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New tax bill is harmful to many aspects of Swat life

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Currently, the nation is engulfed in a political and economic debate about the new tax bill that the Senate passed at 2:00 a.m. last Saturday. Though there are still two different versions of this controversial bill in Congress, both have serious consequences that affect the college’s budget, students, employees, and alumni due to an excise tax, repeal of the college’s tax-exempt status, and a tax on graduate students’ stipends.

One of the main parts of the bill that affects the college is the excise tax on college endowments. In the House version, the tax will apply to colleges that have an endowment of $250,000 or more per student. The Senate version has raised this to $500,000 per student, and according to vice president for finance and administration Greg Brown it applies to 27 colleges, including Swarthmore.

Economics professor John Caskey made some rough calculations of the financial effect of this tax. Since excise tax is 1.4 percent of the college’s earnings from the endowment — approximately $100 million per year — the college would have to pay $1.4 million every year. This money would be cut from the college’s operating budget, which is $163.3 million for 2017-2018. Over half of the college’s budget comes from endowment income.

Brown noted that one million dollars is about 20 scholarships, assuming they are $50,000 each. Caskey estimated that this kind of cut to the budget would be equivalent to letting about five professors go, which would also mean the loss of 16 courses per year.

“This would hurt students,” Caskey said. “Obviously, your selection of courses is smaller and the class size gets larger.”

According to Caskey, this could potentially affect prospective students’ college selections of colleges, but since the college’s competitors are facing the same tax, it will likely not make a difference. While the cuts to the budget would still be significant, Caskey said it is unlikely that the college would cut academics that severely.

The second part of the bill that would affect Swat is the removal of the tax-exempt status of colleges’ bonds, which is only present in the House version. This part of the tax plan would not only apply to wealthy, elite colleges but every college and university in the country. This means that if the college borrows money at an interest rate of 3.0 percent without tax exemption, it would effectively be borrowing at a rate of 3.5 percent due to the added tax premium it would have to pay. Because borrowing would become considerably more expensive, the college’s construction projects would be affected.

“That costs a lot of money,” Brown said, referring to the higher borrowing rate. “That’s serious for us.”

Unlike the excise tax, which would take effect immediately, the consequences of the change of the tax-exempt status would take effect gradually because it only applies to new debt that the college will acquire. According to Caskey, the college’s current debt is $250 million.

“If you assume [the debt level] continues, the loss of the tax-exempt status of the college’s bonds would probably raise the cost of the college’s borrowing by about half a percentage point … Over time, gradually, that would end up costing the college about $1.25 million per year,” Caskey said.

If the House bill passes, this cost would be in addition to the $1.4 million per year paid on the excise tax on the endowment.

The bill also increases the standard deduction, which is an amount of money that reduces a person’s taxed income if they donate money to charity. Caskey explained that currently, the standard deduction is $6,350 ($12,700 for a married couple), but under the new law, it would be raised to $12,000 per person ($24,000 for a married couple). Because of the higher standard deduction, people are less likely to itemize their donations when filing taxes. This reduces the incentive for people who would otherwise donate to give gifts to the college. Caskey noted that the college “is likely to see a decline in donations.”

Though he could not say for certain what the loss of money would be, he added that it is concerning to the college.

The combined effects of these parts of the bill would significantly impact the college’s finances. Over time, 10 to 12 years from now, with the combination of the excise tax and the loss of tax-exempt status together, there would be about $2.5 million cut from the budget each year. Caskey suggested that the college might have to cut from academics, libraries, sports teams, or the Dean’s office. Questions have also been raised about cutting financial aid from students.

“The college doesn’t want to do that, and they have a need-blind policy, but there are

other ways they could do it while maintaining need-blind,” Caskey said, though he added, “I don’t think the college is going to do that sort of thing … They could but they wouldn’t.”

However, it is still undecided where the cuts would apply.

Brown said, “I haven’t made any specific recommendations on that yet … If we’re looking at several million dollars a year on a $160 million a year budget, we would have to look to slow down some of the things that we’re doing. And based on our institutional priorities, make reductions in the budget … Right now, I think we’re running fairly lean, so any cuts I think will be seen and will hurt.”

