Harvard Faces New Threat of State Tax on $51B Endowment
bloomberg.com
bloomberg.com
Boston is pretty constrained in terms of available land - and its large number of expanding universities means that a good portion of it becomes tax-exempt.
The city tried to implement a voluntary payment program to invoke the non-profits’ good will - but you can see for yourself that they rarely get what they asked for - Harvard only paid 80%:
https://www.wcvb.com/article/complete-list-of-colleges-hospi...
Harvard now owns 1/3 of the Allston neighborhood in Brighton - which for decades had some of the cheapest housing in Boston. If it’s gentrifying, at least let the city capture some revenue.
They have a $16B annual budget - https://budget.digital.mass.gov/govbudget/fy23/tax-expenditu...
The VAST majority of it comes from personal income tax, sales tax and corporate excise tax. Don't think Harvards $53B endowment is even relevant compared to that budget.
These institutions in Boston are centuries old. Boston has a very finite amount of land.
Allowing organizations with a lifespan in centuries the ability to buy and hold land without limit at no cost seems like a bad long term economic policy. What is the limiting factor on their growth?
Wait, that's amazing then.
It means that the city can get money from them completely for free with no downside.
They can just keep increasing it, they will keep paying, and all fitt budget issues will be solved forever!
Until, of course, it’s pocketed just like most tax money.
Let's apply this argument to the use of a head tax. Everybody pays the same amount unconditionally with no way to avoid it, so it's free money with no downside?
No there is a downside to that.
The downside is one of redistributionary effect of having a flat tax. IE it negatively effects poor people more.
Thats a separate and unrelated downside to the other example.
This example isn't that though. The hypothetical that the other person gave, was that we could engage in taxing wealthy people and it would have zero deadweight loss (as in, those wealthy people apparently keep using the land exactly the same amount as they were before).
This would indeed be a free win, in economics.
Usually, the problem in economics of taxing wealthy people is that it puts a disincentive on productive work. This is called deadweight loss.
But in this other crazy hypothetical, we can get tax dollars infinitely for free from only wealthy people! Amazing!
To affect poor people more it would have to be affecting people. I thought it was free money because it doesn't put a disincentive on productive work?
> The hypothetical that the other person gave, was that we could engage in taxing wealthy people and it would have zero deadweight loss (as in, those wealthy people apparently keep using the land exactly the same amount as they were before).
They might keep using the land in the same way, but that doesn't tell you anything about how they were using the money.
They could intend to donate it to a charity or use it for some economically productive activity and the government may or may not be able to put it to a more productive use. US legislators' track record on monetary efficiency is rather humiliating.
There are 2 major and unrelated effects to taxes that are discussed in any basic economics 101 theory that I am happen to explain to you.
Sorry, I take a lot of basic econ theory for granted, even though I am sure most people haven't taken an introductory economics class. Thus leading to confusion.
effect 1: Changes to behavior/Disincentives on work. IE deadweight loss.
effect 2: the redistributionary effects of the taxes. IE does it harm poor people or not.
These are unrelated effects and are separate effects/downsides/benefits.
Do you understand how there can be 2 effects to a thing that happens, effect 1 which is bad, and that there can be a different effect 2 which is also bad in a different way?
You saying "Well what about this policy B that doesn't have downside number 1?!? Are you saying that there is nothing bad to policy B?!? Because you said that policy A was fine because it doesn't have downside 1? Therefore it must be that policy B is good because it also doesn't have downside 1."
The completely obvious counter response to this bad point is that policy B, which is different than policy A, has an additional downside which is downside number 2.
And policy A is good because it has neither downside 1 or downside 2.
Does that explain the misunderstanding that is apparent from your comment?
The fact that you brought up a head tax also betrays the point. Because you know that a head tax is bad, otherwise you wouldn't have used it as an example.
You know that it isn't the same. Although it still confuses me that you would bring it up, because you didn't jump to step 2 which is to explain the difference between the 2 policies.
And the next question, that actually matters, is the clear different between a head tax and a land tax. Which is explainable via basic economic theory.
The error you're making is in limiting this cost to redistribution between income levels.
Taxes don't redistribute money from the rich to the poor or vice versa. They redistribute money from the public to the government. The government might then use the money to benefit the poor -- or they might not. They could just set the money on fire without changing how much they collect in taxes or from who. They could collect 90% of taxes from the rich and 10% from the poor and then give 100% of the money to the rich.
The reason taxing the poor is worse than taxing the rich is that it causes more harm. The money means more to the poor because it affects whether they starve or can afford rent instead of whether they can invest in some new business venture. That's why I used that example -- it makes the cost much more clear, because you immediately realize that by doing it you're going to cause someone to go without.
