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Several tax-writers on the House Ways and Means Committee are digging into former Chairman Dave Camp’s (R-Mich.) 2014 tax reform proposal as they mull how to revamp higher education tax breaks.
The current structure is too convoluted to be helpful to families, lawmakers told Bloomberg BNA, and helping students afford an education is a bipartisan goal.
While higher education and tax policy researchers say some changes are definitely needed, they also say lawmakers should reconsider the Internal Revenue Service’s role in the area altogether.
For now, however, lawmakers are turning to the bevy of tax benefits to lower the cost of higher education. In 2016, there were two tax credits—the American Opportunity Tax Credit and the Lifetime Learning Tax Credit—available to individuals, as well as deductions for tuition, fees, and student loan interest. Some scholarships, fellowships, and grants may also be tax-free. And certain student loans and work-related education can also be tax-deductible, according to the IRS.
Camp proposed repealing the tuition deduction and the Lifetime Learning Tax Credit and revamping the American Opportunity Tax Credit, which lets students claim up to $2,500 annually for eligible expenses. He called for making the AOTC permanent—a move Congress took in the 2016 Consolidated Appropriations Act (Pub. L. No. 114-113). The AOTC in Camp’s proposal would be a 100 percent credit for the first $2,000 of higher education expenses and a 25 percent credit for the next $2,000 of expenses. The first $1,500 of the credit would be refundable and the credit would phase out at certain income levels.
“During the Camp discussions we did a lot of work on higher education, so the good thing is we do have a lot of details that we’re looking back on and that’s part of the discussions,” Rep. James B. Renacci (R-Ohio) said. “I think some of the discussions have brought us to a point where we can use some of that information.”
There has been bipartisan interest in altering higher education tax credits, making education one of the few elements of tax reform that both parties may agree on. Democrats want to increase access to college and Republicans want to simplify the tax code.
Several Ways and Means members have previously introduced bills adjusting the refundability levels of the AOTC.
“It’s clear: more tax credits, more complication,” ranking member Richard E. Neal (D-Mass.) said. “I think there’s room for streamlining for sure.”
Neal in February co-sponsored a Democratic bill to tweak the credit. H.R. 823, introduced by Rep. Lloyd Doggett (D-Texas) sets a lifetime credit limit of $15,000 and allows all federal Pell Grant money—grants given to students with financial need—to be excluded from income. The bill was referred to Ways and Means.
Rep. Danny K. Davis (D-Ill.), also a committee member, plans to reintroduce a bill that would reform the credit, which he introduced last session as H.R. 6237. He will also offer new higher education tax-related bills in September to “dovetail with the return to college,” a spokesman said.
Davis also introduced a bill ( H.R. 3393) with Rep. Diane Black (R-Tenn.) in 2013 to alter the credit, but doesn’t plan to reintroduce it, the spokesman said. The proposal was a result of the 11 bipartisan working groups that Camp and Rep. Sander M. Levin (D-Mich.) organized in 2013. Asked if she wants to pursue additional legislation, Black said “we’re just looking at everything, everything is on the table.”
Easing frustration for families trying to afford college is one of the priorities Ways and Means included in its 2016 tax reform blueprint. Families “must now wade through over a dozen different tax breaks for higher education and almost 100 pages of IRS instructions just to figure out which education tax benefits could help them meet the demands of growing tuition costs,” the blueprint said.
The tax benefits themselves are too complicated, the blueprint said, and must be simplified and consolidated “to provide a more effective and efficient package of higher education tax benefits that will cover both college and vocational training programs.” Those changes would encompass 529 plans and tax relief for low- and middle-income families.
Rep. Tom Reed (R-N.Y.) said the committee is interested in modernizing “all those disjointed pieces of the code” and making sure families that need the help have access to it. Reed has for months been working on a series of college cost-related proposals.
Ways and Means members focused on retirement savings are looking at changes to the available tax breaks, committee Chairman Kevin Brady (R-Texas) said.
“We are in a general sense looking at how we could simplify and consolidate the education savings approach, making it simpler and more customer-friendly,” he said. “I don’t know if a decision has been reached yet.”
The complicated nature of the tax code is something Republicans are committed to improving—something that is necessary for families that may not even realize that credits and deductions are available to them, researchers said.
Scrapping all education tax credits, including the student loan interest deduction, and amping up a federal grant program would be a better way to help families that can’t afford college, said Beth Akers, a senior fellow at the Manhattan Institute for Policy Research Inc. Akers specializes in higher education and education financing. The grant program could be run exclusively through the Department of Education, so the IRS wouldn’t have to be involved in the administration, she said.
“It’s inefficient for us to be delivering these subsidies across different channels,” she said. “Students who need help the most, the most economically disadvantaged, are probably least aware of the benefits available for them in the tax code.”
Pell Grants are an example of how a targeted grant program can be effective, she said, because “people know what it is. They know they apply, get the money up front and it helps pay their tuition bill.” The number of Pell Grant recipients increased 46 percent from 2005-06 to 2015-16, totaling 7.6 million. The $28.2 billion awarded through the program in 2015-16 was an 82 percent increase from a decade earlier, according to data from the College Board. Lawmakers should tread lightly when altering tax credits, because it can change the distribution of tax burdens for individuals, said Kyle Pomerleau, director of federal projects at the Tax Foundation. Trading tax credits for lower tax rates for all would be a bigger boon, he said in a 2014 report.“Credits land more heavily on lower- and lower-middle-income taxpayers,” he told Bloomberg BNA. “Once you start peeling away some of those credits, it may look like you’re increasing taxes on them.”
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