According to Brown, Swat currently gives its employees benefits that includes money for their children’s or their own college education, but under the new bill, that money would be taxed.

“That becomes taxable income for [employees] instead of a benefit. The word I would use for that is unfair, and I think it goes against the values of our institution,” Brown said.

A highly controversial portion of the tax bill is the new tax on graduate students’ stipends, which has caused walkouts at universities across the country. This tax would affect recent Swat graduates who are pursuing their Ph.D.s or any current Swat student who would like to obtain a Ph.D. in the future.

Raehoon Jeung ’17, who is getting his Ph.D. in bioinformatics and integrative genomics at Harvard Medical School, said many graduate students are concerned about this change. Currently, graduate students receive a stipend for doing work, but it is not equivalent to a job because students don’t actually see the money and don’t get any significant savings from it.

“From what I’ve heard, we would be paying around $10,000 extra tax per year if the bill passes. Then, I will no longer be self-sufficient … If the analysis that I read in articles are accurate, the impact is very severe. We would go from being barely self-sufficient to being reliant on loans or help from parents as in college,” Jeung said in an email.

Jeung also said that had he known about the tax bill before attending graduate school, it would likely have changed his mind about getting a Ph.D., and he believes that it will influence students who would have otherwise attended graduate school.

“With this new plan in effect, the opportunity cost for choosing to go to graduate school [for a Ph.D.] is too high. During the 5-6 years, we are foregoing chances to earn more money, and now we would also be accumulating debt,” he continued.

This development is concerning to the college’s administration as well.

“For our government to basically say that furthering your education and furthering our ability to create the scholars who are going to come up with the solutions for future problems is very short-sighted,” said Brown. “It will discourage smart people from going to graduate school, who should go to graduate school. And it will discourage creativity and entrepreneurship.”

The college administration views the new tax bill as a serious threat to the college’s educational mission. On Nov. 13, President Valerie Smith sent out an e-mail to students outlining the damages that the new bill would inflict upon the college.

In the letter to politicians in Washington that she added to the e-mail, President Smith wrote:

The cumulative result of these tax changes will be losses in jobs and national economic health; educational access and quality; innovation and discovery; and American global competitiveness … This will directly harm students and their families.”

For many students on campus, the larger aspects of the bill would affect their family’s finances. According to Brown, about one-third of students from the class of 2021 who receive financial aid — 56% of the class — come from families who earn $60,000 or less per year.

“Almost a third of our financial aid students come from families who are in that lowest income bracket. And yes, I think they would be harmed by this bill,” said Brown.

He also cited another part of the House version of the bill that is damaging to Swarthmore students’ ability to pay back loans.

“Student interest is no longer deductible, so if you borrow for your education, you currently get a tax deduction for paying back that loan. Under this proposal, you wouldn’t get that,” he said.

Within student political groups on campus, there is also opposition the bill, particularly on the part of the Swarthmore Democrats, which held a flash phone bank on Tuesday to contact Pennsylvania representatives in Washington.

“The tax plan is ridiculous,” Abby Diebold ’20,  “Basically the entire Democratic party is aligned with Swat Dems in this instance.”

Diebold also said that while she wouldn’t characterize the parts of the bill such as the excise tax that target wealthy, elite schools like Swat as “anti-intellectual,” the effects on higher education are a problem.

“I think that our biggest issue with [the bill] is that academic institutions are the only corporate-type organization that is not having their taxes cut … taxes on the endowment and higher institutions are going up, and that doesn’t make any sense,” Diebold said.

Jorge Tello ’19, the new president of the Swarthmore Conservative Society, said that though there has not been a formal meeting to discuss the club’s position on the bill, opinion among the members seems to be mixed. Some, like Tello, oppose elements of the bill such as the excise tax while some support it in its entirety. Tello said that he doesn’t see enough strong arguments for the excise tax.

“Personally I’m against it as well,” he said. “I think my main concern with it is that I don’t understand what the main purpose of taxing endowments is because … I think there’s better ways to achieve [helping low income students], like possibly setting a percentage of the endowment that they have to spend on [those students]. Because that was one of the main arguments for it, that it would use more of its endowment on helping low income students.”

