June 14, 2018
On Tuesday, May 22, 2018, Rep. Tom Reed (R-NY) introduced the Reducing Excessive Debt and Unfair Costs of Education (REDUCE) Act of 2018 (H.R. 5916). The bill comes as part of a broad plan Rep. Reed announced in late 2016 to address college affordability. The proposal targets colleges and university endowment-spending practices and gift acceptance policies as a means of increasing affordability.
Provided below is a comprehensive summary of the provisions in this bill. The Council is particularly concerned about a number of provisions which relate to charitable giving. First and foremost, the Council opposes the limitations this legislation would place on contributions from donor advised funds (DAFs) and private foundations to colleges and universities. The Council recognizes the array of legitimate reasons beyond scholarships that a restricted grant from a DAF or private foundation would be made to a college or university (including, but not limited to, research, academics, infrastructure, etc.), and believes this flexibility should be maintained.
The Council is also opposed to the manner in which this legislation would limit the value of the charitable deduction dependent on a subjective determination of which causes should be considered worthier than others. The Council sees this as a slippery slope that could jeopardize the vibrancy and diversity of the charitable sector.
Finally, the Council is generally concerned about governmental interference with an institution’s ability to make strategic decisions about how to prioritize spending from their endowment. Though this bill does not directly impact charitable foundation endowments, it demonstrates a willingness by policymakers to apply overly broad requirements for endowment administration that fail to account for the uniqueness of individual business models and situational realities.
Excise Tax on "Undistributed Required Payout"
Certain colleges and universities1 would be subject to an annual “required payout” of at least 25% of the aggregate net investment income2 of said institution for the taxable year and the preceding six years. Of the required payout amount, the grants made to working-family students3 must exceed the total amount spent for other purposes. In the instance that the total amount of grants to working-family students does not equal or exceed the total amount spent for other purposes, the institution is subject to a 1.4% excise tax on the amount of the difference (also referred to as the “undistributed required payout”). If an undistributed required payout is not resolved within one year, the excise tax on it increases to 30% of the amount, and the following year, increases to 100%.
The bill provides two exceptions for where the excise tax described above would be waived.
- If an institution provides a sufficient amount in grants to every working-family student enrolled to cover his/her cost of attendance,4 the institution would not be subject to the 1.4% excise tax.5
- If the undistributed required payout is less than or equal to 1% of the required payout amount (or, if less, $250,000), the institution would not be subject to the 1.4% excise tax.
Limitations on Contributions to Certain Colleges and Universities by Individuals
Except as described in the next sentence, “restricted” gifts to colleges and universities exceeding $5,000 are not eligible for a charitable deduction.
A charitable deduction for gifts that are restricted solely for the purpose of scholarships includes an additional allowance equal to 50% of the amount of the gift.
A charitable deduction for “unrestricted” gifts includes an additional allowance equal to 25% of the amount of the gift.
During the period for which an undistributed required payout existed, no deduction would be allowed with respect to any gift to the university or college in question.
Five-Year Plan Requirements
All colleges and universities6 would be required to (or lose tax-exempt status):
- Create and submit five-year plans, which lay out:
- How the college/university will ensure that the percentage increase in the cost of attendance does not exceed the percentage of increase in Consumer Price Index (CPI);
- Describes the failure to achieve any goals in the preceding five-year plan, as well as steps taken to address such failures;
- Identifies areas where costs are expected to increase the most, and any measures being taken to address such cost increases; and
- Contains any other information the Secretary of Treasury deems necessary.
- Provide a publicly-available report on its website, which includes information regarding:
- Salaries paid by the institution;
- Any certified audited financial statement;
- Any fees paid by the institution for investment management services;
- The institution’s long-term spending plan;
- The institutions investments (including risk portfolio and expected rate of return for such investments);
- A list of the institution’s five largest spending categories, including:
- The amount spent within those categories; and
- The five items within each category on which the most is spent.
Certain colleges and universities7 would be required to (or lose tax-exempt status):
- Ensure that at least 20% of students are Pell Grant-eligible, and that at least 50% of students have a household income for the taxable year that is less than or equal to 600% of the Federal poverty line. As noted in the parenthetical, if an institution fails to meet any of these restrictions it will lose its tax-exempt status.
Limitations on Contributions to Colleges and Universities from DAFs and Private Foundations
Any distribution to any college or university from a donor advised fund (DAF) that is restricted8 in its purpose will be treated as a taxable distribution with a rate equal to 100% of the gift.
Any distribution to any college or university from a private foundation that is restricted9 in its purpose will be treated as a taxable distribution with a rate equal to 100% of the gift.
Reporting Requirements for Net Tuition
All colleges and universities must provide information to the Secretary of Treasury about:
- The amount difference (if any) between the cost of attendance for the institution and the amount in grants the institution provides with respect to working family students; and
- The number of students enrolled at the institution on the first day of the taxable year.
Use of Tax Revenue from This Legislation
Any taxes generated from this legislation will be used to increased Pell Grant funding.
Making More Information Available to Consumers (Potential Students)
All colleges and universities must make the following information publicly available on the College Navigator website, in addition to what is currently required under Sec. 132(i)(1) of the Higher Education Act:
- Total number of employees of the institution in charge of managing/advising the endowment or investments of the institution;
- Annual salary and performance-based compensation for the aforementioned individuals;
- Total expenses for managing the endowment of the institution;
- Total institutional aid provided to students by the institution;
- Number of students whose parents and grandparents have given to the institution
- More than $100,000 during the four-year period beginning on the day before the student’s first date of attendance through graduation, transfer, or expulsion of the student; or
- More than $500,000 in aggregate.
- Number of students whose parent or grandparent (biological, custodial, step-parent, etc.) graduated from the institution.
1 Colleges and universities (both private and public) with at least 500 students (of which, at least 50% must be located in the United States) and total assets of at least $250,000,000 ($500,000 per a minimum of 500 students; excluding those assets which are used directly for carrying out the institution’s educational purpose).
2 Net investment income equals the fair market value of the endowment for the prior year, minus contributions to the endowment for the prior year, plus spending from the endowment for the prior year, minus the fair market value of the endowment for the year two years prior to the current year.
3 For purposes of calculating the excise tax, grants made to working-family students are only counted to the extent that they do not exceed, on a per-credit basis, the least amount of grant given to any degree-seeking working-family student with a lower household income.
4 As defined in section 472 of the Higher Education Act of 1965.
5 In a quirk that could be a drafting error, the current legislation can be read in a way that makes charitable gifts to such institution nonetheless non-deductible.
6 As defined under 20 U.S.C. 1001.
7 Colleges and universities (both private and public) with at least 500 students (of which, at least 50% must be located in the United States), total assets of at least $250,000,000 (and $500,000 per student; excluding those assets which are used directly for carrying out the institution’s educational purpose), and where less than an “applicable percentage” (ranging from 28% in 2018 to 33% in 2022 and thereafter) of undergraduates receive Pell Grants.
8 A gift that is restricted for any purpose other than a scholarship.