Muddled Tax Picture for Higher Ed

Congress seems poised to expand tuition tax breaks for students, but will colleges be taxed more to pay for them?

May 23, 2007

As a bipartisan and bicameral group of members of Congress introduced yet another expensive plan Tuesday to expand existing tax credits for college tuition costs, it is becoming increasingly apparent that lawmakers intend, one way or another, to again turn to the tax code to give students and their families some relief from soaring tuition rates. What is far less clear, though, is whether Congressional tax writers will ask higher education itself -- through increased taxation of colleges -- to pick up some or all of the tab.

The Senate Finance Committee, which sets tax policy in that chamber, was originally due to meet today to lay out a package of education-related tax breaks and tax increases and policy changes that would produce enough revenue to offset the costs of the enhanced tuition tax benefits, as required under the "pay as you go" rules the Democratic Congress is operating under. But the drafting session has been postponed until next month at the earliest, as committee staff members weigh both the competing needs they are trying to meet with any new or expanded tuition tax benefits (how much to help low-income vs. middle-income students, for instance) and whether and how much to try to look to colleges to pay for the new benefits.

College officials are eyeing the latter discussions nervously, given some of the ideas that have been circulating in recent weeks. Among the possibilities that have been discussed: taxing the tuition benefits that some colleges now provide tax-free to employees and their children; making nonprofit organizations' hedge fund investments subject to unrelated business income tax; and applying to some college or university endowments the sort of requirement foundations face to spend a minimum proportion of their assets each year, with the ultimate goal of prodding the wealthiest institutions to spend their own funds rather than raising tuition ever higher.

The discussions about potentially raising more tax revenues from higher education remain highly speculative, and some college tax experts remain hopeful that Congressional tax writers will ultimately decide to look elsewhere to pay for the tuition tax breaks for students. In the meantime, though, members of Congress are not holding back on the easy (and politically popular) part of the equation: offering their ideas for the best way to spend money to help students pay for college.

Several bills have been introduced in the Senate in recent weeks and months, most aimed at simplifying the various existing tax credits, with some -- though not all -- calling for the first time for full or partial “refundability,” meaning that families with income tax liability lower than the value of the tax credit would be eligible for a refund check making up, or partially making up, the difference. Several of the proposals would expand the scope of the credit to apply not just to tuition and fees (as is currently the case), but also to room and board, books, supplies, equipment and transportation -- another boon for low-income students and their advocates, who point out that community college students, in particular, have been hurt by their inability to take advantage of the various higher education tax credits to help cover other costs of attendance.

The announcement Tuesday of the appropriately titled and broadly applicable Universal Higher Education and Lifelong Learning Act of 2007 -- which, though not officially priced, is estimated to come with a $7 billion price tag -- would benefit low-income families as well as those near the top and bottom of the middle-class income spectrum. The bill would simplify the system for all users by consolidating three existing higher education tax incentives -- the Hope Credit, worth up to $1,650 per student for the first two years of college, the Lifelong Learning Credit, worth up to $2,000 for any stage of postsecondary education or job skills training, and the tuition tax deduction worth up to $1,000 per student -- into one maximum $3,000, per-student tax credit.

It would help the upper middle class by significantly raising the income ceiling that determines eligibility. Currently, families whose incomes exceed $55,000, for single filers, and $110,000, for joint filers, are ineligible for the credits; under the proposed legislation, those thresholds would jump to $80,000 and $160,000, respectively (the benefits of the credits do begin phasing out toward the top of the income spectrum).

And the bill would benefit low-income and lower middle-class students as well, by providing a 50 percent refundable tax credit and applying to costs of college attendance beyond just tuition and fees.

Sen. Evan Bayh (D.-Ind.), Rep. Rahm Emanuel (D.-Ill.), the chairman of the House Democratic Caucus, and Rep. Dave Camp (R-Mich.), who like Emanuel is a member of the House Committee on Ways and Means, introduced the legislation Tuesday. When asked how they would favor funding the expansion of tax credits, Bayh said he would like to use monies saved by scaling back earmarks.

“The only obstacle [to the bill] is inertia in my view,” Emanuel said, pointing out that the bill would meet student needs at a variety of income levels, with a focus on the working and middle class. The current tax credit system is often derided for neglecting lower-income families: A May 10 Center on Budget and Policy Priorities report points out that one-third of all households, and almost half of those with children, have no federal income tax liability – making them unable to benefit from the tax credits.

“There is consensus that the neediest students are served least,” Wayne A. Watson, chancellor of the City Colleges of Chicago, said of the current tax system at a Tuesday press event where he endorsed the proposed legislation. “Regrettably, college enrollment is still highly correlated with income.”

“The impact on low-income students certainly relative to current law would be extremely positive," Aviva Aron-Dine, author of the Center on Budget and Policy Priorities report and a policy analyst there, said of the measure introduced Tuesday. "Our hope is that this will serve as a marker for the Senate in its work in the coming weeks.” But, she cautioned, the next step -- the Senate Finance Committee’s eventual consideration of the issue -- will be crucial when it comes to choices, compromises and, of course, cash. “The Senate Finance Committee in trying to pay for this bill may face some tradeoffs,” Aron-Dine said. “There may be some choices about expansions for upper-income students and expansions for low-income students.”

Possible Offsets

College lobbyists have been speculating for weeks about whether the Senate Finance Committee will try to change federal tax laws in ways that drain money from the coffers of nonprofit higher education institutions.

Many of the ideas being discussed are not new. Congress contemplated ending the tax-free nature of tuition benefits for college employees during deliberations over the legislation that created the Hope and Lifetime Learning credits during the late 1990s, and college and university lobbyists fought the effort by arguing that doing so would gut an important benefit that helps them attract high-quality employees who are willing to accept lower salaries than many of them would receive in the private sector. Among other things, Finance Committee aides are said to be considering cutting back the benefits for higher-paid employees or otherwise directing the benefit to those who are seen as most benefiting from it.

The possible restriction on hedge funds, initially aimed at higher education institutions specifically, is now being talked about more broadly for all nonprofit institutions.

One of the other ideas being discussed -- the prospect of requiring institutions to spend a minimum percentage of their endowment assets each year -- is seen less as a way of raising revenue than as a policy change aimed at the behavior of very wealthy institutions. Foundations now must spend at least 5 percent of their assets each year, a restriction adopted to ensure that families and other foundation backers used their funds in the present to achieve their aims, rather than just accumulating wealth for the long term. University endowments were exempted from the requirement when it was imposed.

Those pushing the idea of extending it to universities are being motivated by the sense that the country's very wealthiest institutions (many of them private) are continuing to raise their tuitions despite multi-billion-dollar endowments that, the thinking goes, they could be using for other purposes. The idea was first tossed around as a possible penalty for colleges and universities that were seen as increasing their tuition excessively, but it is now being considered as a freestanding proposal.

Matthew Hamill, senior vice president at the National Association of College and University Business Officers, said his organization's data show that in the aggregate, colleges and universities already spend at least 5 percent of their endowment assets each year.

And even some of those who have been most critical of the spending practices of wealthy institutions, like Leon Botstein, president of Bard College, who has described their "fiscal arrogance," say they do not believe that mandating such behavior through federal policy is wise.

"For universities that have excess wealth -- those that don't need it to function and are hoarding it as a safety against the future -- some incentive should be given to act in the public interest, either with more research, or public aid, or helping with secondary and elementary education," said Botstein. "But I don't think this is the right instrument. Much as I find the attitude of very wealthy institutions irresponsible, this is not the right remedy."

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