Leveling the playing field: the Taxpayer Relief Act of 1997 and tax-exempt borrowing by nonprofit colleges and universities.

I. INTRODUCTION In 1997, Congress passed and President Clinton signed legislation that lifted a cap on the amount of tax-exempt debt outstanding by nonprofit organizations that were not hospitals. The [...]
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. Keywords: cost of capital, nonprofit higher education, tax-exempt debt JEL Codes: H20, H54, L30