Taxing Higher Education (Nov. 6)

Dana

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There is broad consensus among tax experts that the way education finance is treated in the tax code has exacerbated problems contributing to a trillion-dollar student debt overhang.  Student debt today is the largest class of consumer debt, ahead of auto and credit card debt.

The bill that House Ways and Means is marking up this week hikes taxes on student  in various ways, with the heaviest burden falling on middle and working class students and families — and the changes don’t even raise much revenue in the process.

University Endowments

An unexpected provision in the Republican tax bill  introduced a 1.4 percent excise tax on the investment income of private universities with an endowment of at least $100,000 per full-time student.  The move has raised alarms among  universities and academic interest groups concerned that the tax will make college education substantially more expensive.  Martha Pollack, President of Cornell University, has called the proposed tax a “very serious problem,” claiming it would cost her university $10.5 million in the first year alone.

The New America Foundation and the National Association of College and University Business Officers estimate that around 160 universities would meet the proposed taxation threshold.  The average loss per educational institution is $187.5 million.  Republicans claim the tax could produce just $30 billion in revenue over the next ten years. This is a drop in the $1.5 trillion deficit bucket which Republicans seek to fill.

Charitable Deduction

Donations constitute the primary funding source for university endowments.  Such donations can be deducted as charitable giving. With the move to filing taxes on a postcard under the House legislation, the number of itemizers is expected to decline from 33 percent today to about 5 percent. So the millions of taxpayers who itemize the charitable deduction today will no longer be able to do so if the bill becomes law.  As a result, colleges and universities would almost certainly see a substantial reduction in philanthropic donations.

Student Loan Interest Deduction, Gone?

Under the GOP plan, people who are repaying their student loans would lose their current $2,500 deduction.  It would also eliminate the  tuition tax break for universities and their families. Republicans claim that eliminating these tax breaks would raise more than $45 billion over ten years.  This revenue won’t close the deficit gap, but adds a tax burden for the 44 million Americans who borrow to earn academic degrees.

Teacher Supply Deduction, Ditto?

The GOP tax plan aims to harm teachers.  As of now, teachers can deduct up to $250 in expenses for classroom and supplemental supplies.  For two-teacher, joint-filing households, the deduction can total $500 annually. The GOP tax bill would eliminate this deduction completely. Since this could not possibly raise $1 billion in revenue, claiming the policy would raise substantial revenue to pay for the deficit would insult the intelligence of anyone voting for this provision.

College Tax Credit

Republicans would like to fold the American Opportunity Tax Credit, the Lifetime Learning Credit, and the Hope Scholarship Credit into one consolidated education tax credit.  The plans would credit families for the first $2,000 in education expenditures and provide a 25 percent credit on the next $2,000.

It would also make the fifth year of higher education creditable at half the rate of the first four– a provision that would have an outsized impact on students pursuing higher education degrees, who typically spend more than five years in post-secondary education.

Eliminating the Lifetime Learning credit would peril students who not only take more than four years to finish a degree, but would disproportionately impact adult students who are trying to get a career back on track.

Republican tax writers argue that tax credit consolidation will raise around $17 billion over ten years.  Again, such a small revenue impact renders this provision as anti-education social policy rather than one supporting fiscal responsibility.

Tax Savings Accounts

Expansion of 529 plans: The Republican plan proposes the expansion of 529 plans in three significant areas:

1. Elimination of Coverdell Education Savings Accounts: Like 529 plans, Coverdell accounts allow for families to put pre-tax income into a college savings account, albeit at a much lower contribution limit of $2000. Eliminating Coverdell’s would have a minimal fiscal impact, generating about $600 million for federal coffers over ten years. Clearly, however, the move incentivizes the use of 529s

2. Application to elementary and high school costs: In a clear nod to Secretary of Education Betsy DeVos’ privatization push, 529s could be used to cover up to $10,000 in primary and secondary education expenses, as well as those associated with apprenticeship programs

3. “Child in utero” expansion: In one of the most obvious examples of the tax codes’ cultural impacts, the tax plan would allow unborn children to be named as the beneficiaries. Anti-abortion groups have praised the measure, while Planned Parenthood has slammed this as a likely vehicle for restricting access to abortion.

Employer-Sponsored Educational Assistance

The GOP plan would also eliminate the tax break for employer-sponsored educational assistance programs, meaning that tuition-reimbursement programs set up by companies will undoubtedly be on the chopping block.  This disincentivizes businesses from extending open arms to workers trying to advance their skills and improve their career.

Teaching Assistant Tuition Waivers

The House legislation includes a little-noticed provision in which graduate students who receive tuition waivers while working as teaching assistants or research assistants would see those  waivers taxed as if it were standard income. This would require all graduate students to pay taxes on up to $50-60,000 of tuition, limiting this avenue of education to the wealthiest students who can bear that kind of burden (and driving up student debt for those who can’t).

Social Policy in Disguise

Republicans hope these tax bill provisions with  education policy implications will go by unnoticed as small provisions in a gargantuan bill.  Despite predictable claims to the contrary, these policies make no impact on revenue.  These provisions  increase the financial burden on students, teachers and universities… to promote economic growth.