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

National Tax Journal, 2016, vol. 69, issue 2, 387-412

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.

Date: 2016
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