The Senate Finance Committee held a hearing Wednesday to look at access to education and tax reform, whether the complex array of tax incentives are contributing to the increasing cost of a college education.
“The multitude of education tax benefits can result in complexity and confusion for American families,” said Senate Finance Committee chairman Max Baucus, D-Mont. “Under current law, there are eight separate tax expenditures related to higher education. And these benefits use five different definitions of ‘eligible expenses.’ Taxpayers must calculate their taxes using each tax cut to determine which one works best.”
The hearing was held in conjunction with the release of a report from the Government Accountability Office that found improved tax information can help students and their parents pay for college.
James White, director of tax issues at the GAO, noted that many tax incentives for education are too complex for many students to understand. They and their families often pick the wrong tax benefits in paying for college and leave money on the table, the GAO report found. Most tax benefits from the tuition and fees deduction and the parental exemption for dependent students went to families with incomes above $60,000, whereas the majority of benefits from other higher education tax expenditures such as the American Opportunity Credit went to families with lower incomes, the GAO report noted.
“In our analysis of 2009 IRS data for selected returns with information on education expenses, we found that tax filers do not always choose tax expenditures that maximize their potential tax benefits,” said the report. “We found about 14 percent of filers (1.5 million of almost 11 million eligible returns) failed to claim a credit or deduction for which they appear eligible. On average, these filers lost a tax benefit of $466. We estimate that the total amount of tax benefits filers did not claim was approximately $726 million in 2009. We found no cases where filers’ combined state and federal tax liability would have been higher if they had claimed one of those benefits on their federal return.”
Taxpayers might not maximize their tax benefits because they are unaware of their eligibility for the provisions or are confused about their use. The IRS and the Department of Education have taken steps to provide information on these provisions, but the number of filers failing to claim a higher education tax provision suggests more could be done, the GAO noted. For example, the IRS stated that it coordinated with tax preparation software providers to provide links to relevant higher education forms, while the Education Department’s Federal Student Aid website provides a link to the IRS’s "Publication 970, Tax Benefits for Education."
“Developing a coordinated, comprehensive strategy to better inform eligible students could improve take-up of these tax provisions,” said the GAO.
Sen. Orrin Hatch, R-Utah, the ranking Republican member of the Senate Finance Committee, noted that traditionally, the federal government has supported millions of individuals seeking higher education through grants and loans, but that has changed in recent years. “Over the last 15 years, however, federal support for higher education has increasingly relied on incentives in the Tax Code,” he said.
Tax Incentives and Increasing Tuition Costs
Sen. Chuck Grassley, R-Iowa, the former chairman of the committee, pointed out that while tax incentives help students and families pay for college, the same incentives may also increase the costs. He cited a 2010 study by Nicholas Turner at the University of California-San Diego suggesting that schools are reducing financial aid awards by the amount of tax benefits a student or family may receive. “Aside from getting a handle on rising costs and tax incentives for students and families, it is also important to consider the tax benefits that tax-exempt college and universities receive,” Grassley added. “Just like tax-exempt hospitals, tax-exempt colleges and universities are exempt from income tax. They also have the ability to raise capital through tax-deductible charitable contributions and the issuance of tax-exempt bonds.”
Scott Hodge, president of the Tax Foundation, agreed with Grassley that tax incentives may be increasing the costs of a college education. “While we all understand the value and financial benefit of getting a college degree, using the Tax Code to ‘make college more affordable’ not only violates the principles of sound tax policy, but also produces serious unintended consequences,” he said. “These ‘tax programs’— for lack of a better word—are likely contributing to the rising costs of higher education while helping to knock millions of people off the tax rolls. This, in turn, is disconnecting millions of people from the basic cost of government and transforming the IRS into an extension of the Department of Education and the welfare system. These are not the kind of consequences that can be cured by a simple reform of tax credits, but by a wholesale reform of the entire Tax Code.”
Montana State University president Waded Cruzado acknowledged that it is becoming increasingly difficult for students and their families to pay for college. She noted that students are taking on far more debt, but she argued that the Tax Code can play a vital role in assisting students and their families with the cost of higher education. “Students and their families are struggling more than ever with the cost of education and that the tax code can play an important role in assisting them,” said Cruzado. “The number one obstacle to students and their families taking full advantage of federal financial aid and tax benefits is the complexity in understanding and applying for these programs and tax advantages.”
Lynne Munson, president and executive director of the curriculum developer Common Core, pointed out how a college education is becoming increasingly unaffordable. “Affordability is an illusion the higher education establishment adopts when public or government relations demand it,” she said. “In order to have lasting impact on the problem of runaway tuition, your attention to it must be enduring. Our colleges and universities have been given every opportunity, for decades, to do the right thing with regard to controlling the cost of college. They’ve not done it and there is abundant proof that they will never deliver American families a fair and honest tuition bill unless our nation’s political leaders join the public and insist on it.”
Susan Dynarski, a professor at the University of Michigan, said the tax incentives for education need to be simplified. “The goal of federal aid and the education tax incentives is to open the doors of college to those who have the ability but not the means to attend,” she said. “Through some simple reforms, the government can serve this goal more effectively and efficiently. The current education tax benefits provide relief for middle- and high-income families with children in college but do little to get more people into college. We should simplify and focus the tax incentives, and coordinate them with Title IV programs.”
Dynarski contended that aid for college students does not drive up prices, at least for the public and nonprofit institutions attended by 91 percent of college students. “We do have evidence, however, that prices at for-profit schools increase when the Pell does,” she added. “While these schools teach only 9 percent of students, they account for 24 percent of Pell expenditures.”
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