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Cambridge Seeks to Tax Earnings on Endowment

By Ray C. He

If members of the Cambridge City Council have their say, major Cambridge universities such as MIT and Harvard will be required to pay a tax on their endowment earnings.

On Sept. 12, the council sent a policy order for an endowment tax to a special committee including the nine councillors and certain city staff, according to the City of Cambridge Web site. A hike in property taxes last year put pressure on the City Council to take action.

The universities are not operating in a way intended for non-profit organizations, said Timothy J. Toomey Jr., a Cambridge city councillor and Massachusetts state representative.

“Universities are not not-for-profit anymore,” Toomey said. “Harvard has an endowment of 25 billion dollars — anyone with an endowment of 25 billion dollars should be paying a little more in taxes.” While MIT’s endowment is not as big, “they should still be paying more” to meet their “fair share,” Toomey said.

If the policy order passes through the committee, the city would submit a “home rule petition” that the Massachusetts State legislature would need to grant for the endowment tax to be levied.

MIT not completely not-for-profit

MIT does pay taxes on its non-academic, investment and commercial property, said Sarah E. Gallop, co-director of government and community relations. In fact, “MIT is the largest taxpayer in Cambridge.”

MIT paid about $23.5 million in property taxes for the 2004 fiscal year, according to the 2004 Town Gown report.

In addition to the property tax, MIT gives Cambridge a “payment in lieu of taxes” (PILOT) of about $1.2 million, increasing by 2.5 percent each year, according to the report. The current PILOT amount was negotiated in 2004.

Traditionally, “there is an understanding and acceptance by some schools that they rely on their host municipalities for some services,” Gallop said. “We rely on Cambridge for the fire department, for fire safety.” Out of this understanding came PILOT, which allows universities to share the burden of city costs.

Even with the property taxes that MIT pays and with money from the PILOT program, “if the property were assessed at the fair market value, they would pay a far greater amount,” Toomey said.

“Harvard made a 19 percent return on their endowment last year,” Toomey said. “All we’re asking is for one percent of that.”

The policy order states that the city would be allowed “to implement an endowment surcharge to be assessed at the rate of 1 percent of the annual interest in excess of $1 million dollars earned on any endowment of any organization which has more than five percent of its total property in Cambridge listed as tax exempt.”

“This is the very first step for a City Council interested in the possibility of a home rule petition,” Gallop said.

Endowment tax not only solution

Other policy orders were also passed to the property tax committee. “There are several different pieces that have been referred to the committee, and we’re trying to prepare a response or a package of responses for the state legislature to try to make local taxes more equitable,” said Brian Murphy, a Cambridge city councillor and chairman of the Special Committee on Property Taxes.

“We’re trying to figure out what we can do to make the system work better,” he said. “Over the years, there has been a great deal of frustration with the failure of non-profits to pay what is their fair share of the burden in the communities,” he said. In Massachusetts, “we don’t have the local option sales tax or local option income tax, so we have to rely on property taxes that exclude the non-profits,” he said.

A solution would be to “have a local option payroll tax because that would go after the universities in their role as employers rather than as universities,” Murphy said.

Additionally, the PILOT agreements may be renegotiated, and Cambridge needs a more predictable source of income from the universities that “doesn’t go offline,” Murphy said.

The new push for more taxes does not represent a drift in community-university relations, Murphy said.

“This just came out of last year’s property tax revaluation” and as property taxes have increased, the universities should see their share increase accordingly, he said.

“I think the city and the universities have very good relations and this is just an area where there’s some disagreement,” Murphy said. “Cambridge does benefit greatly from the universities, and the universities benefit greatly from the city,” Murphy said. “Many students stay and eventually become residents,” he said.