According to Bloomberg, the state of Connecticut faces a $266 million budget shortfall for the current fiscal year. But attempts to raise taxes in order to offset this deficit have been generally unsuccessful. On Jan. 13, 2016, General Electric, a major Conn. employer, announced a decision to relocate its global headquarters to Massachusetts after Governor Malloy, in June 2015, signed into law a $1.5 billion tax hike that tripled the sales tax on data processing. Concurrently, Connecticut’s economic growth continues to lag behind the national growth rate. Now, running out of options, Malloy must seek alternative methods to both close the budget gap and stimulate the economy in the short term. While the governor has already promised to restructure the state government, intending to cut down on state services and reduce the state workforce, some legislators believe that more must be done. Taking matters into its own hands, the Connecticut State Senate has introduced two controversial bills, S.B. 413, which seeks to grant the state more control in the allocation of large endowments, and S.B. 414, which seeks to specify what counts as taxable land. Together, these bills could potentially tax one of the state’s most notable institutions: Yale University.
The first of these bills, S.B. 413, targets all Connecticut schools with an endowment exceeding $10 billion. The only institution in Connecticut that meets that criterion is Yale, which boasts an endowment of $25.6 billion. According to State Rep. Toni Walker, D-New Haven, if ratified, the bill would either force the university to reinvest an additional $78 million of its endowment each year into scholarships or other educational activity, or place a 7% tax on the annual endowment returns. (This tax would not amount to 7% of $25.6 billion, only of the money the university earns from its endowment investments.) Exactly how much revenue this tax would yield is unclear, as the university receives different amounts of endowment returns from year to year. This year, Walker estimates that the 7% tax would give the state $78 million dollars, but that number could change rather dramatically depending on the success of Yale’s investments. Still, according to State Sen. Martin M. Looney, D-New Haven, Hamden, North Haven, S.B. 413 is lenient compared to legislation being considered on a national level.
“S.B. 413 is far more modest than some of the proposals circulating in Washington. It contains no spending requirement. Instead, it includes a spending incentive,” Looney told the Senate. “S.B. 413 also does not create a new tax. It simply provides that, if the university chooses not to re-invest its earnings into higher education or the economy, those excess earnings would be subject to the UBIT [Unrelated Business Income Tax] tax that universities already pay today on their non-educational income.”
Looney paints S.B. 413 as merely clarifying the purpose of a university’s endowment, and suggests that should a university not treat its endowment as the state defines it (as spending a certain amount of money), then it can be taxed as money unrelated to the university’s tax-exempt mission.
Yale has openly opposed the bill. On March 22 at the State Capitol in Hartford, Conn., Richard Jacob, Associate Vice President for Federal and State Relations at Yale, spoke to the Senate in protest: “You are hearing testimony, on one hand, about a bill to promote research and innovation to create jobs—in other words, to replicate what Yale has done for the past two decades in New Haven,” Jacob told the Senate.
Jacob provided a long list of statistics that explain exactly how Connecticut and New Haven benefit from Yale’s presence, and why this positive influence makes S.B. 413 unnecessary. He noted, for example, that Yale is New Haven’s largest employer and Connecticut’s fifth largest employer. He outlined the benefits Yale provides to its gigantic workforce. For example, wages and benefits in Local 34 (a Yale union) are 27% above the local market (what employees would receive from other local employers) and 39% above market in Local 35 (another Yale union). From Jacob’s perspective, S.B. 413 ignores these benefits, and punishes an institution that does already does its fair share for its students and the community.
Parties outside of Yale have also criticized the bill. Anthony Rescigno, President of the Greater New Haven Chamber of Commerce, spoke in strong opposition on March 22 to S.B. 413.
“Yale’s incredible economic impact is a direct result of it generating educated students and an educated workforce that build long-term economic growth and innovation. Taxing Yale’s endowment would hinder such economic vitality and negatively impact its students, and our economy,” Rescigno said.
Jacob echoes this long-term economic growth and innovation argument. In his testimony to the Senate, he claimed that Yale’s economic strategies have led to the creation of over 60 companies by private entrepreneurs and attracted more than $1 billion in venture capital investment to New Haven. Rescigno’s point, whether it is true or not, does highlight the importance of such a large endowment. Yale is protective of its impressive endowment because of the freedom it allows Yale as an institution to take creative risks with its investments, such as pumping money into cutting-edge research and technology. It also allows for the substantial financial aid packages Yale students receive, and accounts for the lack of student loans at the university. Lastly, the endowment goes towards teacher salaries, which allow the university to attract professors on par with other top institutions.
The conflict over S.B. 413 boils down to a disagreement over how much Yale owes New Haven and Connecticut: the Senate believes Yale misuses its endowment and should be doing more to help the state and city economies, while Yale believes it does more than enough as it is, and that forcing it to do more would only hurt its mission to help the community.
Interestingly, Governor Dannel Malloy has spoken against S.B. 413. Those who blame Malloy for the state’s high taxes hold him responsible for General Electric’s recent departure from Connecticut for cheaper pastures in Massachusetts, so the governor’s critics were surprised by his decision not to endorse the bill. After all, despite Florida governor Rick Scott’s recent invitation, it would be far harder for an institution like Yale to just pick up and leave under threat of harsher taxes than it is for a more mobile company like GE, so the university would theoretically be a prime tax target. Still, according to the governor’s spokesman, Malloy does not believe that new taxes should be a solution to the state’s budget crisis.
Malloy has remained silent, on the other hand, about the second tax, S.B. 414. This bill seeks to clarify what exactly counts as Yale’s educational, nontaxable land and what counts as Yale’s commercial, taxable land. There are concerns amongst New Haven politicians, like Rep. Roland Lemar, D-New Haven, that the university currently partakes in commercial activities within its nontaxable buildings. These concerns even prompted Mayor Toni Harp, who has been silent regarding S.B. 413, to speak in support of S.B. 414.
“We don’t want our colleges competing with our small businesses,” Harp said.
Yet Richard Jacob contends that not only is there is no competition to worry about, but any push to rewrite Yale’s statute (which defines the university’s taxable land) would be unprecedented and unconstitutional.
“Some claim, incorrectly, that S.B. 413 and S.B. 414 would bring ‘clarity’ about Yale’s tax status. In fact, the Connecticut Constitution, and five court cases, including two Connecticut Supreme Court decisions, have been very clear: in every case, Yale’s academic property was held nontaxable,” Jacob told the Senate.
It is true that the statute has remained intact throughout all attempts to alter or remove it. Yale successfully defended itself with a U.S. Supreme Court Case, Dartmouth College v. Woodward, that affirmed the sanctity of contracts between the state and private enterprises. However, it is impossible to predict how a court case between the state of Connecticut and Yale over S.B. 414 would go. Yes, Dartmouth College v. Woodward seems to prevent the rewriting or scrapping of Yale’s statute, but S.B. 414 may not aim to do either of those things exactly. According to the bill’s supporters, Yale is not honoring its statute by partaking in commercial activities inside academic buildings. However, such an offense, should it be confirmed, would more likely warrant a lawsuit than a senate bill.
Whether or not one has a stake in the specific outcomes of these bills, precedents that have far-reaching effects will be on the line in the next few weeks. Under S.B. 413, the state could potentially have control over how private institutions spend their funds. Should the state pass S.B. 414, it would unprecedentedly bend, if not break, the terms of a statute. The imminent results at the State Capitol will hold great significance for states’ rights and rights of private enterprises.