Taxing and Tuition: A Legislative Solution to Growing Endowments and the Rising Costs of a College Degree

I. INTRODUCTIONColleges and universities in the United States have enjoyed ballooning endowment growth in recent years, leading to colossal reserves of wealth at the most elite institutions. In September 2011, for example, Harvard University announced that its endowment was worth $32 billion after experiencing a 21% return on investments during the 2011 fiscal year.1 Likewise, Yale's endowment grew to $19.4 billion on returns of 22% over the same period.2 And while Harvard and Yale are easily the nation's richest schools, they have not been alone in their good fortune. At the end of the 2011 fiscal year, seventy-three additional higher-education institutions in the United States had endowments worth more than $1 billion.3At the same time, the cost of a college degree has continued to spiral higher. From 2010 to 2011, tuition and fees rose by 4.5% at private, nonprofit colleges and more than 8% at public institutions.4 These figures are part of a thirty-year trend of steady increases in the sticker price of higher education;5 since 1986, tuition has grown by nearly 500%, far outpacing inflation6 and creating fears that college may soon be "out of reach for most Americans."7These fears have prompted commentators to propose numerous endowment-related legislative reforms.8 Most have focused on mandatory endowment distributions,9 taxes on the endowment income of wealthy schools,10 increased transparency from universities regarding endowment use and accumulation,11 or changes to donor tax laws.12 Despite widespread academic criticism of traditional justifications for endowment accumulation,13 these proposals have largely been met with skepticism by scholars who fear, among other things, potential unintended consequences.14 Chief among these fears is the concern that endowment regulation would actually encourage tuition increases.15A solution left unaddressed in the legal literature and largely ignored by policymakers, however, is to link an endowment tax to tuition rates. Under such a proposal, the government could tax a university's endowment income when the endowment grows during the same year that tuition at the school increases by more than inflation. Accordingly, as long as tuition increases do not outpace inflation, universities could accumulate endowment income tax-free.This Comment examines this policy proposal in detail. Part II begins by discussing the rising costs of college tuition and the growing concern over educational access. It then offers a brief introduction to university endowments and discusses the most commonly recognized justification for their existence and growth: intergenerational equity. This justification and its outgrowths have been the subjects of significant academic criticism, and scholars have suggested new theories for endowment accumulation that cut against normative arguments for awarding universities tax-exempt status. Part III discusses the advantages and criticisms of the most commonly debated policy proposals related to university endowments. Unfortunately, all of these proposals suffer from the same defect: they are unlikely to significantly impact the affordability of higher education.Thus, in Part TV, this Comment argues that tying an endowment tax directly to tuition increases represents a unique solution. Unlike other endowment-related measures, such a tax would discourage tuition hikes without encouraging wasteful spending. Perhaps more important, it would not necessarily discourage endowment growth or require cuts to current levels of funding for other important academic pursuits, such as research. This would leave room for universities to pursue traditional goals of intergenerational equity while still being closely tethered to their tax-exempt purposes.II. THE CONTROVERSY OVER ENDOWMENTSA. Rising Tuition and the Institutional-Wealth GapResearchers have tracked movements in tuition for approximately thirty years.16 During that period, published college prices have consistently increased more rapidly than prices for other goods or services. …