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Higher Education Has a Tax Problem and It’s Hurting Local Communities

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On March 30, 2020, toward the beginning of the global COVID-19 pandemic, New Haven citizens stormed the city’s Zoom budget meeting to vent their outrage at Yale University’s continued strain on city finances. Residents specifically pointed to Yale’s vast and tax-exempt property holdings compared to the deficit-ridden New Haven public schools hungry for property-tax dollars.

Four months later, on July 29, a new coalition of Yale union workers and residents followed up with a 600-vehicle “Respect Caravan” that brought downtown traffic to a halt. With signs that read “Yale: Pay Your Fair Share,” organizers acknowledged that the university offers the city voluntary PILOTS (payments in lieu of taxes) but declared these funds were “pocket change” compared to the $30 billion endowment. For the protestors, COVID-19 merely exacerbated a growing disparity 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) charitable nonprofit organizations. Because higher education institutions provide the public good of education to surrounding communities, their property holdings are exempt from taxation in all 50 states. But classes with professors and students are a minor side business on college campuses today. The greater value of campuses is their ability to use the nonprofit tax exemption as a tax shelter for profitable research and private investors.

With the meteoric ascendance of the knowledge economy, colleges and universities have become financial titans in urban centers. After a group of universities lobbied to pass the Bayh Dole Act in 1980, schools like Stanford, MIT and Yale immediately created technology transfer offices to privatize and profit from federally sponsored research. Today universities use their academic research to create commercial goods or patents in a range of fields, from the pharmaceutical industries and software products to military defense weaponry. After the fall of factories, knowledge has become the new face of capitalism with university bell towers lauded as the smokestacks of today’s cities.

Read more: The Economic Model of Higher Education Was Already Broken. Here’s Why the Pandemic May Destroy It for Good

Both city leaders and administrators in education rightfully laud the “economic impact” that comes from these public-private partnerships facilitated by college campuses. The research makes life-saving discoveries, generates secondary start-up companies and jobs and attracts additional investors in related industries. We can point to the millions in revenue secured by Stanford when university researchers produced Google or the financial rebound generated for Pittsburgh when Silicon Valley companies and local universities helped revive it as a tech city.

Today’s schools bring the 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” and work with cities and schools to build a monied portfolio of university-affiliated projects like Philadelphia’s uCity Square, Converge Miami and Cortex in St. Louis. Urban neighborhoods are being transformed to optimize “value capture”: the conversion of city blocks into research profits. Under the cover of educational purposes, research that has the potential to produce millions in patents and revenues remains largely tax exempt while conducted in tax-exempt buildings. These financial arrangements are quite lucrative for city leaders, university administrators and their corporate partners.

But what about city residents, especially those who live in the neighborhoods surrounding the schools? A critical paradox has emerged with dire consequences for our cities. We assume that higher education is an inherent public good, most clearly marked by its exemption from property taxes. But nonprofit status is precisely what allows for an easier transfer of public dollars into higher education’s private developments. The former mayor of New Haven, Conn., Toni Harp, said such arrangements create a property-tax gray area where profitable research produced for private companies is conducted in educational buildings that are not on the tax rolls. (In 2010, the Lincoln Institute of Land Policy outlined the increased number of schools starting to pay PILOTs.) At approximately $13 million, Yale pays the largest PILOT in the country. But this is merely a fraction of the estimated $102 million in property taxes that, if Yale weren’t tax exempt, would come from the school or the additional $31 million that would come from Yale-New Haven Hospital.

Most schools also reap the benefits of police and fire protection, snow and trash removal, the maintenance of roads and the electrical grid, and other municipal services while struggling host cities pay the price. Homeowners and small-business owners ultimately carry the weight of increased property taxes caused by campuses and their knowledge communities while the owners of rental properties make units smaller and inflate their prices to prioritize the needs and financial means of those affiliated with the university.

Read more: Applying to College Was Never Easy for Most Students. The Pandemic Made It Nearly Impossible

In 2016, Princeton University paid more than $18 million to settle a lawsuit with residents of the historically Black neighborhood of Witherspoon-Jackson. Residents discovered a noticeable jump in their property-tax bill and wondered why. They realized that nearby university buildings remained tax-exempt while producing research that generated millions of dollars in commercial royalties. One plaintiff in the Princeton case described the university as a “hedge fund that conducts classes.”

And if one thinks this tax hustle is simply an elite, private-school problem, let’s turn to Arizona State University. In 2018, with a six to one vote, the Tempe City Council approved an Omni Hotel and Conference Center project that would pay almost no sales tax for up to 30 years. It would also pay no property taxes because it is going to sit on university land owned by the Arizona Board of Regents. Meanwhile, as in many states, Arizona continued to pull back on its contributions to public higher education.

ASU President Michael Crow, a self-proclaimed “academic entrepreneur,” was unabashed about looking for new revenue streams: “Our funding is down 60% per student per year, O.K.,” he said in a 2018 interview. “Fine, then we come up with other revenue sources to advance the university including using property that has been given to us.” ASU realized they could lease their tax-exempt land to private companies, and instead of shelling out property taxes, these companies could make a lower direct payment to the university. Elected officials have no say in how the money is spent while such university developments simultaneously raise property values and contribute little to public services.

Sean McCarthy, a research analyst with the Arizona Tax Research Association, held little sympathy for ASU’s stated plight of balancing the budget. After reading about the Omni deal, he put together a scathing policy review detailing the long history of “tax free zones” at ASU. He points to the State Farm Insurance regional headquarters on campus as an example of how this works: The Arizona Board of Regents holds the deed to the land and State Farm leases the property, which allows the largest commercial development in Arizona to pay a fraction of its property-tax burden. ASU is able to use the revenue to spend without public oversight.

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

But the twin forces of racial injustice and the pandemic placed a new spotlight on the economic impact of higher education. The same week as New Haven’s “Respect Caravan,” more than 100 students and Philadelphia residents gathered to protest the actions of the University of Pennsylvania’s police department while calling for a PILOT to support the deteriorating public schools. In November 2020, the university announced its contribution of a $100 million “charitable gift” over a 10-year period, largely targeted for asbestos removal in public school buildings. All parties celebrated this decision, but many also noted the careful legal language of “gift.” The financial distinction of gift, compared to payment, absolves the university from any long-term responsibility or acknowledgment that the wealth of their $14.9 billion endowment is directly connected to the city’s budget woes.

Such piecemeal victories have not deterred increased calls for a new tax arrangement between urban universities and their cities. Campaigns from the University of Chicago to UCLA are seizing the moment to argue that a key piece of social justice and anti-racism requires that schools develop a new business model that, at least, redistributes the wealth extracted from cities back into its neighborhoods. If higher education is going to be celebrated as the new economic engine, its prosperity cannot come at the cost of our city’s most vulnerable residents.

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