Connecticut: Lawmakers are considering taxing Yale's large endowment fund

As has been widely reported recently, Connecticut faces a very difficult budget situation. In February, we recapped Gov. Dannell Malloy’s Feb. 3, 2016 state-of-the-state speech in which he painted a picture of tough times, in the form of a $72 million deficit in the current fiscal year, that require the state to adapt to reality. Just three weeks later, the Connecticut Mirror revealed that analysts had reduced projected income tax receipts by hundreds of millions of dollars for this fiscal year and next, in light of budget projections by the Office of Fiscal Analysis that anticipate a $266 million deficit.

In what could be considered a desperate measure for desperate times, the general assembly is now considering Raised Bill No. 413, An Act Concerning a Tax on Certain Endowment Funds of Institutions of Higher Education. Under the act’s terms, independent institutions of higher education that have one or more endowment funds, whose aggregate sum is $10 billion or more at the end of the taxable year, would be subject to the Unrelated Business Income of Nonprofit Corporations' tax. This would take effect on Jan. 1, 2017, and be applicable to tax years commencing on or after that date.

A related item is in the works, Raised Bill No. 414, which would tax the property of certain colleges where certain activities, like rents or other payments, generate at least $6,000 of revenue in a taxable year.

Not surprisingly, Connecticut’s foremost higher education institution, Yale University, is opposed to both. On March 22, 2016, Richard Jacob, Yale’s associate vice president for federal and state relations, submitted written testimony urging the Finance, Revenue and Bonding Committee to reject both measures. Jacob’s argument focused on all the good that Yale, as the fifth largest employer in the state and the largest in the city of New Haven, does for the state and local communities. With 13,000 employees, it has an annual budget of $3.2 billion, including $2 billion in wages and benefits. In addition, Yale voluntarily pays New Haven and West Haven more than $8.2 million and $527,000 annually, respectively.

Jacob also described the university’s strategic investments in commercial development and residential neighborhoods, among other things.

Characterizing the pending legislation as “a specific attack on independent higher education” that is “plainly unconstitutional,” Jacob cited a Supreme Court case from 1819, Dartmouth College v. Woodward, which established “that a university charter is a contract protected from impairment by the State under the Contracts Clause of the U.S. Constitution.” And although the legislation does not mention Yale by name, Jacob explained that “singling out one institution is bad policy, especially when that institution has been a strong partner with its hometown and its home state. The legislature should endorse partnership and so should reject these proposed bills.”

BloomerbergBusiness pointed out that because of the language applying the tax only to institutions with funds of more than $10 billion, Yale is indeed the only institution in Connecticut that would pay the new tax. Its $25.6 billion endowment fund, second in the country only to Harvard’s $37.6 billion fund, earned $2.6 billion in investment gains in fiscal 2015. Nevertheless, other universities and colleges may have reason to worry. In an effort to learn more about the impact of private schools’ tax-exempt status on the cost of higher education, federal lawmakers from the U.S. Senate Finance and House Ways and Means committees sent a joint inquiry to 56 private schools with assets of more than $1 billion, asking about their endowments.

Industry has also taken notice of the legislation, and at least one firm does not like it any more than Yale does. For example, Susan Froshauer, the president of Cure, which is the association for Connecticut’s bioscience industry, asserted that the bills would “undermine the ability of universities to conduct fundamental medical research that is the basis for most if not all of the bioscience startup companies in Connecticut.” Froshauer further contended that “[a]ny proposal to tax Yale’s endowment, or to revoke its property tax exemption, would ultimately reduce the resources available to support pioneering research that leads to the companies that will develop the cures and provide good, high-paying jobs in New Haven.”

A more recent Connecticut Mirror article noted that lawmakers who support the bills say that they are “just forcing the Ivy League school to be a good neighbor.”