Does Tax-Exempt Status for Universities Make Them Good Organizational Citizens?
We discussed in this chapter how the balanced scorecard identifies four categories of organizational effectiveness criteria. Community-related measures of effectiveness, such as satisfaction with services or benefits provided by a company, are one component of the internal business process category. This challenge considers the issue of community-related effectiveness. Specifically, you will be asked to consider the “good organizational citizen” category within the balanced scorecard.
Surely universities and colleges are good for society, but could they do better? Consider the issue of federal income taxation.
According to the Association of American Universities (AAU), “the vast majority of private and public universities and colleges are tax-exempt entities as defined by the Internal Revenue Code … because of their educational purposes—purposes that the federal government has long recognized as fundamental to fostering the productive and civic capacities of citizens.”131
The AAU further notes that “income for activities that are substantially related to the purpose of an institution’s tax exemption, charitable contributions received, and investment income are not subject to federal income tax.”132
Princeton University is New Jersey’s only Ivy League school. Its $22.7 billion endowment is the fourth largest in the United States. Not only does Princeton not pay income taxes on investment income from this endowment, but it also is exempt from property taxes.
Two dozen Princeton homeowners have filed a suit challenging the tax-exempt status of the school. If the suit is successful, tax revenue from the university would climb to about $40 million a year, 264 percent higher than what it currently is paying, according to Bruce Afran, the plaintiffs’ lawyer. That would reduce homeowners’ tax payments by about 33 percent.
“The so-called benefits the university gives are not real economic benefits that help the average person,” said Afran. New Jersey resident Leighton Newlin noted Page 631that the university “almost operates like a hedge fund that conducts classes.”133
The idea of challenging universities’ tax-exempt status is starting to spread. Not only is Congress looking into it, but also lawmakers in New Haven, Connecticut, have proposed legislation to tax Yale University’s $25.6 billion endowment.134
The question for you to address is not the legality of the tax-exempt status of colleges and universities. The issue is whether these institutions would provide enhanced value to the communities in which they are located if they paid taxes on both investment income and property.
If You Were a Jurist Evaluating the Tax-Exempt Status of Princeton and Yale, How Would You Vote?
I would continue to give universities tax-exempt status on both endowments and property taxes. Universities most likely spend the tax-exempt money on scholarships, buildings, and funding research. All these expenditures provide value to society, suggesting that universities are good citizens.
I would vote for tax-exempt status on investment income for the same reasons noted above, but not property taxes. Everyone else has to pay property taxes, and if colleges and universities paid them too, the funds would directly help the members of the surrounding community by reducing their tax burden. This is good citizenship.
I would both revoke the tax-exempt status of investment income and collect property taxes. Being a good corporate citizen necessitates that these institutions pay taxes like businesses and individuals do.
Invent other options.
Remember to use APA format and cite at least 3 references. Find support for your point of view, reasoning, etc. Or, examples, cases, current events that are similar to this case.
Make sure your paper is: at least 2 pages, fully explains your answer, uses supporting references, and follows apa (references, citing, 10 to 12-pt font).
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