Among the surprise provisions in the tax bill released last week by House Republicans were the elimination of municipal bonds popular with hospitals and universities for construction, along with a tax on the largest university endowments.
If the proposal, designed to help the bill’s architects pay for steep reductions in corporate taxes and other areas, were to make it through the legislative meat grinder, it would represent a big setback for health systems and universities, analysts said.
“The timing is not optimal,” Tom Kozlik, municipal strategist at PNC Capital Markets Group, said Monday. “At a time when many are struggling to regain their financial footing and deliver quality service, this proposal makes it harder.”
Alan Schankel, municipal strategist at Janney Montgomery Scott LLC, predicted that getting rid of so-called private activity bonds would reduce the amount of tax-free municipal bond issuance by as much as a third. The total issued last year was $402 billion, according to Bond Buyer data provided by Schankel.
“Nonprofit hospitals and universities will face higher borrowing costs for infrastructure projects,” Schankel said. “This will hasten ongoing consolidation amongst hospital systems, as smaller hospitals have reduced options for financing projects needed to remain competitive.”
“Universities, many of which have experienced enrollment headwinds due to regional demographic challenges, will face difficult decisions and potentially higher tuition to support needed investments for updated student housing and classrooms,” he said.
Tax-free bonds have lower interest rates because investors don’t have to pay taxes on the interest income.
The House Ways and Means Committee said last week that terminating these bonds and the tax breaks that go with them would increase federal revenues by $38.9 billion through 2027.
The 425-page bill also would end the use of tax-exempt bonds for professional sports stadiums. Citizens Bank Park and Lincoln Financial Field each were partly financed with tax-exempt bonds when they were built more than a decade ago, according to a Brookings Institution report.
Other proposals would whack nonprofits, including one that would levy a 20 percent tax on total remuneration over $1 million for the five highest paid employees at nonprofits.
Another would impose a 1.4 percent tax on net investment income on the nation’s wealthiest private colleges, including Swarthmore College, the University of Pennsylvania, Bryn Mawr College, and Haverford College among the roughly 140 that would be hit by the tax, according to the Chronicle of Higher Education.
The tax, which would raise an estimated $3 billion over the next 10 years, would apply to colleges with at least 500 students and an endowment of at least $100,000 per full-time student.
Swarthmore’s $1.96 billion endowment, as of June, works out to $1.25 million per student enrolled this fall.
“This tax bill seeks to limit our ability to help keep a Swarthmore education affordable to low-income students by diminishing available funds for financial aid, which is the primary use of our endowment spending,” said Greg Brown, Swarthmore’s vice president for finance and administration. He did not respond to a question about how much the tax would cost the college.