Economics

Home/Economics

Tax Reform and Higher Education

Now that the Tax Cuts and Job Act of 2017 has been passed it is possible to examine the implications for higher education.  The tax reform bill is of particular interest to higher education because from its earliest drafts, Congress, and the House of Representatives, in particular, seemed to target higher education in ways that would raise costs for families and students.  This apparent objective flies in the face the increasing need for investments in human capital for young people (see here and here) and of vocal concerns about the increasing costs of a college education (see here here and here).

The initial version of the tax reform included the taxing of tuition benefits for employees, graduate students and employees dependents.  It eliminated the deduction for student loan interest, as well as tax-free financing for private college and university capital projects.  The bill also proposed a 2% tax on endowment returns that would have affected about 250 institutions (Saint John’s University would have fallen just outside the original threshold).  These provisions naturally spurred institutions, students and families to lobby Congress, arguing that the proposed changes would make it harder for students to afford what is increasingly becoming a required credential for the middle class and for institutions to hold down tuition costs.

In the end, the outcome was not as dire as first feared, as the Senate bill, which was largely the basis for the final bill, was not as punitive toward higher education .*  The taxing of tuition benefits was removed from the final bill.  The deductibility of student loan interest was retained and only with refinancing of capital projects does the interest become taxable.  The endowment tax remained but was dropped to 1.4% of investment returns and the endowment per student threshold was raised to $500,000, which dropped the number of institutions affected to approximately 32.

From the perspective of the academy and economic research that emphasizes the importance of investment in human capital for long-run economic growth, good sense mostly prevailed.

Yet three questions remain.

    1. Why would Congress punish private institutions?  The endowment tax will only apply to private institutions despite the fact that many public institutions also have billion dollar endowments.  One of the strengths of the American higher education system is the diversity of options available to students: 4500+ institutions of higher education, of which 2200+ are four year degree granting institutions.  Private institutions range widely in size, program offerings and the nature of the student experience.  They are also among some of the world’s finest schools and draw many thousands of the best international students in the world to the United States.  While private institutions do benefits from some government grant and loan programs, they do not directly seek government revenues in the way public institutions do.  Anything that would weaken this sector seems to be cutting off one’s educational nose to spite one’s growth-focused face.
    2. Why tax endowments?  While endowments certainly confer prestige and have a significant impact in some rankings, they serve a very important role in providing financial stability in uncertain times and allow institutions to make a long run reputational/quality promise to students and faculty.  Endowments also, in normal economic times when market returns are at long-run historic levels, allow for institutions to do some combination of: covering costs that rise usually rise faster than inflation (labor costs), moderating tuition increases and increasing programming, research activity or educational quality.  In short, endowments provide an important source of revenue that allows institutions, at least potentially, to control tuition while maintaining institutional quality.  Taxing them makes this less possible. In addition, the gifts that schools used to build their endowments were given with the understanding that the returns would be untaxed, as colleges and universities are non-profits.  This new provision obviously violates that understanding and potentially impacts future giving.  Furthermore, it opens the door for taxing any charitable institution’s endowment, from less well-off schools to foundations of any kind.  This change represents a fundamental change in the way charitable organizations are treated in tax law.
    3. Have Congressional and public attitudes toward higher education changed?  This last question strikes me as the most important one.  Some commentators have observed that the provision targeting higher education are primarily political.  The Minding the Campus blog argues :

      Public attitudes toward universities have distinctly soured in recent years. What the public perceives as outrageous student behavior, feckless university leadership, and excessive tuition fees has combined with a growing hostility by Republican lawmakers angered over the large political donations and public criticism that academics have made attempting to oust them from office. Lawmakers are growing tired of feeding the mouths that bite them. Revenues raised by taxing colleges can modestly help fund other tax reductions that lawmakers want to make, which are probably economically beneficial to the well over 90 percent of the population living outside the Ivory Towers of Academia.

This hypothesis does not address why the provisions in the new tax law focus on private institutions (recall incidents at Berkley and Evergreen State), but it is consistent with the current contentious political environment.

If this interpretation of the tax provisions is accurate, the question for higher education and the public is whether these views are temporary or represent a fundamental shift in attitudes. There is very strong evidence that a well-educated populace plays an important role in long-run economic growth (for example see here and here ). There is also evidence that the changing role of technology in the economy is requiring a more educated workforce. All of which suggests that higher education has and will continue to play a central role in the prosperity of individuals, their families and the country as a whole.

