For the latest evidence of the town-gown divide, look no further than New Jersey, where earlier this summer residents of Princeton banded together to sue the prestigious school in their backyard. The residents argued that Princeton University, which boasts the largest endowment per student in the country, should no longer be entitled to its tax-exempt status because the school makes money—from its scientific patents, ticketed concerts, on-campus eateries and more. The Ivy League school is operating like a business, the plaintiffs say, so the tax code should treat it like one.
The conflict isn't going away. In June, a state tax court judge said the case had merit and refused the school's request to dismiss the case. Princeton officials don't seem worried: Reacting to the judge's decision, a school vice president said that he expected any adjustments to its tax bill to be "quite modest."
Perhaps, but the townies still have a point. According to the lawsuit, the university took in over $115 million from patents in 2011, of which $35 million was given to various faculty members. The lawyer for the plaintiffs told the Times of Trenton that "People in Princeton pay at least one-third more in taxes because the university has been exempt all of these years." If all of the school's property were taxed, the bill would come to roughly $28 million a year, instead of the roughly $10 million the university is now contributing voluntarily to town coffers.
The tax controversy is also springing up elsewhere. Last year, the mayor of Providence, R.I., suggested that it was time for his city's largest employer, Brown University, to increase its tax payments. "Our taxpayers already subsidize the tax-exempt institutions in this city," Mayor Angel Taveras said. "It takes the revenue collected from 19,000 taxpayers" to account "for the $38 million in property taxes not paid by Brown University," he said at a press conference.
In March the mayor of Pittsburgh, Luke Ravenstahl, sued the University of Pittsburgh Medical Center on grounds that the teaching hospital had a "profit motive" and therefore shouldn't be tax exempt. The city sought to recover payroll as well as property taxes going back to 2007. The medical center filed a countersuit, claiming the city's actions violated the due process and equal protection clauses of the Constitution because it singled out the hospital among all of Pittsburgh's nonprofits. The city's lawyers call this reasoning "bizarre," and have filed a motion for it to be dismissed.
State and local governments have typically followed suit by exempting schools from local taxes. Yet Princeton—with its $16 billion endowment, high tuition and research funded by federal and corporate grants—is a very different institution today than it was when the law passed nearly a century ago.
In the intervening decades, some schools like Johns Hopkins, Yale and Duke have worked out Pilot (payment in lieu of taxes) programs with cities or towns. But these donations fall well below what the universities would owe in taxes. Under a deal reached last year between Brown University and Providence, for example, the university agreed to voluntarily pay an extra $3.9 million per year through 2016 and an extra $2 million per year through 2022 for a total of $31.5 million to the city in lieu of taxes that the mayor claims should be $38 million a year. In exchange, Providence is giving the university control over some of the streets adjacent to campus and additional parking permits.
The negotiation of Pilot deals is often secretive and contentious. A university might agree to pay a certain amount, but the school's administration might try to pressure public officials to reconsider zoning laws or other public policies that affect the institution. This kind of wheeling and dealing puts public officials in a difficult position, gives universities undue influence over local governments, and creates more problems for the long-term stability of local economies.
Maybe it's time to treat universities like for-profit enterprises. They are certainly behaving like big businesses. In her 2009 book, "Wannabe U: Inside the Corporate University," Gaye Tuchman, a sociologist at the University of Connecticut, describes a conversation with an administrator at a large research university.
"It's all about money," he told Ms. Tuchman, when asked about the school's priorities. In service of that goal, the athletic director at the same school explained: "We're doing what we can to preserve our brand." The school had barred the philosophy department from producing T-shirts for a conference because counterfeit apparel had recently been sold at football games—cutting into the school's profits.
T-shirts are only the tip of the iceberg. Universities make money from the television rights to athletic events, music performances, cafes, alumni vacation tours and more. As a former top administrator at Emory University put it to Jennifer Washburn in her book "University Inc.": "At the time I got into academia, most people believed they were doing what they were doing—generating ideas and discoveries—because of the public good. . . . Now, when you go look at university business plans, as they are called, students are seen as clients, parents are seen as customers. The question has now become, 'What is going to sell?' "
The fact that universities behave more like businesses may or may not be laudable. There is certainly something to be said for schools being accountable to students and parents. But a relentless focus on expansion and profit can diminish the importance of teaching and learning. Either way, this trend isn't going away, and residents and local business owners in university towns may no longer be willing to buy the line colleges are selling.
Mr. Piereson is president of the William E. Simon Foundation. Ms. Riley is the author of "The Faculty Lounges . . . And Other Reasons Why You Won't Get the College Education You Paid For" (Ivan R. Dee, 2011).