But that doesn't mean the cost of taxing the rich is zero. New business ventures have value too -- sometimes quite significant value. So you still don't want to just tax them for no reason, or raise their taxes by an arbitrary amount regardless of whether the government's use for the money is less productive than their own.
You are ignoring the fact that we have taxes already.
Even if you think that there is other redistributionary harm to taxes, if we found some magic tax that didn't have any dead weight loss, and also only effects rich people, then we could at a minimum replace all existing taxes with that magic new better tax.
(Perhaps total taxes could even be reduced! Because there is now extra room and value created because of the zero dead weight loss!)
Therefore the point stands that if this is the case, then it would still be a massive win to find such a magic tax.
Why? If you believe land should be owned at all, an institution with a lifespan in centuries seems more likely to use the land responsibly than one with shorter-term planning. (At the least they should be less likely to e.g. dump a bunch of toxic waste for others to clean up; better, they actually have an incentive to develop it in positive ways)
The big idea is that cities do need some money.
Locking away large portions of the city’s revenue generating assets (the land) indefinitely is going to reduce options for future city governments.
We don’t know what the funding challenges of the future will be. I hope they are small - with minimal tax increases. But I think cities should have some ability to safeguard their future revenue generation.
There is an argument to fairness. Everyone should be subject to the same tax rules. Even deserving causes like educating elite children.
But overall, the biggest driver of gentrification was the campaign by Eva Webster to treat half of Brighton like it is the Back Bay. You can’t replace your windows, much less build new housing, due to https://www.boston.gov/historic-district/aberdeen-architectu... . That’s what caps the growth of housing and drives prices up.
There's also an argument for LVT applying to government land, just so that the public and decision makers are acutely aware of the rents being extracted from the public, if it's a parking lot or something like that.
How is that supposed to work, you tax the government and give the money to the public? It's not really going to affect their behavior if they're just paying a tax to themselves.
For example, if a public surface parking lot in a downtown area is owned by a city, and brings in $1M in revenue, but is taxed at $3M for its land values it's very clear what the subisidt is and who the beneficiaries are. And perhaps that might motivate the city to make better use of the lot, decide that there would be more public value as a park, or to build offices or housing on it.
Suppose you pass a law prohibiting anyone from constructing buildings with more than two stories. Well then you've just made the land artificially scarce because you need more of it to build the same amount of indoor space. Land value tax is useless in that situation because then all the land will end up with a two story building on it, they'll all be valued about the same (or someone would buy the cheapest one for the land and build a more expensive one), and you've effectively just reinvented property tax. And aren't really achieving the benefits a land value tax is supposed to bring, e.g. reduce housing scarcity by increasing the incentive to build housing, because it can't do that when building more housing is still separately prohibited by law.
Now suppose you don't do that. Anybody can build a ten or twenty story building anywhere, and there would be enough indoor space to satisfy local demand if every lot had a three story building on it. Since there is no additional tax on a tall building, people start putting them up until local rents fall to no longer cover the construction cost. Okay, working as intended. But that happens well before all the lots have a 10+ story building on them, so there are still plenty of lots available.
The question is, what happens to the other lots? Their value would be negative. You can't profitably put up a building there now that local rents are too low to cover the construction cost, but you'd still be paying the land value tax. Unless that's the endgame. Negligible land value, and therefore negligible land value tax?
For example, higher capacity for roads congestion, sewage, electricity connection etc.
At some point it almost seems like the tall building is freeriding on taxpayers.
Curious how you would address that?
The expenses of running roads and sewer are completely dwarfed by the gain in economic activity. Dense, high land value areas are the tax bases that subsidize the far less utilized and more-expensive-per-connection sprawl.
But what does this have to do with property tax? Roads can be funded by fuel taxes or car taxes, if not income taxes. Sewage and electrical systems are billed monthly to their users. Presumably a larger building will have a higher electric bill and if it doesn't it will be from devising a way of not using more electricity.
When there are extreme restrictions on what you can build, such as a maximum of two stories, then that "ability to build" has itself been turned into a finite resource; at that point both the structures and the land are economic land: finite resources that are not easily expanded. This is in contrast to capital, for which a person could theoretically build more of that asset.
This kind of comes back to the issue with valuing the land when the government is using it. Suppose they pass a law zoning that piece of land for use as a parking lot. The land value is then only going to reflect its value for use as a parking lot, since the law prohibits it from being used for anything else. Not taking into account zoning would produce a wildly inaccurate assessment of the practical value of the land, but taking it into account means that you're not taking into account the cost of the zoning restriction.
And the accounting for that is pretty weird. If you change to relaxed zoning on only a small section of land, the value of that land will be quite high because it's the only place you can build tall buildings. The reduction in regional scarcity from having a tiny number of tall buildings isn't going to outweigh the ability to build 10+ times more housing on those lots in particular. Whereas if you relax zoning over a sufficiently large area then it's the opposite. The increase in permissible density makes land in general less scarce, even in places that allow that higher density, because they're now common.