To let politics get in the way of educating young people, either on campuses or in legislative bodies, will leave us all poorer.

*One other provision in the final version of the tax law that is likely to impact colleges and universities is the doubling of the standard deduction, which will cause the number of itemizing taxpayer to drop from about 30% of taxpayers to 5%. Though this change was largely aimed at tax simplification rather than targeting higher education and other charities.

Sandwiches, Social Capital and Barriers to Mobility

Image: studiogabe via flickr

One of the aspects of American life that has benefitted many generations of Americans and made this country so attractive to immigrants has been a high degree of social mobility.  Through education, hard work and fluid social structures, birth typically does not determine economic and class destiny.

In recent decades, however, there has been increasing debate about income inequality, both in absolute terms and how it might affect social mobility.  (See here  and here.)  Does increasing income inequality and more highly concentrated wealth lead to less social mobility across generations?

If social mobility has declined, and it should be emphasized that not all economists agree it has, it is important  to understand why and to consider policies that might increase opportunities for those born into disadvantaged economic circumstances.

In a recent column, New York Times writer David Brooks was reflecting on these issues.   In “How We Are Ruining America”  Brooks examines the structural barriers to mobility, like zoning and the college admissions process, but ultimately concludes that informal social barriers may be even more important in limiting social mobility.  He writes of an experience with such informal social barriers:

Recently I took a friend with only a high school degree to lunch. Insensitively, I led her into a gourmet sandwich shop. Suddenly I saw her face freeze up as she was confronted with sandwiches named “Padrino” and “Pomodoro” and ingredients like soppressata, capicollo and a striata baguette. I quickly asked her if she wanted to go somewhere else and she anxiously nodded yes and we ate Mexican.

American upper-middle-class culture (where the opportunities are) is now laced with cultural signifiers that are completely illegible unless you happen to have grown up in this class. They play on the normal human fear of humiliation and exclusion. Their chief message is, “You are not welcome here.”

Interestingly, in the comments section after the op-ed, Brooks is mercilessly mocked by many of his readers, a number of whom find the story silly, trite or condescending, though how they know what Brooks’ friend was feeling better than the author is unclear. Whether the specifics of Brook’s Sandwich Shop story resonate or not, it is hard to argue that there are not significant cultural differences across classes which potentially affect social mobility.

For many of us in higher education there is a tendency to focus on structural barriers like the college admissions process or financing education after a student is admitted rather than cultural signifiers that can prevent some first-generation students from taking full advantage of their education.

At Saint John’s and Saint Ben’s, as the number of first-generation students has grown, we have worked hard to lower the structural barriers by working with organizations that help with the college admission process and through generous financial aid packages.  But we have also tried to address some of the real social barriers that might affect the educational success of our students.  Among the issues that we are attentive to are:

1. Help seeking and mentors.  Not all new college students are comfortable with asking for help and this impedes their ability to form the mentoring relationships that are so central to college success.

2. Dress for success.  Students from professional and middle class backgrounds usually have some experience with the white collar job market, but not all first generations students do.  They may not know what is expected in an internship or job interview.  Is a jacket, tie or suit expected?  One small thing we have done at SJU is to gather suits donated by alums and make them available to students who may not have one of their own.

3. Fancy dining.  Meals are often part of the professional world and all that cutlery and glassware can be intimidating to the uninitiated.  We offer “etiquette dinners” (one of which is taught by the indomitable Sr. Colman O’Connell) for students who want to prepare for such culinary encounters.

4. Cover letters, resumes and thank yous.  Professional communication is often a challenge for millennials and Gen Z students, as they are used to social media and texting but less certain about when to put pen to paper.  Faculty and the Career Center work to guide all students in how to best present themselves in professional settings.

5. Living abroad.  Many middle class students come to college as world travelers, but first-generations students don’t always have that experience and may be hesitant to take that step into the wider world.  Our many study abroad programs are designed to meet the needs of both our more worldly students and the first time travelers.

This list is certainly not exhaustive but gives a flavor of the kinds of knowledge and experiences that are not automatic for many students and are especially likely to be familiar among first-generation college students.

While some of David Brooks’ readers might want to downplay the existence or significance of such social barriers, those who work with first-generation college students would not be so cavalier.  Certainly some individuals move over and around these barriers with ease, but not all do.

