Education

How Parasitic Universities Drain Towns All Across America

Nonprofit universities are beneficiaries of a blanket tax exemption from property taxes.

With 21,000 students, Syracuse University is one of upstate New York's flagship universities, and is considered one of the main drivers of economic activity in the region, regularly producing some of the state's top academics, lawyers, businesspeople, and politicians.

Yet the city it is located in was named the 23rd most impoverished city in America in 2014, with a third of its population in poverty. Outside the grounds of the university, the area is marked by boarded-up homes, potholed streets and public services that struggle to respond to demands (in Syracuse's brutal winters this means public transit and snowplows).

Syracuse is not unique. Many college towns face a similar situation: they house a famed and prosperous university residing in a location that is mired in poverty and poor public services. These universities largely hire skill staff who commute in from outside the immediate vicinity, and only a small portion of their wealth trickles down to the general public.

There are a number of explanations for why this happens, but one of the most important is that America's nonprofit universities, public and private, are beneficiaries of a blanket tax exemption from property taxes. This huge tax break drains communities of needed revenue, creating a perverse situation where students who will go on to make decent incomes post-graduation are benefiting from universities that pay nothing to support services in cash-strapped communities. Welcome to America's most unexpected tax havens.

Why Universities Are Exempt

Nonprofit universities and colleges are categorically exempt from the federal corporate income tax, but are also for the most part exempt from state and local taxes. The most common exemption universities get is from local property taxes.

Unlike most forms of taxation, such as sales and income taxes, property taxes are not set by arbitrary rates decided by lawmakers or even taxpayers via referendums. Rather, the property tax is levied based on the amount of spending; as localities spend, the amount of property tax needed is automatically generated to pay for the level of revenue needed.

Thus, local governments spend a lot of time assessing and evaluating properties so they can be sure they are taxing all of the taxable land. That last phrase is key—certain types of land are not allowed to be taxed per the law. The biggest category for exemption is land owned by nonprofits. Universities, hospitals and charitable organizations claim this status, which allows them to avoid property taxation.

Because of how property tax rates are generated, the more land in a locality that is nontaxable because it is owned by a nonprofit, the higher tax rates are on the rest of the general population. Thus, not only are universities getting a valuable tax break, they're actually driving up property taxes the rest of the population pays, often in some of the poorest locales in America. 

The Price Of Not Paying Up

In 2010, the Lincoln Institute of Land Policy wrote a comprehensive report looking at property tax exemptions across the states. They looked at various regions of the country and estimates that have been made of how much universities would pay if they did not have property tax exemptions.

“The endowments at Boston College, Boston University, Brandeis, Dartmouth College, Harvard, and MIT — which collectively own $10.6 billion in tax-exempt real estate — would owe $235 million per year in property taxes if they were not tax-exempt,” the authors write, citing a study from the Tellus Institute.

One of the epicenters of uproar over the university property tax exemption is New Haven, Connecticut, home of Yale University. The school's endowment is $23.9 billion and it sits on land that has been assessed as having value of $2.5 billion, all of it tax-exempt.

While future presidents and America's power elite graduate from Yale, the city of New Haven has seen its credit rating downgraded several times in the past few years. New Haven County has greater income inequality than 80 percent of counties in the state, and in 2012 a quarter of the city's residents were below the poverty line.

The tax exemptions in Syracuse are so vast that 51 percent of property is actually exempt from any property taxes, thanks to a plethora of universities, hospitals and religious institutions that are registered as nonprofits. If SU, the star institution of the city, were not tax-exempt, the university would pay $24 million annually in taxes.

The city did strike a deal with SU where it offered to pay a PILOT, or a payment in lieu of taxes, with the city on a voluntary basis. This deal amounted to only $500,000 a year for five years (in addition to a small amount of revenue from ticket sales from sporting events), a fraction of what the prosperous university would pay if it did not get a blanket property tax exemption. Interestingly, Syracuse's budget deficits in recent years level out at around $23 million.

Fighters For PILOTS

Although localities cannot legally tax universities, many have used aggressive tactics to pressure these institutions to sign PILOT agreements.

When Providence, Rhode Island was facing bankruptcy, its mayor, Angel Taveras, took a bold step, calling a news conference at city hall.

"Our taxpayers already subsidize the tax-exempt institutions in this city," Taveras said. "It takes the revenue collected from 19,000 taxpayers like the one I just mentioned to account for the $38 million in property taxes not paid by Brown University." Three months later, the university, facing intense public scrutiny that had gone national with the writing of an Associated Press article about the PILOT fight, agreed an additional PILOT payment of $31.5 million over 11 years. 

PILOTS have spread throughout the country over the past two decades, as cities and counties look to recover revenues in tough budget environments. One report found that there are now 218 localities in 28 states that have used them to get fees from universities and hospitals, in addition to other organizations chartered as nonprofits. However, the overall amount of revenues they generate remains low, estimated at “less than 1 percent of total general revenue in 165 out of 181 localities that have information available.”

Some cities have also proposed taxing what they legally can from universities, such as their students or tuition. Pittsburgh briefly floated such a plan before dropping it after a backlash.

While cities have limited ability to compel universities to agree to PILOT payments, they have one advantage: colleges rarely pick up and move, making them much easier targets than highly mobile businesses for fees.

Comprehensive Solution

The most comprehensive solution to the tax exemptions universities get would be to simply remove the exemptions. That's what economics writer Felix Salmon suggested in a 2013 piece:

The tax exemptions that universities receive cause them to behave in a manner which would otherwise be quite irrational: NYU’s expansionism, for instance, is driven in part by the fact that it can extract more economic value out of property than other actors, thanks to all property it buys automatically becoming tax-exempt. And if you look at Harvard’s balance sheet, it has for decades now been a hedge fund with an educational institution attached, the educational institution more than paying for itself in the tax exemption it confers upon the entire endowment.

The dollar value of universities’ tax exemptions is enormous — and it almost goes without saying that if we simply abolished those exemptions, and used the proceeds to spend on higher education, we would get vastly more bang for our buck. The overwhelming majority of the tax expenditures go to the richest universities — the ones who need the money the least.

Of course, taking on university tax breaks would be thorny in more than one area. You'd have to identify what sort of nonprofit you think is worth a tax exemption and which isn't. Should hospitals continue to be tax-exempt? How about religious institutions? Taking on such a battle would likely spur a huge lobbying fight, and not one that is easy to win. Many would advocate for lower-profile negotiations for PILOT agreements as a better solution.

What is clear is that the status quo is unsustainable. University towns continue to suffer from a perverse circumstance where prosperous universities graduate students who will earn high incomes while the surrounding communities suffer from budget crises and persistent poverty. In an America increasingly perturbed by inequalities, that situation cannot hold.

Zaid Jilani is an AlterNet staff writer. Follow @zaidjilani on Twitter.

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