How Will the Tax Cuts and Jobs Act Affect Colleges and Universities?

By March 28, 2018 March 7th, 2019 Trusteeship Article

At the end of 2017, Congress passed the Tax Cuts and Jobs Act. (See related story.) Trusteeship spoke to Francis Grab, a principal of the Washington Council Ernst & Young Practice of Ernst & Young LLP, to learn what the effects of this bill might be on colleges and universities.

What should trustees know about the Tax Cuts and Jobs Act?

In essence, it’s a $1.5 trillion tax cut bill that primarily focuses on cutting the corporate and partnership business tax rate, lowering individual tax rates, and changing the international tax rules of the United States tax code. I think it’s fair to say it’s the biggest overhaul to the U.S. tax code in 30 years. Many parts of the tax code were adjusted or amended as part of the bill.

There are a few other key components of the bill that are worth keeping in mind. One is it doubles the standard deduction that most taxpayers receive. That fact will dramatically shrink the universe of taxpayers who itemize for federal tax purposes. That could have an impact on charitable giving. The bill also doubles the estate tax exemption amount, which greatly increases the amount of money that can be passed on to heirs. There is a view that many large charitable gifts that are given to tax-exempt organizations, including colleges and universities, are driven by the need to plan around the estate tax. The fact the estate tax exemption has been raised significantly potentially lessens that imperative for high-net-worth individuals. Lastly, the bill creates a new excise tax that will hit certain college and university endowments.

What are the positive aspects of the Tax Cuts and Jobs Act for colleges and universities?

One of the positive aspects is that initial versions of the bill contained provisions that sought to pare back education tax incentives, including limiting the ability of graduate students to receive tax-free education. The final version contains many fewer of these provisions. Earlier versions of the bill were much more problematic for the higher education community than the ultimate bill that was enacted.

A second positive that the bill’s proponents really argued is that lowering the corporate and individual rates will result in increased economic growth. We will have to see how this plays out. If that increased economic growth occurs, it certainly will be a positive for colleges and universities.

Looking ahead, what should trustees anticipate as we move through 2018?

The one thing to know is that Congress considered and enacted the bill in an extraordinarily fast timeline. As with any large and complicated piece of legislation that Congress passes, mistakes inevitably occur in the drafting process. Given the speed with which this bill was put together, that potential for technical glitches is magnified. I think what a lot of taxpayers— including colleges and universities— will be doing is figuring out if there are issues with the provisions that affect them. Are there things that need to be corrected or fixed as we move forward, either through the implementation of regulatory guidance or any legislative process when Congress puts together a technical corrections package?

The other thing to consider is that some of the political questions that were discussed as the bill was being voted upon remain with us. I would note, for example, that the state and local tax deduction really became a hot-button political issue as the bill was being voted on. Particularly in high-tax states, it’s not clear what will happen. Do states and local governments reduce the income taxes or property taxes that they assess because they are no longer fully deductible under the tax code? If that happens, that would have ripple effects for public institutions, including public colleges and universities.