> There's the carrot of cheap purchase price of land, and the stick of high taxes if the land is being hoarded and underutilized.
The thing that worries me is that these are the opposite for the government. Creating artificial scarcity increases their tax revenue and also ingratiates them with local land owners unless the government is capturing all of the value of artificially scarce land. Which is supposed to be the theory with land value tax, but all they have to do is be off by as little as 10% and you're back to landlords lobbying the government for zoning restrictions.
And even if they get that right, when the government wants to spend money on things and they only get money when land is artificially scarce, what are they going to do?
As a general example, there are one million public schoolchildren in New York City, many who attend schools in some of the hottest real estate in the country. Requiring cities to put that on their balance sheet would mean that governments are highly incentivized to make children commute an hour into cheaper suburbs to get schooling.
Or move the school into a floor of a multi-story building which would significantly reduce its proportion of land value tax and in so doing consume less of that hot real estate and contribute less to housing scarcity.
Instead of creating new tax rules, why not remove 501c nonprofit status from all univesities or maybe from those with significant endownment or balance sheet?
Thats where the value really is. The land is just a subset of the overall assets.
Or if you want to be ambitious, just get rid of 501c for universities, period?
It's contemporaries are other not-very-american cities in NYC, Philly and DC proper. DC and Philly are cheap, NYC is dense. Boston has space and is expensive. It's an exception. Bostons tiny roads make driving impossible. It has actually history and protection worthy neighborhoods, so it a few towers do well to compensate for buildings that cannot be brought down. It has the infrastructure for amazing public transit (pre covid) and can easily support the extra density.
All of Boston's peer cities are European-esque cities in the US or European cities.
There is a good reason for that. What America calls European cities, are just called 'cities' elsewhere. Other than US, Canada and Australia....no other place has this wierd American model of car dependent asphalt sprawls.
So it is a good comparative bias.
(1) Massachusetts taxed nonprofit university endowments. (This would not directly improve services -- instead MA would cut personal income tax for the wealthy then reduce state funding for services like the legislature and governor did in 2023)
(2) In retaliation, universities built huge quantities of housing throughout the state, using their Dover Amendment exemption to avoid all zoning requirements. They would have to simulate an eligible use.
This would probably improve quality of life for communities - rents and home prices would go down due to the glut of new housing units.
That’s where I have an issue with it.
An example of countless articles:
https://www.wsj.com/articles/mormon-church-temple-spending-s...
And they pay taxes on any profits generated by their for profit subsidiaries:
https://www.sltrib.com/religion/2022/04/17/lds-wealth-spurs-...
"Churches with unrelated business income pay taxes on that income, Brunson noted, as the LDS Church reportedly does on its for-profit businesses."
So if you make profit and donate it to a charity, you can deduct it and they don't pay tax on it either. But if the charity makes a profit, effectively donating the money to itself, it does? What?
https://www.nbcnews.com/business/business-news/mormon-church...
Most churches (with the obvious exception of megachurches amongst others) do more good than harm. I feel like they are good for local communities because its one of the few places that people interact face to face, and the downsides of religion "brainwashing" probably happens more on the internet than irl.
Im ok with letting churches be.
As a child, this was how I always felt when the Catholic Collection Plate would circulate among the congregation.
>[doing good for community]
I also think that all hospitals should pay taxes — until there is some sort of single-payer universal healthcare institution.
Profit in this context means filthy lucre that the business owners have every right to spend on strippers and cigarettes and private islands. Churches are more restricted in what they can do with it and moreover tend to lose their patronage if that's what they're spending the money on, as opposed to private businesses whose patrons give money in exchange for books or food and don't really care if the owners are using the profits to play blackjack in Vegas.
> I also think that all hospitals should pay taxes — until there is some sort of single-payer universal healthcare institution.
What does that have to do with anything? Business operating expenses are generally deductible and their "income taxes" are effectively taxes on profit. A non-profit doesn't have any owners to receive profits, so they either operate with with a neutral budget or put any net income into an endowment that allows them to survive if future years are leaner or provide more services or charge lower prices.
Taxing them would only cause them to have lower quality or higher prices or go bankrupt more often.
That means churches getting to avoid taxes, unlike other not-non-profit organizations, has always been one of those things that should be resolved but hasn't because the people like breaking that law.
It's the same reasoning why "under God" should be removed from the national oath and Ilhan Omar should not be allowed to wear a hijab in Congress: Special accomodations and exceptions for religion are plainly unconstitutional.
Obligatory IANAL.
