Tax Reform
TAX REFORM AND THE HIGHER EDUCATION TAX BENEFITS
In 2013, then-Ways and Means Committee Chairman Dave Camp (R-MI) released a discussion draft of fundamental tax reform concepts that would generally eliminate most of the current credits and deductions across the board – in all areas of tax policy – in exchange for lower rates. While the draft caused a lot of heartburn for a variety of constituencies, it never advanced beyond draft form.
In November 2017, the House and Senate each debated very different versions of tax bills, touted as significant tax reform measures, and eventually passed the largest tax bill in two decades – the Tax Cuts and Jobs Act of 2017 (TCJA). TCJA was signed into law by President Trump in December 2017, and was widely considered to be a major accomplishment for Congress and the Administration in tax reform policy.
While TCJA maintains the higher education tax benefits for students and families, they were slated for elimination in the House bill, which was similar to the 2013 draft released by former Ways and Means Chairman Camp. The Senate bill maintained those benefits as did the final conference report.
There were changes made to tax rates in TCJA that may ultimately have a negative effect on charitable giving, but the charitable deduction and IRA charitable rollover were maintained.
There was a new excise tax included in TCJA that purposefully targets approximately 30 private colleges and universities with large endowments. Public college were excluded. In addition, there was a new excise tax on the compensation of certain college and university employees that also excluded public colleges.
Lastly, the TJCA eliminated advance bond refunding and included a new problematic tax on mass transit benefits (referred to as the "parking tax") offered by nonprofit employers to their employees. These will both result in increased costs for colleges and universities.
About
Fundamentally reforming the Internal Revenue Code is one of the most common priorities for both Republicans and Democrats on the tax-writing committees. Fundamental tax reform is also enormously difficult for Congress to ever successfully address. Various members and committee chairman have embarked on attempts to rewrite the tax code since the last major reform bill in 1986, with little progress.
Several tax bills have been signed into law since the 1986 Act, and nearly all bear the word “Reform” in their title. However, none of them were truly fundamental reform bills that replaced the current tax code with a new tax system. Even the Tax Cuts and Jobs Act of 2017, which is touted as a massive tax reform effort, and does reform the tax code somewhat, is actually more of a large-scale tax relief bill.
Outlook
With the Tax Cuts and Jobs Act (TCJA) in the rearview mirror, there will be very little interest in tax reform in Congress for the foreseeable future. However, with the majority party shifting in the House, the Democrats may attempt to undo some of the most unpopular provisions in the TCJA in their own legislative tax effort.
Otherwise, TCJA was the vehicle for Congress to eliminate the higher education benefits, consolidate them, or improve them. In the end, all of the current student and family, and charitable giving benefits were left in place without any changes.
Unfortunately, the bill did eliminate bond advance refunding, which is an important refinancing tool for private colleges, and imposed a purely punitive excise tax on private colleges with certain endowment assets valued at $500,000 per full time equivalent student. It also changed the tax treatment of employer-provided mass transit benefits, which will add costs to nonprofit employers, including colleges and universities. So, while the student and family benefits won’t change, many NAICU institutions will face significant lost revenue as a result of these measures. NAICU will continue to advocate for the reversal of all these new harmful policies.
In many substantial ways, higher education tax reform had already been done in the Omnibus Tax and Spending package that was passed by Congress and signed into law by President Obama in December 2015. That bill made the American Opportunity Tax Credit (AOTC) permanent, allowing two other confusing tuition tax benefits (the above-the line tuition deduction and the HOPE tax credit) that duplicated much of what the permanent AOTC also covers, to be phased out. While that was a good start to consolidating the tuition benefits, the budget deal signed into law in February 2018, reinstated the tuition deduction retroactively for 2017, which will likely cause more confusion than benefit anyone paying tuition.
Throughout the tax reform debate, NAICU has supported some additional reform of the tuition benefits to allow the AOTC to be available beyond the first four years of college, thereby negating the need for the Lifetime Learning credit. However, the top priority was always to maintain the three-tiered structure of tax benefits that assists students saving for college, paying tuition, and repaying loans.