As Congress returns from its summer recess this week, all eyes will be on thecongressional “supercommittee,” the joint House-Senate committee established under the Budget Control Act of 2011 and charged with drafting a bill that will reduce the federal deficit by $1.5 trillion over a ten-year time frame. The supercommittee has already begun deliberations on the subject and must report a bill to Congress by November 23. The committee’s twelve members could propose changes to both spending and tax policies to meet their savings target, and proposals that raise more revenue are likely to include the elimination of tax credits, deductions, and exemptions.
To that end, the Chronicle of Higher Education published a story last week that zeroed in on which higher education tax benefits could be on the supercomittee’s menu for deficit reduction (i.e. elimination). The key point of the article is that fourteen tax credits and deductions that individuals can take for higher education expenses will “cost the federal government $95.3 billion by 2014.”
That may be a shockingly large number to some—and would appear at first glance to make higher education tax benefits a target for the deficit cutting supercommittee. But that’s not quite the whole story.
It’s important to note that the estimate cited by the Chronicle was taken from the U.S. Joint Committee on Taxation’s December 2010 estimates and refers to a cumulative total of fourteen tax benefits added together for years 2010 through 2014. In other words, that’s the five-year cost of the tax benefits, not the annual cost.
Now let’s put that number into context. The federal government doesn’t just give people tax breaks for higher education expenses. In fact, relative the other categories of tax benefits provided for other in the tax code the $95.3 billion quoted by the Chronicle is peanuts.
For the years 2012-2016, the White House Office of Management and Budget anticipates all education tax benefits (both K-12 and higher education) will cost $157.9 billion. Compare that to what the agency expects housing-related tax credits to cost: $1.4 trillion. And there are other categories—such as tax benefits for retirement savings (IRAs, 401(k)s) and health care—that are nearly as large as the tax benefits that support housing.
So if the supercommittee is looking at big tax benefits as a way to bring the deficit under control, education benefits won’t fit the bill. Moreover, lowering the cost of higher education is considered by many to be more like an investment than most other types of tax benefits. It drives people into better-paying, higher-quality jobs and supports a skilled, educated workforce.
There’s another point from the Chronicle of Higher Education article that bears further explanation. The Chronicle writes that “the total cost of the [higher education] tax benefits will plunge 42 percent in 2014 from the previous year, after the annual cost of the HOPE/America Opportunity credit falls about $10 billion.” But that’s not exactly the case.
To recap, the HOPE tax credit allowed students to earn a credit (up to $1800 in 2008) on qualified tuition and expenses for their first two years of postsecondary education. In 2009, the stimulus legislation temporarily replaced that credit with the American Opportunity tax credit, which increases the maximum credit and applies it to four years instead of two. In 2010, Congress extended the American Opportunity credit through 2012 (not reflected in the estimates in the Chronicle of Higher Education article or in the OMB estimates because the tax expenditure extension legislation was passed too late in the year). So the “plunge” the article claims we will see in 2014 is actually just the point at which the extension of the credit will expire. For more information on that and other tax credits, check out the background information on the Federal Education Budget Project’s site.
The higher education tax expenditures are a perennial issue for Congress, frequently extended at the last minute for a year at a time. But this year’s expiration of the American Opportunity tax credit brings it to the forefront of the Congressional agenda at a challenging time. The supercommittee is searching for savings in the budget, and the expiration of the tax credit could make it an easy target. Unless it’s a part of a broader overhaul of the tax code, American Opportunity and other tax expenditures may have reached the end of the line.