They made a special exception specifically for her on religious grounds, which is a violation of the government's Constitutional requirement to treat all religions equally as a part of guaranteeing freedom of religion.
If Congress had instead changed the rules so everyone can wear hats and head coverings that would have been fine, but that's not what they did.
[1] https://en.m.wikipedia.org/wiki/United_States_House_of_Repre...
> That means churches getting to avoid taxes, unlike other not-non-profit organizations, has always been one of those things that should be resolved but hasn't because the people like breaking that law.
No, that’s not what it means.
Now if we could just get them all to agree that funding a new minor league baseball stadium is ridiculous! Particularly with all the county funding in addition to tax rebates. <They already have a stadium that is suitable>
[1] Last local election cycle, of our 5 electable candidates THREE were decades younger than incumbent/predecesor.
On the other hand I would accept the government’s position if it were to say aloud that there goal is for all large pools of money to be reclaimed by society. Double taxing wealth is then ok because it will, eventually, redistribute the wealth. In such a moral code, a $51bn pile of gold is quite an aberration.
It is classic right versus left: natural hierarchy versus we’re all the same.
An argument on Harvard’s side is that, in the grander scheme of things, they are part of a process that generates phenomenal tax revenue. The state takes their 40% cut off the top of every $150k CS and IB graduate salary after all. Is that a good enough benefit to let us tolerate Harvard’s pile of gold?
There is a related argument that if society is to be the ultimate recipient of the majority of benefits of a university system, then it should probably be state funded. Just like roads (public) trains (ish) electricity (not any more) and food (private but subsidised).
We should be lowering government spending and lowering taxes, not trying to spend more.
These things have a target on them for pretending to be inclusive at all
But the only reason for that is because the common person & industry decided that university degrees are necessary for workplace eligibility. This is a half century aberration that will go away as quickly as it came about, and these 400 year olds institutions will continue being their isolated elite trading cards for a whole millenium
After seeing the inefficiency and incompetence of government bureaucracies for so many years, I’ve really come around to this idea. I don’t think we should have a libertarian free-for-all, because that carries its own problems. But I do think a great deal more policy could be effectuated through market-based mechanisms and private rights of action instead of clueless and corrupt functionaries.
No, you just hear more about the problems with government because they have much better accountability measures. Which is exactly why it's better for money to be taxed, and services run by governments, than these things handed over to the opaque and unaccountable NGO complex.
Personally I'm neutral on taxing the endowment. I can't get around the paywall (archive.ph seems to be having trouble with bloomberg links today) so I don't know if this is an asset tax or a tax on realized gains. Given how the institutions use their endowments (they just hoard them to game the US News ratings, which is pointless for Harvard and MIT) it's probably good.
If you somehow made a voluntary donation to, say, your local bar, the bar would still be taxed on that revenue (assuming it's not somehow a registered non-profit bar).
Because that's part of the deal those institutions basically cut with at least the city (don't know about the state) decades ago. It's pretty reasonable. They don't have to pay taxes and are arguably good for the city as a whole but, of course, they're dependent on a lot of city services. When you're as wealthy as they are, it's just sensible not to see how far you can push things in the direction of paying the least possible amount.
While I agree that university endowments are getting absurd, I also doubt that the government will make better use of them.
What’s $5B to the Massachusetts government? Almost nothing - just 9% of the budget for one year [1].
These schools should leverage what they’re good at and put real resources to increasing access to education. More OCW courses.
Or just do more research.
[1] Massachusetts enacted its FY 2024 budget in August 2023. The budget reported $56 billion in general fund spending, an increase of less than 1 percent over the previously enacted budget. https://www.urban.org/policy-centers/cross-center-initiative....)
If you want to talk the actual bill, it seems to be for a 2.5% tax on investment returns, so actually pretty small.
If 9% is next to nothing then you should have no problems parting with next to nothing of your salary. I know that this would be a one time payment, I'm not asking you to sign up to tithing to me each year.
I'll just get that next to nothing 9% from you the one time and be on my way.
Elizabeth Warren is a senator and thus represents Massachusetts at the federal level. Also, Massachusetts often has Republican governors. In fact, Charlie Baker was so good, his biggest supporters were the Democrats instead of his own party. Go figure.
2.5% of $51B is about $1.2B. I'm not sure where your $5B number is coming from.
As to where it goes -- state universities, as the article states. The 2023 budget over all the state universities appears to be around $1.27B, with the state government providing about $320M of that.
An additional $1.2B given to the state universities can probably do a lot of good, and raise the service level (and allow for expansion as well).
You seem to have misread where the funds will be directed.
https://budget.digital.mass.gov/govbudget/fy23/appropriation...
* Government doesn't really use the money, they are going to state universities and community colleges, if you bother to actually read the article.