NAICU Washington Update

CBO Releases College and University Tax Arbitrage Report

May 12, 2010

The Congressional Budget Office (CBO) has released a report examining tax-exempt bond financing by colleges and universities.  The report, released April 30, had been requested in 2007 by Sen. Charles Grassley (R-Iowa). The full report can be found on the CBO Website.

Grassley has stated that many colleges and universities sit on large untaxed portfolios, while simultaneously borrowing with tax-exempt debt.  Tax arbitrage - the use of low-cost tax-exempt bonds to finance higher yield investment - is illegal.  Under current law, however, many colleges and universities can use tax-exempt debt to finance investments in buildings and equipment, while simultaneously holding investment assets giving a higher rate of return.  The report investigates whether or not this practice is a form of "indirect" tax arbitrage.

While the report makes no specific recommendations, it does suggest that if the definition of tax arbitrage were changed to include the tax-exempt debt financing practices in question, colleges and universities would cease to use this type of financing, resulting in as much as $5 billion a year in additional tax revenue.

Currently, there are no plans for legislative activity on this issue.  However, there is the danger that this could be considered a viable "revenue raiser" at a time when funds to pay for legislation are scarce.  Funds to maintain buildings and equipment at our institutions are equally scarce, though.  It would be counterproductive to attempt to address the cost of higher education by stripping colleges of this financing option.

MORE News from NAICU