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Leveling the Playing Field: The Taxpayer Relief Act of 1997 and Tax-Exempt Borrowing by Nonprofit Colleges and Universities

Todd L. Ely and Thad D. Calabrese

Abstract:

As part of the Tax Reform Act of 1986, non-hospital nonprofit organizations were subject to a $150 million cap on tax-exempt debt outstanding. This federally-imposed constraint was lifted by the Taxpayer Relief Act of 1997. This paper examines how this credibly exogenous policy change — which was little noticed outside of the municipal bond industry — reduced the cost of capital, and, as a result, led to a significant increase in the use of tax-exempt debt overall and relative to other financing sources by nonprofit colleges and universities. Using two different comparison groups and a difference-in-differences estimation strategy, we find that nonprofit colleges and universities significantly increased the use of tax-exempt borrowing and altered capital structures following the policy change in 1997 with some variation by degree of constraint.

Citation

Todd L. Ely and Thad D. Calabrese (2016), Leveling the Playing Field: The Taxpayer Relief Act of 1997 and Tax-Exempt Borrowing by Nonprofit Colleges and Universities, National Tax Journal, 69:2, pp. 387-412

DOI: dx.doi.org/10.17310/ntj.2016.2.05