Leveling the playing field: The taxpayer relief act of 1997 and tax-exempt borrowing by nonprofit colleges and universities

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.