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

Wednesday, April 7, 2021
Davarian Baldwin


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.