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.
