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Governor Evers Vetoes Wisconsin Standard Deduction Tax Relief Bill

Governor Evers Vetoes Wisconsin Standard Deduction Tax Relief Bill

Tax Policy – Governor Evers Vetoes Wisconsin Standard Deduction Tax Relief Bill

This week, Wisconsin Governor Tony Evers (D) vetoed Assembly Bill 4, legislation introduced by House Speaker Robin Vos (R) that would have provided targeted low- and middle-income tax relief through a more generous standard deduction in the state’s individual income tax code.

Like many states, Wisconsin offers a standard deduction that reduces the amount of a taxpayer’s income that is subject to the state’s individual income tax. However, unlike most states, Wisconsin’s standard deduction is hardly “standard” at all. Instead of offering a standard deduction at a set value, Wisconsin’s sliding-scale standard deduction is highly progressive in nature; individuals with the lowest incomes can claim the highest amount, and the higher a taxpayer’s income, the less of a deduction he or she is eligible to claim. In fact, the deduction phases out completely for taxpayers with income above a certain level.

Due to inflation indexing, Wisconsin’s standard deduction and income thresholds vary from year to year. In Tax Year 2018, single filers with Wisconsin Adjusted Gross Income below $15,500 can claim a $10,580 standard deduction, and married couples filing jointly with income below $22,000 can claim a standard deduction of $19,580. Taxpayers with incomes above that amount can claim decreasingly lower amounts using a complex sliding-scale formula. The standard deduction then phases out completely such that single filers with $103,500 or more in income and married couples with $121,009 or more in income are not eligible to claim Wisconsin’s standard deduction at all.

Assembly Bill 4 would have made the standard deduction available to more taxpayers while increasing the amount of the deduction eligible to be claimed at every income level. Specifically, under this legislation, single filers with less than $18,790 in income would be eligible to claim a standard deduction of $13,360, and married couples making less than $27,120 would be eligible to claim a standard deduction of $24,740. While this legislation would have increased the standard deduction and made it available to more filers, it stopped short of reducing the standard deduction’s progressivity or simplifying its complex structure.

One option to reduce complexity is to conform to the federal standard deduction or use it as the starting point for Wisconsin’s own calculation. The Tax Cuts and Jobs Act (TCJA) increased the federal standard deduction to $12,000 for single filers and $24,000 for married filers, adjusted annually for inflation. In addition to making the standard deduction more generous, conformity with the federal provision would allow Wisconsin taxpayers to claim the standard deduction regardless of income.

Another structural improvement worth considering is eliminating the marriage penalty inherent in Wisconsin’s standard deduction. Under current law, a single filer with $30,000 in income is eligible to claim a standard deduction of $8,780, but two individuals who are married and each make $30,000 in income can claim a standard deduction of only $12,017. If the marriage penalty were remedied, the standard deduction for a married couple making $60,000 in combined income would be double the amount available to single filers, or $17,560 in Tax Year 2018.

Should Wisconsin policymakers reconsider a similar proposal to offer individual income tax relief through the standard deduction, structural reforms should also be considered, such as eliminating the marriage penalty and perhaps conforming to the federal deduction. Policymakers might also consider changes to the standard deduction as part of a broader comprehensive tax reform package. Our Wisconsin Tax Options: A Guide to Fair, Simple, Pro-Growth Reform offers four comprehensive tax reform options for policymakers to consider, each of which makes changes to the standard deduction. Specifically, Options A, B, and C would conform to the new federal standard deduction, while Option D would eliminate the standard deduction’s marriage penalty while maintaining the current sliding-scale structure.


Source: Tax Policy – Governor Evers Vetoes Wisconsin Standard Deduction Tax Relief Bill

Top Individual Income Tax Rates in Europe

Top Individual Income Tax Rates in Europe

Tax Policy – Top Individual Income Tax Rates in Europe

Most countries have a progressive income tax structure. This means that the tax rate paid by individuals increases as they earn higher wages. The top income tax rate is applied to the share of income that falls into the highest tax bracket. If a country has five tax brackets with a top income tax rate of 50 percent at a threshold of €1 million, then each additional euro of income over €1 million would be taxed at 50 percent.

Individuals in the top tax bracket also pay social security contributions or payroll taxes. These are typically flat-rate taxes levied on wages and are additional to the tax rate on income.

