As published in the Winter Park/Maitland Observer, Thursday Jan. 3, 2012 Edition Offers... Read More »
Academia Benefits from Illegal Tax Arbitrage
ar·bi·trage (ärb-träzh) n. - the purchase of securities on one market for immediate resale on another market in order to profit from a price discrepancy.
- American Heritage Dictionary, Fourth Edition -
The CBO has issued a report titled Tax Arbitrage by Colleges and Universities alleging that tax exempt colleges are engaging in a form of indirect tax arbitrage (emphasis added):
The law explicitly prohibits the use of tax-bond proceeds for the purchase of investment assets, a practice known as tax arbitrage; however, issuers of tax bonds may use the proceeds for the purchase of operating assets while they simultaneously hold investment assets that provide a higher rate of return.
To the extent that colleges and universities earn an untaxed return on investments that exceeds the interest they pay on tax debt, they are benefiting from a form of indirect tax arbitrage.
The law allows a tax-exempt college to raise the capital it needs in order to conduct research and expand facilities through the issuance of tax-free bonds. But if a college already has invested capital on which it is earning a rate of return that exceeds the bond rate, it doesn’t need to issue tax-exempt bonds at taxpayer expense to raise capital. It already has the capital.
The only reason a not-for-profit college or university would want to retain it’s invested funds while raising taxpayer-subsidized capital is to benefit from the spread on the interest earned on those funds and the amount of interest it has to pay on the tax-free bonds. In other words, to make a profit.
The CBO report makes no overt recommendation, but the clear implication is that colleges and universities should be forced to exhaust their invested, liquid funds before they are permitted to float a taxpayer-subsidized bond issue.
As part of its stated effort to close the tax gap, the Obama administration should agressively pursue tax-exempt organizations that abuse the rules at taxpayer expense.
(Hat Tip: Shirl Kennedy, Docuticker)