A mistake in Republicans’ tax overhaul is allowing many state universities to escape a crackdown on highly paid executives.
Lawmakers inadvertently exempted public universities — though not private ones — from a new 21 percent tax they created on nonprofits that pay their employees more than $1 million.
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There are hundreds of million-dollar employees on college campuses, many of them football and basketball coaches. Nick Saban, the University of Alabama football coach who earlier this week lost his bid for a sixth national championship at the school, earned $8.3 million in 2018, according to USA Today, which tracks coaches’ pay.
Republicans are now trying to correct the snafu, though there is no sign that Congress will act anytime soon. In the meantime, the oversight is saving public universities millions in taxes. The levy is paid by the school, not the employee.
“Congress knows it screwed up,” said Paul Streckfus, a longtime expert on tax-exempt organizations. “If you’re a state university, this is a pretty nice deal.”
It is one of more than 70 glitches in the Tax Cuts and Jobs Act. It’s not unusual for there to be errors in major legislation, though critics say the 2017 law was rushed through Congress so quickly that it has an unusually large number.
Democrats have been preventing Republicans from cleaning up the mistakes, partly in retaliation for the GOP stopping them from addressing hitches in the Affordable Care Act. This one could be harder politically to block, though, given Democrats’ push to raise taxes on the rich.
As part of the tax law, and attracting little notice, Republicans cracked down on executive compensation, taking away deductions for businesses that pay executives more than $1 million.
Republicans say they wanted to treat nonprofits equally. But because those groups don’t pay taxes to begin with, lawmakers couldn’t take away deductions. So they created a new 21 percent tax on compensation exceeding $1 million. It generally applies to the five highest-earning employees at hospitals, charities, universities and other nonprofits.
The problem came in how lawmakers targeted colleges.
The law stipulates the tax applies to so-called 501(c)3 organizations, as well as those that fell under another arcane section of the tax code.
Republicans thought that did the trick, but it turns out that, while private colleges are typically 501(c)3s, many, if not most, public institutions do not fall into either of those categories. Public schools contend they are actually part of their state governments and therefore exempt from any federal taxes.
“They’re recognized as tax-exempt entities because they’re creatures of the state,” said Steven Bloom, director of government relations at the American Council on Education.
In recent weeks, the federal government has agreed.
The Joint Committee on Taxation, Congress’s nonpartisan tax advisers, identified the provision as one of more than 70 in the law that need correcting. The IRS essentially seconded that in guidance released late last month detailing how the tax is supposed to work.
Shortly before he gave up his Ways and Means chairmanship, Rep. Kevin Brady (R-Texas) introduced legislation that would expand the tax to all universities.
The glitch will translate into significant savings for public schools, especially as pay for top employees has climbed rapidly in recent years. At the same time, it means private universities are put at a competitive disadvantage.
“It could be quite unfair,” said Streckfus, who edits and publishes EO Journal, which focuses on tax-exempt organizations. “If you’re a private university paying your coach $5 million versus a public university also paying their coach $5 million – there’s quite a difference in the tax impact.”
Public institutions had 206 employees who earned more than $1 million in 2016, according to the Chronicle of Higher Education, which tracks executive compensation at universities.
Most of them that year were coaches or athletic directors, including University of Kentucky basketball coach John Calipari ($7.2 million), University of Oklahoma football coach Bob Stoops ($6.4 million) and University of Michigan football coach Jim Harbaugh ($5.2 million). Much of the rest of the list is comprised of university presidents and chancellors, investment officers and medical faculty.
Private schools had 180 million-dollar employees in 2017, the Chronicle says.
Not surprisingly, public and private universities hate the new tax. They’re emphasizing the threat it represents to their medical school staffs, though the law includes special provisions to deal with physicians’ income.
“The vast majority of presidents and chancellors and coaches don’t make anywhere near [$1 million], but the medical faculty? You’re going to see a big problem,” said Bloom.
It’s too early to know exactly how the glitch or the new tax will affect how much universities are willing to pay top employees, said Raymond D. Cotton, a partner at the law firm Nelson Mullins who specializes in executive compensation on college campuses.
He predicts it will push down salaries and benefits at less-wealthy schools but will make little difference at places like Harvard University that have huge endowments.
Decisions on how much to pay people like presidents don’t come up very frequently though, said Cotton, so many college boards that approve compensation packages are not yet aware of the levy or the glitch.
“I can tell you for an absolute certainty that when boards find out about this tax, they’re going to be furious.”