Commenting on Brooks’ column and the resulting brouhaha, Rod Dreher writes:

The point is this: in our time and place — in liquid modernity — a man [or woman] who can make and accommodate those kinds of radical shifts in perspective is a man who is enormously advantaged professionally over a man who cannot. More prosaically, a man who can walk into a gourmet sandwich shop and roll with it is enormously advantaged over the man who cannot. This is the real meaning of the David Brooks anecdote. Don’t laugh at it.

To truly achieve a society with a high degree of social mobility we must lower or remove both the obvious structural barriers to mobility but also help individuals navigate the less obvious but sometimes equally challenging social and cultural impediments to social and class mobility.

Formal education can be a start, but a more nuanced and holistic social and cultural education, often occurring outside the classroom, it necessary too.  We, along with many other institutions, try to provide that for all our students at Saint John’s University and the College of Saint Benedict.

Sustainability at Saint John’s*

July 11, 2017

The Feast of Saint Benedict, which we are celebrating today, provides a good opportunity to reflect on Saint John’s Abbey and University’s deep and longstanding commitment to sustainability, particularly in light of the ongoing discussions of climate policy in the United States and abroad.

Benedictine communities, of course, have been emphasizing self-sufficiency and sustainability for over 1500 years, though the situation for 21st century communities in an industrial era is rather different than that faced by the original monasteries in a pre-industrial world.

In 2007, Saint John’s President Dietrich Reinhart signed the American College and University Presidents’ Climate Commitment (ACUPCC).  Saint John’s was a charter signatory, and we committed to a goal of becoming carbon neutral, meaning zero net emissions of carbon dioxide, by 2035. Two intermediate goals were set at the time to ensure continued progress: reduce emissions 15% by 2015 and 50% by 2030.  We also set up a process to measure our progress toward these goals.

The ACUPCC calls for a significantly more ambitious commitment to reducing our greenhouse gas emissions than anything envisioned in the Paris Climate Accord or any other international agreement.**  We have already made significant progress toward reducing our emissions, and we continue to stand by that commitment regardless of what is happening internationally.

The most recent Green House Gas Inventory was completed in 2014.  As of October 2014 Saint John’s had reduced carbon emissions by 57.76% compared to 2008 emission levels. This reduction is the equivalent to the annual emissions of 1,363 average American households.

We were able to accomplish this level of reduction through a number of major projects. The first occurred in October 2013 with a shift from burning coal in the Powerhouse, which is the primary source of heat on campus, to burning natural gas.  This reduced emissions at the Powerhouse by nearly 60%.

The second major project has been occurring over the last eight years with a significant investment by Saint John’s in solar energy. In 2009 Saint John’s Abbey and University partnered with Westwood Renewables, a Minnesota based solar company, to create the four-acre Abbey Solar Field which, at the time, was the largest ground mounted solar array in Minnesota.  This solar field produced 3.77% of annual electricity needs at Saint John’s. With the success of this first solar array, two additional installations were constructed in 2014 and 2017, for a total solar installation of over 27 acres.  At present, Saint John’s receives 18.75% of its annual electrical needs from solar energy.  This renewable energy source has reduced greenhouse gas emissions even further since 2014, though the exact reduction will not be calculated until our next Green House Gas Inventory, planned for later this year.

Smaller projects such as LED light upgrades, induction lights in the pool area, new temperature controls on the campus and general conservation efforts have also contributed to a reduced carbon footprint. Through these and multiple other efforts we are many years ahead of the ambitious goals set when Br. Dietrich signed the ACUPCC.

Rooted in Benedictine Tradition, Saint John’s Abbey and University have always had a focus on the good stewardship of resources.  Regardless of the political and policy storms that may be raging in the world beyond Collegeville, members of our community can be proud of our commitment and efforts to reduce greenhouse gases.  Our actions communicate our commitment to protect and sustain both Saint John’s and our natural world for future generations.

Happy Feast of Saint Benedict!

Sincerely,
Michael Hemesath
SJU President

** The Paris Accord, for example, allowed each country to determine its own climate-action plan.  The United States’ plan set a goal of reducing greenhouse gas emissions by 26-28% by 2025.

Below are links for those who would like more information about sustainability at Saint John’s, including waste reduction, local sourcing of food and the Sustainable Revolving Loan Fund:

*  This letter was sent to the SJU/CSB community on 11 July 2017, the Feast of Saint Benedict.

By |July 19th, 2017|Categories: Economics, History|0 Comments