Caskey said that though he is personally against the excise tax, which specifically targets wealthy schools, he can’t find a strong enough argument against it.

“We’re an extremely privileged place … Is it unfair that we have to reduce our privilege?” he said.

Though it is true that the college is a privileged institution and will remain privileged compared to other colleges, there are other elements of the bill, particularly the House version, that will have a significant effect on the college’s finances as well as on current students and alumni. If the bill passes with any of these changes to the taxation of higher education, Swarthmore and its students will likely have to face financial problems, whether they are personal or in the college’s budget.

Students put financial literacy to use in volunteer work

in Campus Journal by

Juniors Jake Moon and Tessa Rhinehart spend their free time doing other people’s taxes. The two, along with other members of the Swarthmore Volunteer Income Tax Assistance club, go into neighboring towns to help low-income residents fill out their tax forms and reduce their tax rates. Through this volunteer experience, students get the opportunity to give back to the community and learn a valuable life skill.

An IRS sponsored program, VITA provides free service to families and individuals in Chester, Holmes, Darby, Upper Darby, and Borough. The group recommends programs to their clients according to their needs. For families below a certain income, the group can help clients receive tax credit and even refunds.

“Most of the people who we provide our services to are elderly, and they can’t really do the taxes themselves with something like Turbo Tax,” Moon said. He asserts that there are many advantages to choosing VITA over an online service; families they assist receive individualized help from a real person rather than a computer. “There are some tax services that lie and say they can give you a reduction in tax rates and they just scam you off of money. By having students do it who have no incentive to take their money we can honestly give them the right amount.”

 

In the spring semester of 2014 alone, VITA saved residents in Delaware County over a million dollars in income tax. According to Rhinehart, the group returns around $3.5 million each year depending on the number of volunteers participating.

 

Rhinehart is a social coordinator for the group, and says she got involved in the organization at the activities fair during the beginning of her freshman year. “At the time, I had no idea how to prepare taxes, but I learned how to prepare taxes through participating in VITA,” Rhinehart said. All members of the group are trained in tax preparation and are required to complete the IRS certification process before they can begin volunteering.

 

Moon says one of the most rewarding experiences he has had in the group was helping an elderly woman who initially doubted the group because of their age and experience. “I had an old lady who was a little difficult to deal with because she didn’t entirely trust us; we’re students and we look like students. Through our procedures I gradually gained her trust and she came out really happy with our work. She really thanked us in the end. It was just a little success that I found very gratifying,” Moon said. “You hear a lot of our volunteers talk about stories where there’s a little suspicion in the beginning but then they open up.”

 

Rhinehart says going through the tax preparation process is both a very personal and rewarding process. “You learn a surprising amount about a person’s life: their children, their spouse, glimpses of what their lives are like at home and at work. Interacting with those whose taxes I prepare is definitely my favorite part of VITA.”

Joining the group provides students with valuable volunteer experience and real life skills. “You can learn more about tax code and more of how federal public services work. It’s also a good resume builder if you really want to be career oriented,” Moon said.

 

While the group does not provide tax services to other Swarthmore students, all students are welcome to join the group and learn the skills themselves, while also providing a needed service to members of the greater community.

 

“VITA is definitely a two-way street,” Rhinehart said. “On one hand, Swarthmore VITA makes a big impact on the community of Delaware County. But it also provides an important alternative to tax preparers that require a fee for tax preparation, and its volunteers are specially trained to look for tax opportunities likely to benefit low-income or elderly people. We are conscious of how much we, as volunteers, also learn and grow from VITA.”

American colleges and universities face controversy over municipal payments

in Around Higher Education/Region by

In recent years, cities have implemented or are increasing the PILOTs — payments in lieu of taxes — paid by institutions of higher education. While cities claim that they face financial shortfalls and need support from the wealthy schools housed within their borders, many colleges protest that they cannot afford the additional expenditures.

