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A Change to Tax Credits?

July 26, 2012

WASHINGTON -- Tax benefits for higher education are unnecessarily duplicative and confusing, and should be consolidated or perhaps even eliminated, higher education researchers and government officials told a Senate panel Wednesday.

A Finance Committee hearing on tax credits for higher education, and how those benefits might be changed in an overhaul of the tax code, focused frequently on a familiar debate: whether federal subsidies (in the form of tax benefits as well as student loans and grants) for higher education drive up tuition prices at colleges and universities.

But those testifying agreed that the benefits, which go to both poor and wealthy families and have grown to $14.7 billion annually, should be better targeted and less confusing.

Education tax benefits come in several different forms -- the American Opportunity, HOPE and lifetime learning credits, as well deductible tuition and fees for some families -- that are available to different families based on the level of education students are pursuing, as well as how much money the families make. When preparing taxes, many people choose the wrong credit and “leave money on the table,” said Senator Max Baucus, a Montana Democrat and the committee’s chairman.

A study released Wednesday by the Government Accountability Office found that 14 percent of filers didn’t claim a credit or deduction for which they were eligible, missing out on about $466 in tax savings or refunds. Another 250,000 filers didn’t claim the benefit that would give them the most money, and missed out on about $300 per taxpayer, said James White, director of tax issues for the Government Accountability Office, during the hearing.

One problem with the tax credits is that families don’t receive the money immediately, said Susan Dynarski, an associate professor of public policy at the University of Michigan who studies financial aid. A tax code overhaul should allow families to collect the money immediately, rather than waiting -- making the program indistinguishable from a grant.

“The current education tax benefits do little to get more people into college,” Dynarski said, adding that the tax credits and deductions -- which often go to middle-class families -- are not as well-targeted as the Pell Grant Program for low-income students.

If the tax credit can’t be simplified, with refunds delivered up front, it should be eliminated, with the extra money added to Pell Grants or other forms of financial aid, she said.

“If we can't get to that goal, we're probably better off just running things through the traditional systems,” she said. “We need a unified system with a single application for families.”

Scott Hodge, president of the Tax Foundation, a group that calls for simplifying the tax code and lowering tax rates for corporations, said that tax credits for education -- except for some tax exemptions on college savings plans -- shouldn’t be part of the tax code at all.

“I'd rather see that assistance on the spending side of the budget, simply folding in any of the money dedicated to tax programs into Pell Grants and what-have-you, rather than having the IRS run this program,” Hodge said. “It should be run in the Department of Education.”

That could be unlikely; the tax credits are politically popular. President Obama has campaigned in part on a promise to make permanent the American Opportunity Tax Credit, which has more than doubled tax expenditures on education. The tax credit was created by the stimulus and set to expire at the end of 2010, then extended into the 2011 and 2012 tax years. Still, senators argued that the system should at least be clarified so that students and parents can take the tax breaks into account when planning for college.

“The education tax incentives represent the greatest increase in federal funding for education since the G.I. Bill,” said Senator Orrin Hatch, a Utah Republican. “But no one can tell you how they work.”

 

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