Workers recognize the impact of marginal tax rates and thresholds when deciding whether to work an additional hour or whether to take a new job paying a higher salary. High marginal tax rates can make additional work more expensive and lead to individuals deciding to stay in less productive positions or choosing not to work. When high tax rates increase the cost of labor, this has the effect of decreasing hours worked, which decreases the amount of production in the economy.

Estonia (21.3 percent), Latvia (21.4 percent), and the Czech Republic (31.1 percent) have the lowest top income tax rates of all European countries covered. The countries with the highest top income tax rates are Slovenia (61.1 percent), Portugal (61.0 percent), and Belgium (60.2 percent).

The threshold at which the top income tax rate applies also plays an important role. Both the top tax rate and threshold can determine the amount of tax revenue raised by the top bracket. For instance, if a country has a top income tax rate of 50 percent on income over €1 million, only a small number of high-earning taxpayers will pay that rate and it may not generate significant tax revenues. In contrast, a top income tax rate of only 20 percent on all income over €10,000 would apply to most taxpayers, implying a broad income tax base and higher tax revenues from the top tax bracket.

The top income tax threshold can also be expressed as a multiple of a country’s average wage. While a low multiple indicates a flatter tax structure, high values signify more progressive tax systems.

Top Income Tax Rates and Thresholds

Source: OECD (https://stats.oecd.org/index.aspx?DataSetCode=TABLE_I7), Tax Foundation calculations. (a) This all-in marginal rate is calculated as the additional central and sub-central government personal income tax, plus employee social security contribution, resulting from a unit increase in gross wage earnings at the earnings threshold where the top statutory personal income tax rate first applies. It takes account of the effects of tax credits, the deductibility of sub-central taxes in central government taxes, etc.

(b) The average top threshold wage was converted to euros for countries that have a national currency other than the Euro. The average 2017 exchange rates provided by the European Central Bank (ECB) were used for the conversion. For Iceland, the ECB did not publish the average Euro-Icelandic Krona exchange rate for the year 2017, therefore the 2018 average was used.

Country Top Marginal Income Tax Rate (in %) (a) Top Marginal Income Tax Threshold (in Euros) (b) Top Marginal Income Tax Threshold (expressed as a multiple of the average wage)
Hungary 33.5  € 0 0.0
Latvia 21.4  € 804 0.1
Estonia 21.3  € 2,196 0.1
Czech Republic 31.1  € 4,694 0.3
Poland 39.9  € 23,647 2.0
Turkey 45.5  € 31,406 3.2
Slovak Republic 35.1  € 40,441 3.5
Belgium 60.2  € 49,639 1.0
Spain 43.5  € 64,859 2.4
Sweden 60.1  € 67,631 1.5
Denmark 55.8  € 70,081 1.3
Ireland 52.0  € 70,148 1.9
Netherlands 52.3  € 70,513 1.4
Finland 58.3  € 81,450 1.9
Iceland 44.4  € 81,597 1.2
Greece 55.0  € 82,052 3.9
Italy 52.8  € 83,275 2.7
Slovenia 61.1  € 95,264 5.0
Norway 46.7  € 100,145 1.6
Luxembourg 42.8  € 164,321 2.8
United Kingdom 47.0  € 171,103 3.9
Germany 47.5  € 267,189 5.4
Switzerland 41.7  € 270,683 3.5
Portugal 61.0  € 280,900 15.6
Austria 48.0  € 361,936 7.9
France 55.1  € 562,377 14.6

Hungary applies a flat tax of 33.5 percent on all income earned, setting the top income tax threshold to €0. Latvia (€804) and Estonia (€2,196) are the countries with the second and third lowest top income tax thresholds, respectively. In contrast, France (€562,377), Portugal (€361,936), and Austria (€280,900) have the highest thresholds for their top income tax rates.

Because Hungary applies a flat tax on all income, top income earners are subject to the same tax rate as average income earners. On this measure, Portugal has the most progressive tax system, with a top income tax rate that applies at 15.6 times the average income.