According to Swarthmore Vice President of Finance and Treasurer Suzanne Welsh, increases in PILOTs can’t be classified as good or bad. “It’s a very local decision,” she said. It’s a negotiation between the locality and the institution and each one is totally different than the other. The services going both ways are totally different from one place to the next.”

Non-profit organizations pay few taxes to the municipalities in which they are located. These tax-exempt institutions often hold economically valuable land, and cities have sometimes chosen to require some additional form of financial assistance from the non-profits. These include so-called PILOTs. These payments are often calculated on the basis of the property values of the non-profits or some other set criterium and can take the form of long-term payments or stable annual contributions. Services in lieu of taxes (SLOTs) can sometimes contribute to the PILOTs.

According to the Lincoln Institute survey of 599 jurisdictions with large non-profit sectors, at least 218 municipalities had received PILOTs since the year of 2000. These payments were valued at more than $92 million annually. While 420 non-profits contribute to this sum, colleges and universities contributed about two-thirds of these funds. Harvard, Yale and Stanford are the top three contributors.

These negotiations have not always led to peaceful compromise. Providence, Rhode Island faces bankruptcy and has asked non-profits to increase their annual contributions to the city by $7.1 million. This increase would fall largely on Brown University, whose payments would increase by $5 million with the plan’s implementation. The University has not supported the proposition, and the city has threatened to remove its tax-exempt status.

In financially-struggling Philadelphia, politicians have also put the possibility of creating and expanding PILOTs to be paid by institutions of higher education and other non-profits on the table. According to Lincoln Institute, the city currently only receives about $491,869 of revenue from non-profits’ PILOT payments. Some of these institutions who would be financially impacted by this change have preemptively attempted to show that they are already beneficial financial neighbors for the Philadelphia area.

Twelve Philadelphia colleges and universities, including the University of Pennsylvania and Drexel University, recently hired the consulting firm Econsult Solutions to investigate the financial contributions of their institutions to the city of Philadelphia. The resulting report, released in October, calculated that these schools provide over $850 million dollars to the city.

In the Borough of Swarthmore, the financial relationship between the college and the municipality is not contentious. According to Swarthmore Borough Manager Jane Billings, “The college is a good neighbor, a better neighbor that pays more than almost any comparable academic institution.”

Swarthmore college is the Borough’s largest taxpayer. In 2012, it contributed $114,500 to the Borough to fund one-half of a police officer’s salary and cover the fees related to Borough-financed tax-exempt loans that the college uses to finance capital projects. According to Billings, the college also paid $67,876 in real estate taxes on off-campus, college-owned property, $32,320 for trash fees and slightly less than $200,000 in sewer fees.

According to Welsh, the college’s contributions are  “very consistent by design” because the Borough “doesn’t want a lot of volatility in their budget.”

Both Welsh and Billings don’t refer to the college’s contributions to the Borough as PILOTS. “We never pushed the word PILOT,” Billings said. “The college prefers not to call it that.”

Instead, they emphasized that the payments were based off of services that the college receives from the Borough and not a fixed metric like property values.

“I don’t have an opinion on the fairness,” Welsh said about Swarthmore’s contributions to the Borough. “The taxes we pay on the houses we own are the same as everyone else pays. The Borough decides that.” She also noted that a significant portion of the school’s contributions come from the Borough’s tax-exempt bonds, bonds that she believes are competitive in the market.

“The college goes above and beyond the minimum that it would have to provide to the Borough,” Billings said. “When times are tough, some argue that the college has a lot of money [and] should be paying more. I’m not in favor of that argument. It’s like saying if someone owns a small house but is really rich, [they] should pay more property taxes. That’s not how it works. [Their payments] should always be related to the services they receive.”

“We have developed good working relationship with the college,” Billings said. “If we ever felt that there were significant needs, if we thought it was fair for the college to pay more, we would initiate the discussion.”

Welsh also spoke about the good working relationship between the two parties and about the mutually beneficial nature of the college’s investments in the Borough, like planned construction of an Inn and Restaurant in the Borough of Swarthmore.

“It’s a tremendous thing for the college to be willing to commit those kind of resources,” said Billings. “I’m kind of speechless sometimes.”

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