the third, a loss of tax-exempt status.
The bill would also include a requirement for colleges and universities to develop a cost containment plan to manage tuition expenses, Reed said in a release issued Monday. A failure to develop such a plan would also result in the loss of tax-exempt status.
"There is no silver bullet for controlling college costs but we can come together and find common ground that will protect our students and their families from skyrocketing tuition," Reed said.
At Tuesday's hearing, Reed said the issue of endowment funding is something he cares deeply about, and cited several seven-figure salaries of college athletic coaches' as well as endowment funds used for a lazy river at the University of Missouri examples of controversial uses.
The hearing comes seven months after the House Ways and Means Committee began to look into tax-exempt endowments. Lawmakers had raised concerns that these funds were being used to fund non-educational purposes such as campus gyms and recreation centers.
In February, Roskam, Senate Finance Committee chairman Orrin Hatch, R-Utah, and House Ways and Means Committee Chairman Kevin Brady, R-Texas, sent a letter to 56 private schools with endowments of more than $1 billion to find out how the funds were being used for educational and charitable purposes.
The letter asked the schools to provide answers on endowment size, how endowment is allocated to student tuition financial aid, conflicts of interest and grant naming rights to donors.
Roskam said during the hearing that he supports an increased level of transparency, such as getting the Internal Revenue Service to require private schools to disclose on their Form 990s how their endowment funds are being used.
"There's an issue there that needs to be spoken about and dealt with," Roskam said. "There's an incredible opportunity for us to do a lot of good all the way around."
