Federal tax package could cost Dartmouth at least $5 million a year

  • The Dartmouth College campus seen from the air during a 20-minute scenic flight over Lebanon on Saturday, Dec. 9, 2017, from the Lebanon Municipal Airport in West Lebanon, N.H. Cape Air had three 20-minute scenic flights for community members on Saturday. (Valley News - Charles Hatcher) Copyright Valley News. May not be reprinted or used online without permission. Send requests to permission@vnews.com. Charles Hatcher

Valley News
Thursday, December 21, 2017

The massive tax bill now on President Donald Trump’s desk could cost Dartmouth College at least $5 million annually in new taxes, and college officials also are concerned that some provisions in the measure could have a negative impact on charitable giving in general.

The Republican-backed tax package includes a 1.4 percent excise tax on income from endowments and other investments for private universities with more than 500 tuition-paying students and at least $500,000 in endowment per student.

That is expected to affect about 30 colleges and universities, including Dartmouth, which in September reported that its endowment had grown 10.2 percent in the fiscal year that ended in June, bringing the fund to $4.96 billion.

When other reserve funds on the Dartmouth balance sheet are factored in, the college has about $6.3 billion in investments, including the endowment, Dartmouth Chief Financial Officer Michael Wagner said in an interview on Thursday. Based on averages over the past five years, they accounted for roughly $357 million in income that could be subject to the next tax once the rules are clarified, or $5 million in new taxes a year, Wagner said.

On top of that, Dartmouth would have been subject to another $3 million in taxes annually from other new provisions in the tax bill, including limitations on the deductibility of interest payments that the college has deducted in the past, based on averages over the past five years. But Wagner said because Dartmouth has paid off some of its debt, that provision “won’t have as much impact in the future.”

Dartmouth has an operating budget of roughly $1 billion, Wagner said, and the new taxes might be paid for out of the endowment return, “so it doesn’t hit the operating budget directly,” he said.

That means the $100 million Dartmouth provides in scholarship aid is unlikely to be directly affected. But Wagner noted that a tax that draws $5 million annually from what otherwise would go into the endowment and grow would have an effect over time on the pool of money available to fund various college operations.

“The real issue over the long term is when you start compounding $5 million a year that’s not in the endowment returns, over 30 years that’s something like $200 million that the endowment is smaller than it would be without this tax, and that’s a really big number,” Wagner said.

On top of that, another provision in the tax bill that would almost double the standard deduction for a married couple – to $24,000 – could have an impact on charitable giving for any number of nonprofits in the Upper Valley, Wagner noted.

“By doubling the standard deduction, more people will take the standard deduction rather than itemizing, and if you don’t itemize, are you going to give as much?” he said. “I don’t think we know the answer to that. People are thinking about that.”

Likewise, the doubling of the exemption on the estate tax, to roughly $11.2 million, could mean that wealthy Dartmouth alumni who might make large donations to their alma mater as part of their estate planning also could be impacted, Wagner acknowledged.

“The big picture is that over time, it is definitely going to continue to put pressure on a really important funding source for the college,” Wagner said of the changes. “The endowment funds 20 to 25 percent of our budget.”

He also noted that not all of the Ivy League schools could be hit by the endowment tax. Dartmouth’s holdings per capita is about $720,000, but he said larger schools such as Cornell and Brown appear to fall below the $500,000-per-student threshold.

On the other hand, Dartmouth’s tax bite won’t be as severe as that at Harvard, which has an endowment of almost $36 billion. Harvard Magazine reported that college officials estimate the new investment earnings tax could cost Harvard some $40 million a year in new taxes.