The College Tax Reform Tantrum Higher ed howls at the modest cut in subsidies in the House bill.
https://www.wsj.com/articles/the-college-tax-reform-tantrum-1510184465
Colleges have been rocked by student protests, but now they’re launching a demonstration of their own in Washington against reductions to their tax subsidies. They’re throwing a tantrum because they may, at long last, have to rationalize their spending.
The IRS code contains about a dozen individual tax subsidies for higher education, all with disparate rules that the IRS describes in a 95-page brochure that makes academic prose look lucid. Parents and students can claim three different tax credits, deduct loan interest, and receive an exemption for some discharged loans and tuition assistance.
These dispensations are layered on top of low-interest federal loans (4.45% for undergrads), grants and loan-forgiveness programs. The Congressional Budget Office estimates that the government will lose about 25 cents on every dollar of subsidized Stafford loans.
Colleges that have been riding this gravy train are howling that Republican House reforms repealing and consolidating their tax carveouts will raise tuition. But stripping down the subsidies might make students and parents more aware of costs and impel colleges to curb unnecessary spending.
Take the three tax credits, which the House bill proposes to combine into a partly refundable $2,500 American Opportunity Tax Credit that can be claimed for up to five years. This simplification would yield about $17.5 billion in revenue over 10 years and reduce the enticement for students to drag out their education. The Lifetime Learning Credit, which is part of the consolidation, can now be claimed indefinitely.
Parents and students would also no longer be allowed to write off tuition (cost: $3.9 billion in 2015) and interest on student loans ($13.6 billion), which receive singular treatment in the tax code. Interest on other non-mortgage personal loans is subject to taxation. Individuals have also been able to claim these above-the-line deductions even if they don’t itemize.
The GOP bill would also tax “tuition waivers” that colleges often use to pay grad students in kind. These effectively let colleges employ teaching assistants as indentured servants and have contributed to a surfeit of graduate degrees in fields for which there are few jobs beyond academia. Maybe colleges could try paying TAs a better wage.
The reforms would continue to encourage thrift by letting parents sock up to $28,000 annually in 529 college savings accounts that grow tax free. However, it’s unfortunate that the plan retains a tax exemption for discharged debt of borrowers who become government and nonprofit workers. Cancelled debt under other loan-forgiveness programs is typically taxable, but not for this privileged class.
All of these subsidies have failed to make college more affordable. Colleges instead pocket the subsidies and jack up tuition, which they steer into bloated administration and facilities. Over the last decade, tuition has risen at an annual inflation-adjusted 2.4% at private, and 3.5% at public, four-year colleges. Soaring college costs are the main reason student debt has doubled since 2009 to $1.3 trillion. Students are also taking longer to finish, perhaps in part because taxpayers are footing much of the tab.
Government grants, loans and tax credits also give students less reason to work during school. Alternatively, their parents can write off their college costs. This may help explain why labor-force participation over the last decade has declined by 5.4 percentage-points among Americans age 16 to 24 compared to 1.6 percentage-points from 25 to 54.
College leaders also complain that the House bill doubles the standard deduction, which means fewer middle-income households will itemize. They say this will reduce charitable giving and alumni donations. If that’s true, they really need to work on alumni enthusiasm.
Some public colleges have also groused that the elimination of the state and local deduction could discourage tax increases in states like Connecticut and New York. They’re worried that Democrats will instead cut funding for public colleges.
They have a better point that the GOP’s 20% excise tax on compensation of nonprofit employees that exceeds $1 million is arbitrary and meddles in wage-setting that Congress shouldn’t do. The House also slaps a 1.4% excise tax on investment income of private college endowments (which private foundations must also pay) that exceed $250,000 a student. We’d prefer ending the charitable deduction rather than taxing endowments, but as endowments grow so will political interest in taxing them.
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If they’re really concerned about student welfare, colleges could make up for the decline in tax subsidies by scaling back spending and tuition. Purdue University President Mitch Daniels has held tuition flat since 2012, so it can be done. College leaders howl that Republicans are squeezing students to pay for corporate tax cuts. But college graduates would benefit from a simpler tax code with fewer distortions that produces more growth and higher wages.
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