Higher education has a tax problem and harms local communities

On March 30, 2020, at the start of the global COVID-19 pandemic, New Haven citizens stormed the city’s Zoom budget meeting to express their outrage over Yale University’s ongoing strain on city finances. Residents pointed out that Yale’s large and tax-exempt real estate holdings compared to the deficit New Haven public schools that were starving for property tax dollars.

Four months later, on July 29, a new coalition of union workers and residents followed in Yale with a 600-vehicle “Respect Caravan” that brought downtown traffic to a standstill. With signs reading “Yale: Pay Your Fair Share,” organizers confirmed that the city’s university is offering voluntary PILOTS (payments instead of taxes), but declared these funds to be “pocket money” compared to $ 30 billion. For the protesters, COVID-19 merely exacerbated the growing inequality between urban colleges and universities and their host cities.

Universities and their medical centers are registered with the Internal Revenue Service as 501 (c) (3) not-for-profit organizations. Because higher education institutions provide public education to surrounding communities, their real estate holdings are tax-free in all 50 states. But classes with professors and students are a sideline on college campuses today. The greater value of Campus is its ability to use the nonprofit tax exemption as tax protection for profitable research and private investors.

With the rapid rise of the knowledge-based economy, colleges and universities have become financial titans in urban centers. After a group of universities campaigned for the Bayh Dole Act to be passed in 1980, schools like Stanford, MIT, and Yale immediately set up technology transfer offices to privatize and benefit from federally funded research. Today universities use their academic research to create commercial goods or patents in a number of areas from the pharmaceutical industry to software products to military defense weapons. After the fall of the factories, knowledge has become the new face of capitalism, with university bell towers hailed as the chimneys of today’s cities.

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Both city guides and education administrators rightly praise the “economic impact” of these public-private partnerships made possible by university campuses. Research is making life-saving discoveries, creating secondary startups and jobs, and attracting additional investors in related industries. We can point to the millions in revenue Stanford made when university researchers produced Google, or the financial rebound that was achieved for Pittsburgh when Silicon Valley companies and local universities helped revitalize it as a technology city.

Today’s schools bring what were once suburban research parks to the city as “innovation districts” where academic research and corporate partnerships meet real estate, retail and cheap labor. Real estate developers like Wexford: Science + Technology focus on what they call “knowledge communities,” working with cities and schools to build a cash portfolio of projects that are affiliated with universities like uCity Square in Philadelphia, Converge Miami and Cortex in St. Louis. Neighborhoods are being transformed in order to optimize the “acquisition of values”: the conversion of city blocks into research profits. Under the guise of educational purposes, research that has the potential to generate patents and millions in revenue remains largely tax-free while conducted in tax-free buildings. These financial arrangements are quite lucrative for city guides, university administrators and their corporate partners.

But what about the city’s residents, especially those who live near the schools? A critical paradox has emerged with grave consequences for our cities. We believe that higher education is an inherent public good, most clearly characterized by the property tax exemption. Nonprofit status, however, allows for easier transfer of public dollars into private higher education developments. Former New Haven, Conn. Mayor Toni Harp said such agreements create a gray area for property tax, where profitable research for private companies is conducted in educational buildings that are not on the tax list. (In 2010, the Lincoln Institute of Land Policy described the increased number of schools starting to pay PILOTs.) At approximately $ 13 million, Yale is paying the largest PILOT in the country. However, that’s only a fraction of the estimated $ 102 million property tax that would come from the school if Yale weren’t tax-exempt, or the additional $ 31 million that would be incurred by Yale-New Haven Hospital .

Most schools also benefit from police and fire safety, snow and rubbish removal, road and power grid maintenance, and other community services while the troubled host cities pay the price. Homeowners and small business owners ultimately bear the weight of increased property taxes caused by the campus and their knowledge communities, while rental property owners are downsizing units and increasing their prices to prioritize the needs and financial resources of those associated with the university.

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In 2016, Princeton University paid more than $ 18 million to settle a legal dispute with residents of the historically black neighborhood of Witherspoon-Jackson. Residents discovered a noticeable increase in their property tax bills and wondered why. They found nearby university buildings remained tax-free while producing research that generated millions in commercial royalties. A Princeton plaintiff described the university as a “hedge fund that runs courses”.

And if you think this tax crisis is just an elite private school problem, we turn to Arizona State University. In 2018, Tempe City Council approved a six-to-one vote for the Omni Hotel and Conference Center project that would pay almost no sales tax for up to 30 years. It would also pay no property tax as it will be on Arizona Board of Regents university properties. Meanwhile, like many states, Arizona has continued to withdraw its contributions to public higher education.

ASU President Michael Crow, a self-proclaimed “academic entrepreneur”, was intrepid about the search for new sources of income: “Our funding has dropped 60% per student per year, OK,” he said in a 2018 interview. then we came up with other sources of income to keep the university going, including using real estate that was given to us. ” ASU realized they could lease their tax-free land to private companies, and instead of paying property taxes, these companies could make a smaller direct payment to the university. Elected officials have no control over how the money is spent, while such university developments add real estate value and contribute little to public service.

Sean McCarthy, a research analyst with the Arizona Tax Research Association, had little understanding of ASU’s stated need to balance the budget. After reading about the Omni-Deal, he put together a scathing policy review detailing ASU’s long history of “tax-free zones”. He cites State Farm Insurance’s regional headquarters on campus as an example of how this works: the Arizona Board of Regents holds the deed for the land and State Farm leases the property, making the largest commercial development in Arizona pay a fraction of it can his property tax burden. ASU can use the income for expenses without public oversight.

Arizona Attorney General Mark Brnovich shared McCarthy’s outrage and sued the Arizona Board of Regents in January 2019 for essentially leasing its tax-exempt status to private companies. Few were surprised when the Supreme Court dismissed the case in developer-friendly Arizona. And ASU is continuing to expand its campus projects into downtown Phoenix, where they have partnered with Wexford to build an “Innovation Center”. I spoke to Rick Naimark, ASU’s vice president of program development planning, and he told me that ASU expects the designation of “educational purposes” to exempt this development from property tax.

But the twin forces of racial injustice and the pandemic have shed new light on the economic impact of higher education. On the same week as New Haven’s “Respect Caravan,” more than 100 Philadelphia students and residents gathered to protest the actions of the University of Pennsylvania Police Department while demanding a PILOT to aid deteriorating public schools. In November 2020, the university announced that it would be donating a US $ 100 million “charity gift” over a 10-year period, primarily to be used for removing asbestos from public school buildings. All parties celebrated this decision, but many also referred to the careful legal language “gift”. The financial distinction between gifts and payments relieves the university of any long-term responsibility or recognition that the assets of its $ 14.9 billion foundation are directly related to the city’s budget problems.

Such piecemeal victories have not deterred increasing demands for a new tax regime between urban universities and their cities. Campaigns from the University of Chicago to UCLA seize the moment to argue that a key piece of social justice and anti-racism requires the development of a new business model that at least redistributes the wealth gained from cities back to its neighborhoods. If higher education is to be celebrated as the new economic engine, its prosperity cannot come at the expense of our city’s most vulnerable residents.

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