Only one week after a proposed tax on Yale’s $25.6 billion endowment generated heated discussion at a public hearing, Gov. Dannel Malloy’s administration has denounced the bill.
Malloy sided with Yale on Tuesday, the same day Florida Gov. Rick Scott extended an invitation for Yale to relocate to the Sunshine State should the tax bill move forward. Malloy’s rejection of the bill — which comes amid the attempted resolution of a state budget crisis — follows vocal opposition from the University and state Republicans, who claim that a tax on Yale’s endowment is unnecessary because the University already contributes significantly to the state economy. Democratic lawmakers from New Haven and local city officials have backed the bill, arguing that the tax would spur the University to fund higher education, the state’s technology sector and student tuition.
“Many proposals are put forward during the legislative session, and many stay as just that — proposals,” Malloy’s spokesman Devon Puglia said in a statement. “As the governor has made clear, we don’t believe that new taxes should be part of our solution as Connecticut adjusts to a new economic reality.”
The proposed S.B. 413, “Act Concerning a Tax on Certain Endowment Funds of an Institution of Higher Education,” targets schools in Connecticut with endowments exceeding $10 billion. The bill singles out Yale — the only Connecticut institution of higher learning with such an endowment. The University considers the bill an inappropriate measure because it targets a single institution, according to University spokesman Tom Conroy.
The bill would impose a tax of approximately 7 percent on annual University endowment returns. State Rep. Toni Walker, D-New Haven, estimates that Yale would pay an annual $78 million to the state through the tax.
The resulting tax revenue amounts to over 30 percent of the $220 million in cuts made by lawmakers through a bipartisan plan to close an immediate budget deficit Tuesday, the same day that the Malloy administration shot down S.B. 413 and Scott held a press conference inviting Yale to Florida.
“It’s wonderful to be recognized as an outstanding asset, but Yale, New Haven and Connecticut have been on common ground to great mutual benefit for 300 years,” Conroy told the News on Wednesday.” We’re looking forward to reaching even greater heights in education, research and civic engagement over the next three centuries and more.”
Scott’s invitation for the University to pull up stakes and seek refuge in warmer weather came with a promise that the Florida governor would not impose taxes. Scott indicated he has not raised taxes since he took office in 2011, but has instead slashed $1 billion through tax cuts over the last two years. In June, Scott traveled to Connecticut to urge other Connecticut businesses to relocate to Florida.
Others have said the proposed endowment tax could drive Yale from the state, referring to the recent departure of General Electric from Fairfield for Boston, suggesting that the bill reflects an attitude that stifles economic growth.
In the state finance committee’s public hearing for the bill on March 22, state Rep. Laura Devlin, R-Fairfield, said business taxes drove GE from Connecticut. She questioned the effect of a similar tax on Yale. A March 28 opinion article by FutureOfCapitalism.com Editor Ira Stoll suggesting that Yale follow GE to Boston gained momentum online. Stoll cited multiple advantages to such a move, such as shorter travel time for the Harvard-Yale football game and lower taxes for professors who relocate with the University.
The bill has picked up the attention of many state and national news organizations, including the Hartford Courant, which published a March 25 editorial extolling the University’s prudent financial planning under Chief Investment Officer David Swensen and condemning what it called the “shambles” of Connecticut’s finances.
“The word ‘plan’ isn’t in the vocabulary of our leaders in Hartford,” the Courant wrote. “It is easy to understand why legislators are so eager to raid the ivy-covered coffers of those blue-blooded showoffs in New Haven.”
But the sentiment that private pools of money should be taxed by the government predates last week’s proposed bill, said William Jarvis ’77, managing director of the Commonfund Institute, an institutional investment firm. Since the 1960s, legislators have attempted to direct the earnings of large university endowments with laws like the Tax Reform Act of 1969, Jarvis added.
“It’s a sentiment that will not go away,” Jarvis said. “Right now, universities are written about more [and] watched more. They’re regarded as financially sophisticated and successful investors.”
But Jarvis noted that many proposals to tax endowments stand on false assumptions about those endowments, which are not undifferentiated pools of money. Instead, around 75 percent of Yale’s $25.6 billion endowment is restricted, meaning it can only be spent on certain parts of the University like financial aid or athletics.
This legislative session, state lawmakers have also proposed a bill clarifying Yale’s property taxes, S.B. 414. Although New Haven Mayor Toni Harp has not commented publicly on the proposed endowment tax, she has vocally supported the property tax bill.
Jarvis said this proposal is tied to historically poor town-gown relations between Yale and New Haven, which are exacerbated when Yale shrinks the city’s tax base by purchasing new property. These tensions have improved in the past few decades due to former President Richard Levin’s efforts to channel more Yale funding into the city, Jarvis added.
Beyond the historical precedent for both bills, Yale suggested the bills may be unconstitutional. Associate Vice President for Federal Relations Richard Jacob argued that the University would defend its constitutional right of nontaxation in front of the finance committee on March 22. This right, according to the University, was established by its charter in 1701 and backed by the state’s 1818 constitution.
Jacob also reminded lawmakers in Hartford about the University’s impact in both New Haven and Connecticut as the city’s largest and state’s fifth largest employer. In addition, Yale voluntarily pays New Haven more than $8.2 million each year, totaling $96 million since 1991.
The University has begun an aggressive outreach effort battling both bills. On Wednesday evening, Vice President and Director of New Haven and State Affairs and Campus Development Bruce Alexander ’65 emailed University alumni living in Connecticut, imploring former students to share their concerns on the “unprecedented and extraordinary bills,” which Alexander alleged were prompted by union lobbying to local lawmakers.
“As some organizations cut back, and some corporations moved out of state, Yale has remained a steadfast leader in contributing to the prosperity of its hometown and state,” Alexander wrote. “Singling out a longstanding partner for criticism threatens long-lasting harm to Connecticut’s ability to attract other partners to promote prosperity for its citizens.”
Alexander emphasized that, in spite of support from the Courant and the Malloy administration regarding the endowment tax, the bills remain a “serious concern” during this legislative session.
In his written testimony to the finance committee, President of the Greater New Haven Chamber of Commerce Anthony Rescigno argued to reject the endowment tax bill. Rescigno estimated that Yale contributes $8.7 billion to Connecticut’s economy annually. He pointed out that nonprofit organizations like Yale are already required by law to use money for the public.
“This bill ignores the economic impact created by Yale,” Rescigno wrote. “Lacking any connection to reinvestment in the community, the bill misses the larger picture.”
This larger picture, Jarvis said, is that in addition to educational resources, Yale benefits the town by providing jobs and bringing students to the city.
Jarvis added that although universities like Yale do tremendous good, many people in the U.S. see them as “overweening” in their wealth.
Before moving to New Haven in 1716, the University was located in Old Saybrook.
Correction, March 31: A previous version of this article stated that Rep. Toni Boucher, R-New Canaan, referred to General Electric in a March 22 public hearing. In fact, it was Rep. Laura Devlin, R-Fairfield, who made this point.