Last week, the often-provocative Victor Fleischer rocked the higher education world with a New York Times op-ed that accused universities of hoarding their often-enormous endowments instead of spending the funds on student aid. Vic, a tax law professor at the University of San Diego, suggested that colleges be required to spend at least 8 percent of their endowments each year. But he could have asked a more fundamental question: Why are these funds tax-exempt at all. There is no doubt that tax-exempt status is enormously beneficial to universities. They are exempt from local, state, and federal income taxes. They are exempt from property taxes, even as they receive an estimated $80 billion in support from state and local governments, according to a study by the Nexus Research & Policy Center. Some schools do make voluntary payments in lieu of property taxes, but many do not. Even their non-academic income, from the sale of everything from football skyboxes to tee shirts and computers, is often tax-free (though in theory the law requires them to pay tax on this unrelated business income).  Thanks to their special status, universities often finance capital projects with tax-exempt bonds. Not only are gifts from well-heeled alumni deductible to the givers, but investment earnings on the cash hoards are tax-exempt. These endowments are enormous, topping $500 billion according to one estimate.  And they are highly concentrated. In 2014, the top 10 schools held nearly one-third of those assets. The Nexus study found enormous variation in the per-student value of these subsidies. For instance, it calculated that the average per-student subsidy at private, high-endowment schools was more than $41,000 but barely $5,000 at community colleges. In New Jersey, compare Princeton’s per student subsidy of $105,000 with Rider University’s $500. The study took into account some direct payments to schools and grants to students. It excluded research grants and property tax exemptions. It also assumed that all increases in the value of endowment assets  were taxable gains though current law taxes only realized gains. The funds are often aggressive investors. In 2014, the largest endowments were heavily into private equity, venture capital, and junk bonds. And these assets paid off. The endowments earned more than 15 percent in 2014, on top of an 11.4 percent return in 2013. All exempt from capital gains taxes.  In 2013, former Reuters columnist Felix Salmon memorably called Harvard, “a hedge fund with an educational institution attached.” As Fleischer noted, the twin exemption for both contributors and the endowments themselves at least creates an environment for a troublesome conflict of interest: Wealthy investment managers make big tax-deductible gifts to the universities.  The endowments hire the giver’s investment firm to run their money, paying extremely generous fees in the process. Fleischer doesn’t try to prove a quid pro quo, but it is worth asking why taxpayers should be subsidizing these incestuous relationships. Of course, some tax-deductible alumni gifts are used for tuition assistance, much of it aimed at low-income or otherwise disadvantaged students. But not all of it. High endowment schools often enroll low percentages of students eligible for Pell Grants. And the highest paid employees of many universities are the internal money managers who run the endowments (and, of course, the football and men’s basketball coaches who are also funded at least in part by tax-exempt booster money). Backers of the current tax-exempt status will argue, rightly, that removing the exemption will shrink after-tax returns and leave less money to help needy students. I suspect that’s why Fleischer would allow them to retain the exemption as long as they spend at least 8 percent of their endowments annually. Typically, foundations must spend 5 percent. In 2008, the then-chair and ranking member of the Senate Finance Committee, senators Chuck Grassley (R-IA) and Max Baucus (D-MT) floated the idea of a 5 percent mandatory payout for universities. It went nowhere. The Nexus study has an alternative solution: Impose a modest excise tax on endowments in excess of $500 million. One could also require something like the community benefit obligations required for non-profit hospitals. In such a model, a fixed percentage of endowment funds would be targeted to a specific, well-identified need. But why not just make the endowments taxable and use some of the huge revenue windfall to boost tuition assistance and other supports for those students who really need it?