Federal Tax Policy Regarding Universities

Publication Date: February 2008

Publisher: Center for College Affordability and Productivity

Author(s): Richard Vedder

Research Area: Education

Keywords: Endowments; Grants; Higher Education; Tax Policy

Type: Report

Coverage: United States

Abstract:

The vast bulk of economic activity in the United States is taxed by the federal government. There are
exceptions carved out, primarily for charitable operations, including universities. The rationale is that
these organizations serve the public good and should not be reduced in magnitude by the deleterious
effects of taxes. Universities in particular get a wide range of tax breaks. Contributions to universities are
tax deductible. Earnings from endowments in the form of capital gains, dividends, rents, royalties, or
interest are non-taxable. Property owned by universities is rarely taxed at the local or state level, and university
fees and often even commercial activities are frequently not subject to sales taxes. Customers of
universities typically get tax breaks, such as tuition tax credits, or are allowed to create tax sheltered savings
accounts to help pay for college.
Should federal tax policy towards universities be reviewed and changed? This study is not a comprehensive
look at all the issues raised above, but discusses some of the major ones. Special attention is
placed on the tax treatment of university endowments, and what are reasonable rules that should be
enacted, if any, to assure that monies are expended in a manner consistent with the granting of tax-exempt
status. Lesser attention is placed on other issues, such as the use of tuition tax credits.