Source: Tax Policy – Top Individual Income Tax Rates in Europe

State tax law cannot discriminate against federal pensioners, Supreme Court holds

State tax law cannot discriminate against federal pensioners, Supreme Court holds

IRS Tax News – State tax law cannot discriminate against federal pensioners, Supreme Court holds
The U.S. Supreme Court held that West Virginia cannot provide a tax exemption to state law enforcement retirees while denying that exemption to federal law enforcement retirees who performed similar jobs.
Source: IRS Tax News – State tax law cannot discriminate against federal pensioners, Supreme Court holds

Evaluating Education Tax Provisions

Evaluating Education Tax Provisions

Tax Policy – Evaluating Education Tax Provisions

Key Findings

  • The tax code contains several provisions designed to make higher education more affordable and to encourage educational attainment. These include credits, deductions, exclusions, and tax-neutral savings plans.
  • Many of these benefits overlap and are complex, creating confusion for taxpayers that leads to underutilization of current policies as well as administrative and oversight difficulties.
  • Research shows that the current menu of education-related benefits is not effectively promoting affordability or the decision to attend college.
  • Lawmakers wishing to provide education assistance should reconsider whether the tax code is the best tool to achieve that goal.

Introduction

The tax code contains several provisions which are intended to make higher education more affordable. While traditionally the goal of affordability was pursued with loan programs and direct subsidies,[1] the policy toolkit now contains at least a dozen tax-related provisions such as credits and deductions.

Some provisions are available after education expenditures are made, while others are designed to incentivize long-term savings for higher education. Despite being touted as benefits for lower- and middle-income taxpayers, a disproportionate share of the provisions’ benefits flow to higher-income earners. Many of the benefits overlap and create confusion for taxpayers, while evidence is lacking as to whether these provisions work and whether they result in higher levels of education.

This leads to questions of whether the tax code is the most effective way for lawmakers to address the affordability of higher education, or whether traditional means offer a better way to pursue this goal.

This paper provides background information on the arguments for and against education-related tax provisions; an overview of the different provisions under current law, including how they function, who they benefit, and what they cost; and a discussion of areas lawmakers should evaluate when looking to reform these provisions.

Background

Two of the primary considerations for the tax treatment of education expenditures are whether they constitute investment spending or consumption spending, and whether higher education creates a social benefit.[2] For the tax code to be neutral, it should not affect a household’s decision whether to invest or consume. This can be easily illustrated with an example:

The tax treatment of an investment in an Individual Retirement Account (IRA) is neutral. A person may save $1,000 pretax in an IRA, and then pay income taxes when taking distributions from the account—resulting in one layer of tax. Likewise, if the person wished to immediately spend their income on consumption they would face only one layer of federal income tax. This individual would pay just one layer of federal income tax on their income whether they invest it or spend it immediately. Their decision is unaffected by the tax code. On the other hand, the tax code would create a bias against the investment if both the principle placed in the IRA and the return earned on the IRA were subject to tax.

It can be argued that higher education is an investment in human capital, similar to investments in physical capital. Individuals pay for higher education in order to earn higher income in the future, on which income taxes will be paid—in other words, education is the cost of investment in human capital and should be tax-deductible.[3]

This theory makes sense when viewed in the light that “individuals should be allowed to deduct from their income the expenses incurred as part of earning that income.”[4] This argument would favor a simple, above-the-line deduction for educational expenses.

However, if portions of education-related expenditures represent consumption, rather than investment, it would call for different tax treatment. To the extent that students obtain utility from pursuing higher education, the consumption portion of spending, it should not be deducted and instead taxed as any other type of consumption.[5]

If the mix of deductions and tax credits available to a student more than offset the cost of obtaining an education, this would in effect serve as a subsidy for education. For a subsidy to be justified, it would need to de demonstrated that higher education creates positive social returns, or benefits which spill over to society at large.[6]

The likely answer is that higher education expenditures represent a mix of investment and consumption spending, which has conflicting implications for the appropriate tax treatment.

Education Provisions under Current Law

The size and scope of education provisions in the tax code have greatly expanded over the past two decades.[7] A mix of credits, deductions, exclusions, and savings plans[8] are available to households as they plan and pay for higher education. The stated intent of many of these policies, especially the tax credits, is to increase investment in higher education and provide a tax cut to middle-class households that invest in higher education to make it more affordable.[9]

Credits

Two permanent credits, the American Opportunity Credit and the Lifetime Learning Credit, provide tax benefits for tuition and related expenses.

