Potential Impacts of Tax Cuts and Jobs Act
To: The W&L Community
From: Steve McAllister, Vice President for Finance and Treasurer
Subject: Potential Impacts of Tax Cuts and Jobs Act
Date: Nov. 17, 2017
Since the House of Representatives has passed the Tax Cuts and Jobs Act, and the Senate is beginning to debate its version of this tax reform legislation, we want to provide the Washington and Lee community with information on three of the ways that this legislation, as currently formulated, could impact the university.
While the 1.4 percent excise tax on our endowment earnings has gained most of the media attention in recent days, other elements of this legislation would have negative effects on the university and our employees, if enacted in their current form.
First, the House bill would eliminate tax-free tuition assistance to employees and their dependents. That would mean that you would be required to pay taxes on the tuition that your eligible children receive through our Educational Grant Program. We think this is bad policy for many reasons, not least because it could result in more families resorting to federal assistance in order to allow their children to attend college. We consider the Educational Grant Program one of our most valuable employee benefits.
Second, the House bill proposes the elimination of tax-exempt borrowing for W&L and other 501(c)(3) organizations. As you may know, we now have $190 million of debt, and all of it is tax-exempt. We have used these funds to make significant and necessary capital investment in facilities that directly benefit our students. If this debt were taxable, we estimate it would increase our debt burden by at least $1.9 million per year. This would have a significant impact on our budget.
Third, both the Senate and House bills propose a 1.4 percent excise tax on endowment earnings. This would mean fewer dollars available for every area of the university. We would be one of fewer than 70 private colleges and universities targeted for this tax. If such a tax had been in place over the past 20 years, W&L would have been charged $14.85 million in excise taxes. This tax would reduce our annual endowment payout by about $700,000. Our draw on endowment now pays 40 percent of our operating budget, and this includes everything from salaries to financial aid. In addition, such a tax would limit the support available for specific purposes that donors have designated. This includes professorships, departmental operations, and signature programs such as the Shepherd Poverty Program and the Roger Mudd Center for Ethics. Incidentally, the university already pays unrelated business income taxes on a portion of the endowment's income and return, so we have paid $3.02 million in federal income taxes on investments in the past five years alone. As presented in the legislation, the excise tax would represent a new tax on top of an already existing tax for a portion of our endowment investments.
There are other elements in the legislation that could have negative effects on the university and on higher education in general. These include the elimination of student loan interest deduction, the repeal of the Hope Scholarships Tax Credit and the Lifelong Learning Credit, and the elimination of itemized deduction for 95 percent of taxpayers, thereby suppressing charitable giving.
In consultation with the Council of Independent Colleges in Virginia (CCIV) and the National Association of Independent Colleges and Universities, we have contacted our congressional delegation to express our deep concern about the way in which private colleges like W&L have been unfairly targeted by these proposals. While there are legitimate arguments, pro and con, for the need for tax reform in this country, our purpose is not to litigate those arguments or other elements of the current legislation. But we do believe that we should address specific elements of this bill that are not in the university's best interests.
We would encourage all members of the community to become familiar with the bill and with the elements that we have cited above, since these will have an impact on everyone who works at W&L. We will continue to provide information as necessary.