To Tax or Not to Tax (University Gifts)...

by Daniel Bennett

That is the question being given serious discussion at many colleges. Faced with a decline in revenues and endowment value vis a vis the current recession, many colleges are pondering whether to add a front-loaded "gift tax" to all new university gifts, according to this morning's Chronicle.

The "tax rates" being considered range from 3 to 6.5 percent of the total gift, on top of the endowment management fee. The rationale given for such a proposal is to preserve jobs that might otherwise need to be axed. It appears to be an attempt to sidestep having to make tough decisions to reduce costs internally by downsizing the blooming bureaucracy that has reduced the productivity of our nation's colleges in recent years. This decline in productivity is verified empirically in an upcoming CCAP study on the higher education labor force. The figure to the right is an excerpt from the study that shows the decline in the number of FTE students per FTE "back office" employee, which include administrators, managers, executives and other professionals.

I suspect that at least some potential donors will view such policies as exorbitant and choose to donate their scarce resources to a more fiscally responsible charitable organization, which will derive the donor with the same philanthropic fulfillment and tax deduction. A gift tax, coupled with the Obama administration's proposed reduction in the deductible rate for charitable donations, will create additional hardship for fundraising activities for universities in the future.