The American Opportunity Credit[10] provides a maximum annual amount of $2,500 per student, calculated as 100 percent of the first $2,000 in qualifying expenses and 25 percent of the next $2,000 in qualifying expenses for the first four years of undergraduate education. If the credit reduces a taxpayer’s liability to zero, then up to $1,000 may be refunded. The credit is subject to income limits: to claim the full credit, modified adjusted gross income (MAGI)[11] must be below $80,000 for single taxpayers ($160,000 married filing jointly). Taxpayers cannot claim the credit if MAGI exceeds $90,000 ($180,000 married filing jointly).

The Lifetime Learning Credit[12] provides a maximum annual amount up to $2,000 per tax return, calculated as 20 percent of the first $10,000 of qualified expenses, and it is nonrefundable. The Lifetime Learning Credit is subject to income limitations: for tax year 2018, the amount phases out if MAGI is between $57,000 and $67,000 ($114,000 and $134,000 married filing jointly) and cannot be claimed if MAGI exceeds that threshold.

Provision Annual Limit Qualifying Expenses Qualifying Education Level Income Phaseout
American Opportunity Tax Credit Partially refundable credit of up to $2,500 per student Tuition and required enrollment fees   Course-related books, supplies, and equipment             First four years of undergraduate education $80,000-$90,000 (single) $160,000-$180,000 (married joint)
Lifetime Learning Credit Nonrefundable credit of up to $2,000 Tuition and required enrollment fees Undergraduate, graduate, and job skills courses $57,000-$67,000 (single) $114,000-$134,000 (married joint)

Taxpayers cannot claim more than one education benefit for the same students and the same expenses;[13] instead they must choose which education benefit is best for their situation. In tax year 2016, nearly 9 million returns claimed nonrefundable education credits,[14] while 8.7 million claimed refundable American Opportunity Credits. The average credit sizes for filers with $30,000 to $50,000 in AGI were $1,054 for nonrefundable credits and $859 for the refundable portion of the American Opportunity Credit (see Appendix Table 1).[15]

Who benefits from education credits?

The Joint Committee on Taxation (JCT) estimates that in 2018, the credits for postsecondary education cost $18.9 billion.[16] Over the five-year period from 2018 to 2022, the JCT estimates they will cost $95.5 billion.

Deductions

The tax code provides one permanent and one temporary deduction related to higher education costs: the Student Loan Interest Deduction and the Tuition and Fees deduction, which at the time of writing had expired.[17] Both are “above-the-line” deductions, which means taxpayers do not have to itemize in order to take the deductions.

The Student Loan Interest Deduction[18] allows taxpayers to deduct up to $2,500 of qualifying interest paid during the year. The deduction phases out for MAGI between $65,000 and $80,000 for single filers and between $135,000 and $165,000 for married filing jointly.

The Tuition and Fees Deduction allowed taxpayers to deduct up to $4,000 of qualified expenses. Taxpayers could not take the deduction if they claimed either of the two higher education tax credits, if the expenses were paid using certain monies,[19] or if MAGI exceeded $80,000 (or $160,000 married filing jointly). Because both tax credits are a permanent part of the code, generally provide a larger benefit, and cannot be used in conjunction with the deduction, most taxpayers utilize the credits rather than the deduction.[20] However, the deduction is beneficial for taxpayers who do not qualify for the credit.

The Tuition and Fees deduction is part of a group of tax provisions which are enacted on a temporary basis, regularly expire, and are then reauthorized on a temporary basis. At the time of writing, this deduction had expired.

Provision Annual Limit Qualifying Expenses Qualifying Education Level Income Phaseout
* At the time of writing, this deduction had expired.
Source: Margot L. Crandall-Hollick, “Higher Education Tax Benefits: Brief Overview and Budgetary Effects,” Congressional Research Service, Aug. 27, 2018.
Student Loan Interest Deduction Up to $2,500 deduction Tuition and required enrollment fees   Course-related books, supplies, and equipment   Room and board   Other necessary expenses, including transportation            Undergraduate and graduate $65,000-$80,000 (single) $135,000-$165,000 (married joint)
Tuition and Fees Deduction* Up to $4,000 deduction Tuition and required enrollment fees  Undergraduate and graduate $65,000-$80,000 (single) $130,000-$160,000 (married joint)

In tax year 2016, 12.4 million returns claimed the student loan interest deduction for a total of $13.4 billion while 1.7 million claimed the tuition and fees deduction for a total of $3.9 billion. In 2016, taxpayers with AGI between $30,000 to $50,000 took an average tuition and fees deduction of $2,207 and an average student loan interest deduction of $1,142 (see Appendix Table 2).

