Congress pulled the country back from the edge of the fiscal cliff late Tuesday night when the U.S. House of Representatives voted to pass an agreement urgently negotiated and passed by the Senate on New Year’s Day. The agreement, set to become law this week, addresses some, but not all, of the policies that make up the fiscal cliff. It deals mainly with expiring tax policies, but only postpones for a few weeks the automatic spending cuts set to take effect on January 2 and does not increase the limit on the national debt. The pending law – titled the American Taxpayer Relief Act of 2012 – extends or makes permanent a number of tax benefits for education.
Few observers outside of Washington understand the extent to which Congress and the president make education policy through the tax code. Exemptions, credits, and deductions now account for over $30 billion a year in “spending” (in the form of forgone revenue) for education, mostly for postsecondary education. But a good portion of that spending was set to expire or had already expired at the end of 2012. With the passage of the American Taxpayer Relief Act of 2012, those policies are here to stay for a few more years, or in some cases permanently. (The table below lists the expiring policies and the pending extension.)
The largest of these tax expenditures related to education, the American Opportunity Tax Credit, was set to expire at the end of 2012 and revert to the less-generous Hope Credit. Instead, it has been extended for five years, through 2017, at a $67.3 billion 10-year cost to taxpayers. Other tax expenditures, including Coverdell education savings account benefits, employer-provided educational assistance, and the student loan interest deduction, were permanently extended. Those three combined will cost more than $21 billion over 10 years.
Two other education tax expenditures – the classroom expenses deduction for K-12 teachers and the deduction for qualified tuition and related expenses for postsecondary students and their families – were extended through 2013 after both deductions lapsed at the end of 2011. The short renewal Congress afforded to them this week means lawmakers have set themselves up for another fight over the deductions at the end of the 2013 calendar year.
Moreover, the deal Congress produced failed to answer other questions. Sequestration, the across-the-board cuts to virtually all programs scheduled to occur on January 2, 2013, for example, remains unresolved. Instead of either implementing the cuts this month or cancelling the threat of sequestration, the cuts have been delayed until March 1, 2013. That’s just a few weeks before the short-term continuing resolution, under which the federal government is currently operating at fiscal year 2012 funding levels, expires.
And according to the Treasury Department, the U.S. hit the debt ceiling – its borrowing limit – on Monday. Treasury Secretary Tim Geithner said the Department would engage a set of “extraordinary measures” to buy time, giving lawmakers until late February to act.
All this means the fiscal cliff agreement is really just a short respite on the way to the next fiscal cliff, scheduled to hit again in just a few months. Admittedly, the next agreement may be slightly easier to reach, given that it will occur under a new Congress with more Democrats in both houses (though leadership will still be split, with a Democratic Senate and a Republican House), and the biggest tax issues are now settled. But the circumstances haven’t changed, at least on the spending side. School districts are still at risk of losing significant federal funding (estimated at 8.2 percent per federal program, across the board). And Congress faces yet another knock-down, drag-out fight over spending levels and deficit cutting.