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ERIC Number: ED509715
Record Type: Non-Journal
Publication Date: 2010-Apr
Pages: 25
Abstractor: ERIC
Reference Count: 0
Tax Arbitrage by Colleges and Universities. A CBO Study
Congressional Budget Office
Colleges and universities enjoy a variety of federal tax preferences that are designed to support a broader public purpose--the advancement of higher education and research. Not only are institutions of higher learning exempt from paying federal income taxes, they also are eligible to receive tax deductible charitable contributions and allowed to use tax exempt debt to finance capital expenditures. This Congressional Budget Office (CBO) study focuses on one of those tax advantages, the ability of colleges and universities to borrow funds by issuing tax exempt debt. According to the staff of the Joint Committee on Taxation (JCT), the cost of allowing institutions of higher learning to borrow using such debt--measured in terms of the revenues that could have been collected if those institutions had borrowed using taxable debt--will be about $5.5 billion in 2010. The use of proceeds from lower cost tax exempt bonds to directly finance the purchase of higher yield securities--a practice known as tax arbitrage--is prohibited by law. Nevertheless, the law as currently implemented allows many colleges and universities to use tax exempt debt to finance investments in operating assets (buildings and equipment) while, at the same time, they hold investment assets that earn a higher return. (Investment assets are publicly traded and privately held securities, as well as land or buildings held for investment purposes.) To the extent that colleges and universities can earn untaxed returns on investments that are higher than the interest they pay on tax exempt debt, they are benefiting from a form of "indirect" tax arbitrage. The appendix presents alternative calculations of bond holdings that would earn profits from tax arbitrage under a broader definition using no adjustments for misreporting tax-exempt-bond liability or for assets held by supporting organizations. (Contains 4 tables, 3 figures, 1 box and 29 footnotes.)
Congressional Budget Office. Ford House Office Building 4th Floor, Second and D Streets SW, Washington, DC 20515-6925. Tel: 202-226-2809; e-mail:; Web site:
Publication Type: Reports - Research
Education Level: Higher Education; Postsecondary Education
Audience: N/A
Language: English
Sponsor: N/A
Authoring Institution: Congressional Budget Office