(Bloomberg) -- A Republican sweep in November’s US election threatens a niche tax break that helps American colleges to upgrade dorms and academic buildings on their campuses for cheap.
There are more than 1,700 private, nonprofit colleges and universities in the US which can sell tax-free bonds for infrastructure projects, providing a lower cost of debt than a traditional loan. After the GOP took the US House, Senate and White House, colleges’ tax-exempt benefit is at risk as lawmakers look for ways to offset the cost of extending tax cuts, according to muni analysts.
“The private higher-education sector is probably one of the more vulnerable muni sectors,” as policymakers will likely have it in their sights, said Mikhail Foux, a strategist at Barclays Plc, in a November research note.
Elite colleges have become a target of Republican lawmakers in the wake of controversies over campus antisemitism and protests against the Israel-Hamas war in Gaza. GOP officials also view schools as having become too progressive and intolerant of conservative ideas.
President-elect Donald Trump said schools could lose their accreditations and federal support, while his key backer, Tesla Inc. boss Elon Musk, alleged “something is seriously wrong” with elite universities. Vice President-elect JD Vance last year proposed legislation raising the tax on endowments of the wealthiest colleges.
That rhetoric has sparked concern over a potential repeal of the schools’ bond perk as lawmakers search for new revenue to extend Trump’s 2017 tax cuts. During Trump’s first term, lawmakers proposed curbing the sale of private activity bonds as part of their tax overhaul. Such debt can be issued by public agencies on behalf colleges, hospitals, airports, affordable housing developers, and other charities and nonprofits.
Chuck Samuels, a lawyer at Mintz, said he’s concerned that private activity bonds could be a target. He works as counsel to the National Association of Health and Educational Facilities Finance Authorities, a group of entities that can sell bonds on behalf of nonprofit borrowers.
Samuels urged non-profits to explain the importance of tax-exempt bonds to their members of Congress. “We’ve been through it before and we need to be ready to deal with it,” he said.
Colleges have roughly $179 billion of tax-exempt debt outstanding, according to data compiled by Bloomberg. The schools often tap the market to finance campus renovations or expansion efforts. From small liberal-arts schools to giant universities, the institutions have been on a borrowing binge this year to spruce up their campuses and lure the next generation of students.
Lower Yields
The tax benefit allows them to offer lower yields than benchmark debt. Long-dated, top-rated tax-exempt yields are about 85 basis points lower than 30-year Treasuries, according to data compiled by Bloomberg. Analysts have speculated that any change to the tax-exemption would affect future bond sales. That would make existing tax-free securities more valuable.
To be sure, some municipal bond experts view a reduction in the tax-exemption as less of a possibility. No specific proposal on college bonding has been made. Analysts at Municipal Market Analytics, an independent research firm, said that the private-activity bond statuses are most at risk, followed by an elimination for housing or hospitals.
Curbing the use of tax-exempt muni bonds wouldn’t raise much revenue for the federal government. It is estimated to cost about $3 billion a year to provide the exemption on bonds sold for private nonprofit education facilities, according to the Treasury Department.
If there were restrictions imposed, wealthy institutions like Ivy League schools would likely shift to the taxable bond market, where they already often sell debt. Those deals are typically large and have high credit ratings.
The impact would be most acute on smaller institutions with lower credit ratings, which may have a tougher time accessing that market. Such schools are already pressured by dwindling enrollment and a challenged demographic outlook as the number of high-school seniors declines.
“Reduction or elimination of access to tax-exempt bonds is likely to accelerate the closure of smaller private colleges,” said Malcolm Nimick, president of Ascension Capital Enterprises LLC, a financial advisory firm.
--With assistance from William Selway.
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