Dear Commons Community,
The Republicans in the House of Representatives released their new tax proposal yesterday. While very few experts believe that this proposal will remain unchanged as it works its way through the Senate, it was natural to examine some of its details to determine its effects on personal tax situations. In its present form, the proposal benefits corporations and the highest income earners the most. What follows is The Chronicle of Higher Education’s analysis of the proposal’s provisions on colleges and students.
“Republicans in Congress released their proposed overhaul of the nation’s tax laws on Thursday, including several measures that would place new tax burdens on colleges and students — and, critics said, could undermine charitable giving to higher education.
The bill was met with immediate opposition from a number of higher-education groups, which argued that the measure would rob institutions of vital dollars and increase the price of college for debt-laden students and already-strapped families.
“The House tax-reform proposal released today would discourage participation in postsecondary education, make college more expensive for those who do enroll, and undermine the financial stability of public and private two-year and four-year colleges and universities,” said Ted Mitchell, president of the American Council on Education and under secretary of education in the Obama administration, in a written statement.
In broad terms, the bill would eliminate or consolidate a number of tax deductions meant to offset the costs of higher education for individuals and companies, including the Lifetime Learning Credit, which provides a tax deduction of up to $2,000 for tuition, a credit for student-loan interest, and a $5,250 corporate deduction for education-assistance plans.
The bill proposes new taxes on some private-college endowments and on compensation for the highest-paid employees at nonprofit organizations, including colleges and nonprofit academic hospitals. The plan would also tax the tuition waivers that many graduate students receive when they work as teaching assistants or researchers.
Perhaps most significant, the bill would result in many fewer people itemizing their deductions for charitable gifts. Higher-education experts warned that that change could lead to a steep decline in donations to colleges.
Richard D. Legon, president of the Association of Governing Boards of Universities and Colleges, said in a news release that Republicans in the House of Representatives had proposed extracting money from colleges and students in their “zeal to find offsets to fund cuts in the corporate and personal tax rates and eliminate the estate tax.”
“‘Simplifications’ to current tax provisions that encourage saving and paying for college could cause great harm to the very families the legislation is purporting to help,” Mr. Legon said.
Two provisions in the legislation take aim at higher education’s most popular targets — endowments and executive compensation. But the bill’s details mean that relatively few institutions and administrators would see a tax increase.
Republicans proposed a 1.4-percent tax on the endowments of private colleges that enroll more than 500 students and that have nest eggs of more than $100,000 per student. The proposal would generate an estimated $3 billion over 10 years.
A Chronicle analysis found that the tax would apply to fewer than 150 colleges.
Still, while the number of institutions affected by such a measure would be small, the impact on how those colleges spend money could be large, said Brian Flahaven, senior director for advocacy at the Council for Advancement and Support of Education.
The tax on endowments is meant to increase spending from those reserves, but Mr. Flahaven said it would instead redirect the money away from its intended purpose to the federal coffers.
Similarly, the tax bill calls for a new tax on compensation of some highly paid employees of nonprofit organizations, including benefits such as housing and transportation, but not contributions for qualified-retirement plans.
Under the provision, a tax-exempt organization would be subject to a 20-percent excise tax on compensation in excess of $1 million paid to any of its five highest-paid employees. Lawmakers estimated that the measure would generate about $3.6 billion over a decade.
Again, the limits of the bill constrain the number of institutions that would be affected.
Fewer than 150 public and private colleges had an employee who earned more than $1 million, according to The Chronicle’s analysis.
Imposing a tax on employee benefits would put colleges at a disadvantage in competing with privately owned companies for the best employees, said Brian Pinheiro, an expert in executive compensation with the consulting firm Ballard Spahr.
“In the compensation world, this was a bit of a surprise,” said Mr. Pinheiro.
The impact of taxing endowments and executive compensation, though, would pale in comparison to other provisions in the plan, said Steven Bloom, director of government relations for the American Council on Education.
Mr. Flahaven said that about 30 percent of tax filers are now able to itemize their charitable gifts to reduce their tax burdens. The Republican proposal would decrease that number to just 5 percent, according to figures cited by the National Council of Nonprofits, and would cause giving to fall by as much as $13 billion annually.
Middle-income students, too, would feel the impact of the House bill, which proposes eliminating the Hope Scholarship Tax Credit, worth up to $1,500, and the Lifetime Learning Credit. M. Peter McPherson, president of the Association of Public and Land-Grant Universities, said in a written statement that eliminating the Lifetime Learning Credit would cause particular harm to nontraditional students and graduate students. “The current tax code helps reduce the cost of college for good reason — not just because a college education benefits individuals, but because it benefits society at large,” he said.
The bill would retain the American Opportunity Tax Credit, worth up to $2,500. The changes would increase government revenue by more than $17 billion over 10 years, according to Congressional estimates. The government would also save nearly $48 billion by eliminating deductions for interest on student loans and including things like employer-provided tuition reimbursement.
“This bill would increase the cost to students of attending college by more than $65 billion between 2018 and 2027,” Mr. Mitchell said in a written statement. “This is not in America’s national interest.”
As I said earlier, it is unlikely that this proposal will survive in its present form. We will see in the next couple of months what changes the Senate will recommend.