25 Largest Private Institutions Seen as Hardest Hit : Colleges, Students Could Be Tax Losers

College and university administrators warned Wednesday that their students and employees could be among the biggest losers if Congress enacts the new tax bill after its Labor Day recess.

Although precise dollar estimates are not available, education analysts said the landmark federal tax revision could cost scholarship students substantial sums because they would be liable for taxes on part of their scholarship money. Campus employees, particularly professors, could be forced to forgo sizable pension benefits, the analysts said, and the campuses themselves could lose hundreds of millions of dollars in tax-free bonds and charitable contributions.

Hardest hit would be the nation’s 25 largest private research universities, including USC and Stanford University, they said. Many, but not all, experts agreed the tax bill would have an adverse impact on all educational institutions, from the smallest private colleges to the largest public universities.

“I believe that we (universities) are one of the single biggest losers in this tax bill,” said Larry Horton, Stanford associate vice president. “I can’t think of a single other group that fared as badly. We had four major issues. We lost on every one of them. . . . When we heard the news that we lost as badly as we did, there were a lot of ashen faces in university presidents’ offices.”

Of particular concern to private colleges and universities is a provision in the tax bill that would put a $150-million cap on the amount of tax-exempt bonds that any one institution could issue. The cap would have a particularly serious impact on the country’s 20 to 25 largest research universities, which have depended on tax-exempt bonds as a way to finance costly renovation and construction of new hospital facilities and research laboratories.

Construction Planned

USC, for example, is approaching the proposed cap with $130 million in debt and $30 million to $40 million in new bond financing anticipated. Stanford has between $250 million and $300 million in tax-exempt bonds and has been planning construction that would amount to more than half-a-billion dollars over the next few years.

In California, the $150 million cap also would affect small, private colleges because of a system of “pooled financing” in which prestigious private universities cooperate with small, lesser-known colleges in the state in seeking tax-exempt bonds, according to Jonathan Brown, vice president of the Assn. of Independent California Colleges and Universities.

Brown’s organization, which represents 63 of the 80 accredited private colleges in California, provides nearly a quarter of all the state’s baccalaureate degrees, nearly half of all masters and doctorate degrees and nearly three-quarters of California’s professional degrees. Each year, California’s private colleges raise about $1.25 billion in private funds.

Fellowships Included

Another matter of concern to private colleges and public universities is a provision in the tax law that would change tax treatment for students who have scholarships and fellowships.

While the new law would maintain tax exemptions for tuition, it would require students to pay taxes on scholarships that cover room and board and on fellowships for graduate students who are teaching assistants.

According to Dennis F. Dougherty, USC’s treasurer and vice president for finance, “the tax liability for students would just about be tripled.” At USC alone, he said, several thousand students would be affected and it would “surely be the poorest students who were supposed to be helped by the tax law, not hurt by it.”

A third provision in the law that troubles many university administrators is the way employee pension plans would have to be set up. Under current tax law, universities may have more than one type of pension plan for their employees. But the new law would require one pension system for all employees.

Recruited Nationally

Typically under the present system, colleges have set up one plan for “local” employees such as secretaries and groundskeepers. Another plan, usually more generous, has served professors and administrators recruited nationally.

Critics call such a system discriminatory, but university officials argue that having a special plan for professors allows institutions to help compensate professors for their relatively low pay in comparison to other professional groups. A change in the system, they argue, not only will be costly to universities but could push professors in some disciplines out of the teaching profession.

The fourth section of the tax bill that universities dislike concerns deductions for charitable giving.

Taxpayers who do not itemize their deductions no longer would be allowed to deduct charitable contributions. And, since tax rates under the legislation are lower, the deductions of those who itemize would not be worth as much as in past years, a factor that some experts believe could reduce the incentive to make gifts.