Across the country, private universities are generally exempt from federal taxes and are classified as nonprofit institutions, often referred to by the statute that defines them: 501(c)(3). States generally follow the standard set by the federal government and also allow private universities to avoid taxes on their holdings — Rhode Island is no exception. Tax-exempt status is enjoyed by private universities because it is assumed that they do not collect tuition and grow their endowments for the sake of private profit, but rather to provide for their students. More significantly, these institutions are supposed to be mission-driven and furnish an essential product: an educated citizenry necessary to sustain American democracy and maintain the country’s economic competitiveness. Thus, it has been reasoned, the imposition of taxes would only serve to hinder universities’ ability to provide these services for the American populace. However, this is not the case. Private colleges and universities should be taxed in order to properly account for their impact on surrounding communities — and passage of legislation in Rhode Island could serve as a catalyst for this movement.
Two major issues emerge with the common explanation for universities’ tax-exempt status. The first is that it is unclear whether a college actually creates more public good than other investments or purchases. Is it really the case that the students educated at universities provide critical support for American democracy that they could not provide if the universities’ endowments were taxed? A cursory examination would suggest otherwise. The benefits of a degree are experienced most strongly among those from higher income brackets, casting doubt on the idea that college is a positive for everyone, let alone those who don’t attend in the first place. Relatedly, receiving a college degree has been likened to buying a home: It ensures prosperity for certain holders, but has murky benefits for society. Sure, colleges create jobs in themselves and can generate research that can help those around the world. But a blanket tax-exempt policy implies that the basic product colleges offer — degrees — is valuable on its own. We should not expect that everyone must get a college degree to add to American society. Someone with a high school diploma can just as easily engage with the American political process or economy as someone with a college degree, even if a degree may bring its holder a greater level of fluency in some of the more esoteric and complex of society’s processes. In short, we’re giving colleges too much credit.
In addition to producing predominantly private benefits, universities are also abusing their tax-exempt status to wreak havoc on municipal revenue streams. In many cities and towns across the country, universities are often some of the largest landlords in the area. With primary and secondary school funding being largely derived from local and state property taxes, the tax-exempt status of these universities leaves huge holes in school budgets. On top of this, localities often must still provide services for the university, including road and electrical maintenance, snow removal, trash pickup and fire protection while the university pays no taxes to support them. As a result, these universities leave the cities they inhabit in fiscally dire straits, forcing them to find ways to provide services when large portions of the land they would use to pay for it are not able to be taxed. And, often, schools are hit first in local budget cuts.
Rhode Island lawmakers have recognized this issue for some time, but this past year has seen important progress in redressing it. Three bills currently under review in the Rhode Island General Assembly aim to solve this problem: H7956, H7813 and S2600. At their core, these bills would allow localities to tax the property owned by these colleges or their endowments. H7956 and S2600 would allow for the taxation of university property, and H7813 would allow for a locality to tax up to 2% of a university’s endowment to fund local public schools.
The benefit these bills would bring to Rhode Island cannot be overstated. Take Providence, where nearly 40% of all land in the city is tax-exempt, partially because of the large sums owned by Brown, the Rhode Island School of Design, Providence College and Johnson and Wales University, with Brown being the largest institutional landowner in the entire city. Currently, the city of Providence receives payments in lieu of taxes from local colleges, which amount to $7.2 million in total. But if H7956 were to be passed and the city could tax university land, Providence would likely receive more than $80 million from its various colleges and universities in property taxes. The implementation of this bill would increase the revenue from universities to the city tenfold and increase the city budget by something like 14%. It goes without saying that such an enormous infusion of cash to the city would allow it to produce tangible changes for its residents, especially its young students. If H7813 is also passed and the city is allowed to tax endowments, schools in the city would immediately see an additional $155 million in funding, a dramatically impactful sum for grossly underfunded Providence public schools.
Universities should be for the public good. Ultimately, institutions of higher education, particularly those in Providence, can either preserve their tax-exempt status or fulfill that mission. Preserving tax-exempt status means continuing to expand university influence across the city, further shrinking the tax base and harming the educational opportunities of more and more public school students. If Rhode Island colleges relinquish their tax-exempt status and pay their fair share, they will do far more to educate students and preserve American democracy than they can claim to do right now. Education is the surest path to opportunity today, and universities can provide education to far more than their own students by giving up their tax-exempt status.
Gabe Sender ’25 can be reached at firstname.lastname@example.org. Please send responses to this opinion to email@example.com and other op-eds to firstname.lastname@example.org.