With the inauguration of President Donald Trump, Washington now has unified Republican control over all three branches of government for the first time in about a decade. From the president to leaders in Congress, Republicans have made clear that comprehensive tax reform is very high on their packed list of legislative priorities. Beyond tax reform, the Trump administration is seeking to repeal and replace the Affordable Care Act, modify changes to immigration and trade laws, fill a Supreme Court vacancy, and pass a large infrastructure package. In addition to this ambitious agenda, Republicans in Washington will have to pass a number of “must-do” bills, including ones that fund the government and increase the federal debt limit.
While there is uncertainty about the timing and substance of the new initiatives, college and university governing boards need to know that tax reform could have a major impact on higher education, including potential limits to charitable giving, restrictions on endowments and revenue sources, and changes to other important deductions.
TAX REFORM TAKING SHAPE
As with other major pieces of legislation, tax reform will be shaped by three major players: the House of Representatives, the Senate, and the White House. To date, only broad outlines of tax reform plans have emerged from House leaders and then-candidate Trump. More detailed proposals may be unveiled in spring 2017.
Guiding action in the House is the “Better Way for Tax Reform” blueprint, a 35-page document providing broad strokes on how Republicans would rewrite the tax code and grow the economy—in a way that is revenue neutral, and that utilizes “dynamic scoring,” which takes into account the economic growth associated with tax reform. The key for tax writers is finding a way to pay for tax reduction by assuming growth or eliminating deductions in other areas of the tax code.
The ultimate goal of the House blueprint is to lower both the individual and corporate tax rates. The plan would lower the top individual rate from 39.6 percent to 33 percent, and the top corporate rate from 35 percent to 20 percent. The blueprint is silent on a number of issues concerning colleges and universities, including the tax treatment of endowments.
However, we should not take this omission to infer that House tax writers will ignore the subject as they rewrite the tax code. Rep. Tom Reed (R-NY) is on the tax-writing panel and can be expected to aggressively push for his proposed crackdown on colleges and universities with large endowments. Reed may introduce legislation to require those institutions to spend a portion of their endowments’ annual proceeds on tuition assistance. House tax writers may also refer back to the endowment-related provisions included in the tax-reform plan put forward by the former Ways and Means Committee Chairman, Rep. Dave Camp (R-MI). Camp’s Tax Reform Act of 2014 contained a number of tax increases aimed at colleges and universities, including changes in the tax treatment of endowments, charitable contribution deductions (such as elimination of the 80 percent deduction for certain payments to colleges and universities in exchange for the right to purchase tickets or seating at an athletic event), tuition remission for college and university employees, and changes to the unrelated business income tax (UBIT) rules.
Lowering corporate and individual rates is very expensive, and House tax writers plan to rely on a number of changes to the tax code to achieve the necessary revenue. Key among them is an item known as “border adjustability,” a controversial proposal to exempt export income from tax while subjecting imports to a tax of 20 percent.
For its part, the administration has yet to issue a formal tax-reform proposal, but during the campaign, Trump released a plan containing some elements in common with the House blueprint, including lowering the top individual rate to 33 percent and repealing the estate tax, but with some key differences, as well. Highlights of the Trump tax reform plan include: a lowered 15 percent tax rate for both corporations and partnerships, a lowered 20 percent tax rate for capital gains and dividends, and a hard dollar itemized individual deduction cap of $100,000 for single filers and $200,000 for couples filing jointly.
While his plan does not touch on endowments, then-candidate Trump did criticize colleges and universities for spending “more on private equity fund managers than on tuition programs.” So it is possible that, as the White House rolls out additional details on tax reform, the issue could be addressed.
Meanwhile, Senate tax writers have remained largely on the sidelines of tax reform—likely waiting to see a formal proposal from the House. Nonetheless, GOP leaders in the Senate have been in clear agreement with both the president and House leadership on the need for comprehensive tax reform.
TIMING MATTERS
President Trump and Republican Congressional leaders are committed to moving forward on comprehensive tax reform only after the enactment of legislation to repeal and replace the Affordable Care Act (ACA). They have also made the calculation to pass both measures utilizing the budget reconciliation process, which is a procedural tool that allows budget bills to pass the Senate with only 51 votes (normally 60 votes are required to break filibusters in the Senate). Given that Republicans control 52 seats in the Senate, this is an attractive procedural option. Reconciliation bills do have some limitations, however: they can only include provisions that relate to taxes, spending, or the federal debt limit; and they cannot add to the federal deficit outside the 10-year budget cycle, which is why the Bush tax cuts of 2001 contained a sunset provision.
Right out of the gate, the 115th Congress passed an FY 2017 budget resolution that will enable Congress to repeal and replace the ACA utilizing the reconciliation process. Republicans had initially hoped to get a healthcare reform bill to the Oval Office by the President’s Day recess, but the difficult political dynamics of advancing healthcare legislation have slowed these efforts considerably. Now Republican leaders are pushing for an April or May deadline to move ACA repeal/replace legislation. It is possible that even that date will slip.
If the ACA is repealed and replaced, Congress will move to pass an FY 2018 budget resolution that will provide tax reform reconciliation instructions to the tax-writing committees, most likely in the late spring or early summer. The House Ways and Means Committee will advance its measure first, followed by House passage; then the action kicks over to the Senate, with the Finance Committee reporting out its version of tax reform, followed by Senate approval.
Given that the two chambers are very likely to pass competing versions of comprehensive tax reform, a conference committee composed of House and Senate tax-writers will be convened to iron out the differences. This is where the real tax-reform bill will be written, most likely in late fall or possibly even early 2018. This tax reform “conference report” will then have to be passed again by both the House and Senate before it can be sent to the White House for President Trump’s signature.
BOARD ENGAGEMENT IS CRITICAL
The higher education community must use the timing surrounding comprehensive tax reform to its full advantage, given that other major players with a stake in the legislation are already at work to influence the process. It is absolutely critical for college and university leaders—in particular, governing board members—to stay engaged and involved throughout the entire legislative process. By staying connected with key decision-makers in Congress and the administration, board members can ensure that institutional interests and priorities are protected to the fullest extent possible as the tax-reform process advances.
QUESTIONS TO CONSIDER:
- Is your institution carefully monitoring the evolving landscape of potential tax reform on an ongoing basis, and has that information risen to the attention of the board?
- Has your institution fully analyzed how it might be affected by potential changes in federal tax policy, including changes in rules concerning charitable giving?
- Has your institution articulated a suitable response to more pressure from federal policymakers to be more aggressive in spending funds from the university endowment?
MOVING FORWARD
AGB will continue to monitor the situation as tax proposals are introduced in and moved through Congress, and will call on its members to reach out to key legislators to provide facts and expert opinions, should it become necessary.
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