Washington Watch updates congressional and federal agency activities and AACC advocacy efforts.
The House Republican tax reform legislation released Thursday would make attending college more expensive for thousands of students.
The thrust of the legislation is to reduce corporate and personal taxes while simplifying the tax code. In order to achieve these tax cuts while limiting the bill’s deficit impact to $1.5 trillion over 10 years, as required by the fiscal year 2018 budget resolution, the legislation includes dozens of provisions that increase tax revenues in other areas. Several of these revenue raisers would directly affect college students and institutions.
Higher education tax provisions
The legislation contains a several changes to current tax provisions that students and their families use to reduce college costs. Most importantly for community college students, the bill consolidates the American Opportunity (AOTC) and Lifetime Learning (LLC) tax credits into what is called an “enhanced” AOTC. As is currently the case, students enrolled in credit programs (or parents of dependent students) would qualify for a tax credit of up to $2,500. That’s calculated by taking 100 percent of the first $2,000 of qualified higher education expenses and 25 percent of the next $2,000 in expenses. The credit would remain 40 percent (up to $1,000) refundable.
The bill would add on a fifth year of eligibility (currently the first four years of postsecondary education are covered), but only for half the credit for which student would otherwise be eligible. Currently, students can claim the LLC for as many years as they are in school. In addition, by folding the LLC into the AOTC, which only applies to students in credit programs, students in noncredit programs would no longer qualify for a tax credit.
The legislation also fails to remedy an AOTC provision that reduces the credit amount (in many cases to zero) for Pell Grant recipients. Pell grants, GI Bill benefits or any other non-taxable scholarship a student receives is deducted from the expenses eligible for the AOTC credit. For example, a community college student who has $3,500 in educational expenses in a given year but receives the maximum Pell Grant award of $5,920 would not qualify for an AOTC credit. This would still be the case under the new legislation.
The proposal also would repeal several other tax provisions that benefit students, including deductions for student loan interest and tuition expenses, and exclusion from income of tuition reductions provided by higher education institutions to their employees. Of even greater concern to community colleges, the bill would repeal the provision (Section 127) that allows up to $5,250 of tuition assistance to be provided tax-free by employers to their employees.
In a small silver lining, student loan balances that are forgiven because of the death or disability of a student would no longer be considered taxable income.
As expected, the plan would eliminate the deduction for state and local income (or sales) taxes. The American Association of Community Colleges (AACC) is concerned about the potential pressure this may create on states to keep taxes below the level necessary to support public institutions, such as community colleges. However, the bill would not curtail tax benefits for charitable contributions – if anything they are slightly enhanced – that help spur donations to colleges and their foundations.
The House Ways and Means Committee is expected to consider the legislation next week, with a full House vote possible the following week. Senate Republicans are likely to unveil their bill in the coming weeks.
The Republicans’ goal is to pass tax reform legislation before the end of the year, but there are many obstacles to overcome before that can happen.