University Tax Arbitrage Examined By CBO

The Congressional Budget Office has a well deserved reputation for excellent analysis and for "calling them as they see them." On April 30, CBO analyzed tax arbitrage by U.S. colleges and universities. The Internal Revenue Code bars recipients of tax-exempt bond proceeds from directly reinvesting at higher rates, but the Congressional Budget Office found that most colleges and universities will do so indirectly with the $5.5 billion of muni's to be issued for them in 2010. Tax arbitrage is a pipeline directly into the pockets of U.S. taxpayers. That $5.5 billion will be spent on qualified purposes for university buildings etc., but until they are built they're invested in taxable assets at much higher rates of return. These institutions also benefit from tax-free charitable contributions for those who are well off enough to itemize their deductions, about 25% of the taxpayers. That tax expenditure has been estimated by the Joint Committee on Taxation as costing taxpayers $32.1 billion over five years FY09-FY13. I'm not against subsidies for higher education because there are long-term benefits for the economy as a whole from better educated workers and from university R&D. However, there needs to be some constraint so that we're not subsidizing NCAA Division I sports, favored high income alumni, overbuilding, and endless growth of large endowments that aren't spent on education. BusinessWeek did an excellent piece on May 29, 2008 on whether certain large endowment universities are institutions of higher learning with large endowments or whether it's more accurate to describe them as hedge funds with some education on the side. Even after the downturn, that latter definition applies to too many schools. The Senate Finance Committee looked at this issue in a December 5, 2006 hearing, but I'd be surprised if many in Congress have the political courage to take on these tax expenditures.