Hot off the Press – a new tax proposal

A new tax reform proposal is circulating about, with a number of provisions designed to impact higher education.  As one might expect, any assault of even the tiniest nature against the industry results in the typical claim that these provisions will adversely impact the ability of families to pay for an education.  On closer examination, I only see a couple of the proposed provisions as being harmful.  Both entirely miss the boat and are fraught with unintended consequences.  The rest are not as significant.

A synopsis of the proposal as it relates to higher education is found here:

Cruising through the proposals (that the article realistically states has little chance of becoming law) there are a number of provisions that seem to make sense. Combining the variety of current tax breaks into one and limiting it to four years seems prudent.  It simplifies the process and provides the benefit to those who need it the most – people who are struggling to send their kids through school in four years.

The provisions concerning donations for athletic facilities and the inclusion of coaches in the excess earnings excise tax calculation both make sense. Limiting the amount of a student’s earnings that are exempt from Social Security isn’t that big of a deal, particularly with minimum wages increasing materially.  For that matter, why should students be the only ones who are exempt?  Also, getting rid of the deduction for interest incurred on school-related debt while the student remains in school would have a minor effect on families.  None of this stuff is earth-moving.

Two other provisions entirely miss the boat, however.  One is the elimination of a corporate tax deduction for the tuition costs of employees who are encouraged by their employer to take courses.  In a day when most employers are required to provide health care, this seems to be moving in the wrong direction.  Developing talent benefits the company and society. I’ve met a number of those who had to leave school during the traditional years and have recently benefitted from employer-sponsored education.  This is particularly true for many women who, for a variety of reasons, were tasked with caring for children during what would otherwise have been their traditional college years.  I have witnessed their joy as they march across the stage as graduates, some with grown children cheering them on. For the institutions where I have worked, the sponsorship of an employer made the difference for many graduates.  If anything, the $5,250 max reimbursement per year should be increased to accommodate accelerated programs.

The other area that is puzzling relates to the proposal to eliminate tax-free tuition remission for an institution’s employees and their dependents.  Before I take that on, a little primer is needed.  

Students receive financial aid from a number of sources but two are primary; governments and the institution itself.  Aid from governments takes the form of grants designed to meet financial need and a series of loans.  Students with high demonstrated need who attend a low-cost institution like a community college can have all of their college costs covered by this kind of assistance.

Those who attend private institutions and highly endowed publics may qualify to receive aid directly from the institution for a number of purposes.  Those with great need whose federal and state aid are insufficient to cover the cost of education may receive some need-based grants in the form of endowed earnings or tuition discounts.  Others with high academic, athletic or artistic ability may be the recipients of what is called merit-based aid.  The “full-ride” student is typically a merit aid recipient.  For whatever reason, merit aid tends to positively correlate with family income and higher earning families often pay less than lower earners.  Under current law, with all governmental and institutional grants considered tax-free, it is possible to provide a full-tuition award to a student whose family makes $1 million a year, with no tax consequences.  Technically, awards that go beyond tuition to cover other costs like room, board and books are supposed to be taxable but there really isn’t a good mechanism to track them – yet.

So, with the lesson out of the way, let me suggest an alternative that retains the tuition remission benefit but also addresses excessive awarding of tax-free institutional grants.  I propose needs-testing both students who receive institutional grants and those who are tuition remission recipients.  Limit the total of tax-free institutional and governmental grant aid to the institution’s cost of attendance minus the expected family contribution, as computed by the family’s FAFSA.  That is, if the total cost of attendance is $40,000 and the expected family contribution is $35,000, up to $5,000 of grant aid from any source may be received tax-free.  Beyond that amount, all non-loan assistance should be taxable and reported on the 1098T that is currently produced by nearly all campuses.

This approach provides a much bigger contribution for government coffers than the elimination of the employee tuition benefit would. The President of the University or the wealthy family of an athlete with a full ride might wind up owing some taxes.  Seems fair to me, particularly since the tuition benefit will encourage people to take lower paying positions in higher education, holding costs down.

I end with a statement of frustration about these matters.  It is unlikely that those who propose this legislation had any meaningful dialog with anyone about how this could be done.  It is armchair quarterbacking, with the only resource being the CBO and their analysis of the cost of various benefits.  We all benefit from open dialog.  I wish the government understood that.