Massachusetts lawmakers desperate for additional revenue are eyeing the endowments of deep-pocketed private colleges to bolster the state’s coffers by more than $1 billion a year, asserting that the schools’ rising fortunes undercut their nonprofit status.
Legislators have asked state finance officials to study a plan that would impose a 2.5 percent annual assessment on colleges with endowments over $1 billion, an amount now exceeded by nine Massachusetts institutions. The proposal, which higher education specialists believe is the first of its kind across the country, drew surprising support at a debate on the State House budget last week and is attracting attention in higher education circles nationally.
The idea has prompted a range of questions, including whether it is legal to infringe upon private colleges’ tax-exempt status or single them out based on their wealth. It also faces significant opposition from the colleges and some skeptical lawmakers.
But proponents say the colleges’ vast accumulations of wealth — Harvard University has the biggest endowment at $34 billion — and their often modest contributions to their host communities justify the assessment.
“When is a nonprofit not a nonprofit because of the wealth they are acquiring?” said Representative Paul Kujawski, a Democrat from Webster and chief backer of the legislation.
“It’s mind boggling that one entity not paying taxes has $34 billion. How do you justify that?” said Kujawski, who serves on the influential House Ways and Means Committee. “When people can’t afford to live. How do you justify not taxing them?”
University leaders criticized the plan as a gimmick that would backfire by hurting institutions that are pivotal to the state.
“You’d be taxing success here,” said Kevin Casey, Harvard’s associate vice president for government, community, and public affairs. “Over time, this would put us at a real competitive disadvantage, which would drastically hurt the Commonwealth.”
Casey said it was understandable that lawmakers would search for new sources of revenue when economic times are tough. But he said the law would hurt colleges’ fund-raising and financial aid initiatives.
The plan was introduced amid a national debate over whether elite colleges are hoarding their endowments. Members of Congress, including Senator Charles Grassley, Republican of Iowa, have questioned why elite universities do not spend more of their vast reserves to defray the cost of tuition.
Amid the scrutiny, some top-tier colleges have sharply expanded financial aid offerings, often replacing student loans with grants and waiving tuition for a greater number families. At some of those schools, increases in financial aid are outpacing tuition increases.
The Massachusetts plan has also brought to the fore a more radical notion: whether certain colleges have amassed so much wealth that they no longer deserve to be tax-exempt.
In addition to Harvard, the legislation would affect Amherst College, Boston College, Boston University, Massachusetts Institute of Technology, Smith College, Tufts University, Wellesley College, and Williams College.
Lawmakers estimate that by assessing a fee for assets exceeding $1 billion, they would raise about $1.4 billion a year, a significant influx for a state budget of approximately $28.2 billion. Amounts up to $1 billion would not be assessed under the plan.
The House’s approval of a study last week was only a first step toward adopting a new assessment, but it indicated a political willingness to cross a previously sharp boundary. Most lawmakers predicted the measure would quickly wilt against the universities’ political muscle. But after several hours of debate, it became clear that the issue had gained momentum.
Senate President Therese Murray said she supports the idea of studying the issue. Murray declined to answer questions about the proposal, but her spokesman e-mailed a statement saying: “Some of these institutions give very little back to their communities. With such large endowments, they should be doing more. We’ve done some research on the endowments at some universities and other large non-profits, and we will continue to look into it.”
The plan has garnered support among those who believe many top-tier colleges are managed more like corporations than nonprofits and are not doing enough to reach out to low- and middle-income students and the communities around them.
“The pileup of wealth doesn’t match their mission of serving the public good,” said Wick Sloane, a specialist on college finances and student access who teaches at Bunker Hill Community College. “These schools have generated huge cash flows but are not doing their civic duty.”
Sloane and others pointed out that private colleges receive significant government funding for research and financial aid and that their tax-free endowments, financed by tax-free donations, represent a major public subsidy.
“The Williams indoor golf nets are paid by all of us through federal tax policy,” said Sloane, a Williams College graduate. “These institutions have brought this upon themselves.”
Yet several leading lawmakers are skeptical about the plan. Representative Kevin J. Murphy, the House chairman of the Joint Committee on Higher Education, said it was unfair to single out wealthy universities to improve the state’s finances. “You’re picking and choosing someone who has a lot of money,” he said. “Taxing the Red Sox would raise money for the state, too.”
Critics of the plan said colleges are easy targets because of their wealth and because they do not have the option of relocating.
College leaders said the measure would probably reduce the amount they would raise and spend on financial aid, and noted that most gifts to endowments are restricted for specific uses. Private colleges and universities already make substantial public contributions through taxes on payroll and nonexempt property, and educate the bulk of the state’s students.
The proposal is the latest example of state leaders searching for new sources of revenue, such as new taxes on cigarettes and on large corporations.
While states get no direct tax benefit, municipalities often try to coax more revenue from local colleges and other nonprofits when budgets are tight. Known as PILOT arrangements, these payments are voluntary contributions of money and a host of other benefits such as scholarships and volunteer work.
Boston receives $1.8 million a year from Harvard, for example, $261,000 from BC, and $141,000 from Northeastern. Many communities say colleges, which often own significant chunks of valuable land, rarely pay property taxes.
Richard J. Doherty, president of the Association of Independent Colleges and Universities in Massachusetts, which has lobbied against the assessment, said the plan would weaken one of the state’s strongest sectors. “It’s like Florida taxing oranges,” he said.
Amherst College’s treasurer Peter Shea said that the idea would be “unfortunate” and that the college relies on its $1.66 billion endowment for more than one-third of its annual spending.
Other critics said the measure would result in donors essentially writing checks to the state government. “This could provoke a real backlash,” said Matthew Hamill, senior vice president of the National Association of College and University Business Officers.