Note that the value of a deduction varies with the marginal tax rate of the taxpayer; for example, deducting $4,000 against a 22 percent tax rate reduces tax liability by $880, while deducting the same $4,000 against a 12 percent tax rate reduces tax liability by $480.[21]

Who benefits from education deductions?

The JCT estimates the student loan interest deduction cost $2.2 billion for 2018 and will cost $11.8 billion for the five-year period from 2018 to 2022.[22] Because the tuition and fees deduction had expired, it is not included in current expenditure reports. However, in a May 2018 report, the JCT estimated the 2017 revenue cost of the deduction for higher education expenses at $0.4 billion.[23]

Exclusions

Several types of education-related income are excluded from taxable income:[24] scholarships, grants, and tuition reductions; certain discharged student loans; and employer-provided education assistance.

  • As long as scholarships, grants, and tuition reductions are used to pay for qualifying expenses and are not work-based, there is no limit on the amount that may be excluded from income.
  • If students work for a certain period in certain professions, their student loan debt may be canceled, and that cancellation is not included in taxable income. Likewise, the cancellation of student debt due to death or permanent disability of a student is nontaxable.
  • If an employee receives education assistance from their employer under a qualified program, up to $5,250 may be excluded from the employee’s taxable income.

The JCT estimates that in 2018, the exclusion for scholarship and fellowship income cost $3.0 billion, the exclusion of income attributable to the discharge of certain student loan debt and loan repayments cost $0.2 billion, the exclusion of employer-provided tuition reduction benefits cost $0.3 billion, and the exclusion of employer-provided education assistance benefits cost $1.1 billion.[25] Over the five-year period from 2018 to 2022, these exclusions together are estimated to cost $25.1 billion.

Tax-Neutral Savings Accounts

Lawmakers have also created a variety of college savings vehicles, which allow taxpayers to set aside funds that can grow tax-free.

529 Plans

529 Plans[26] can be established for a designated beneficiary to take tax-free withdrawals to pay for qualifying education expenses, such as tuition, fees, books, supplies, equipment, and room and board at eligible institutions and up to $10,000 of tuition at elementary or secondary schools.[27] While there are no income limits for contributors or beneficiaries of 529s, overall lifetime limits for contributions range from $250,000 to nearly $400,000 per beneficiary. The tax code provides two types of 529 plans.

The first type of account, a 529 “prepaid” plan, allows the contributor to save for a specified number of academic periods, course units, or percentage of tuition costs at current prices. This type of plan essentially purchases education at today’s price to be used in the future. The JCT estimates that this was a negative tax expenditure of $3 billion in 2018, but over the five-year period from 2018 to 2022 will reduce federal revenues by $0.3 billion.[28]

The second type, a 529 “savings plan,” allows contributors to invest savings that can later be withdrawn tax-free for education purposes. The JCT estimates this will reduce federal revenues by $1.0 billion in 2018, and by $7.2 billion over the five-year period from 2018 to 2022.[29]

Coverdell Education Savings Accounts

Coverdell education savings accounts[30] are tax-neutral accounts which allow taxpayers to save and then make tax-free withdrawals to pay for higher-education, elementary, and secondary school expenses. The JCT estimates that Coverdell accounts will reduce federal revenue by $0.1 billion in 2018 and $0.6 billion between 2018 and 2022.[31]

Contributions are limited to $2,000 a year per beneficiary (usually the taxpayer’s dependent), unless the contributor’s income exceeds $110,000 ($220,000 for married filing jointly), in which case contributions are prohibited. However, contributions may be gifted to an intermediary individual under the income limit and the intermediary may contribute the gift to the Coverdell.

Miscellaneous

In addition to the two categories of savings accounts, the tax code contains other provisions which provide preferential tax treatment for funds used for education.

First, taxpayers may take early distributions from any type of IRA to use for education costs without paying the 10 percent tax on early distributions.[32] Another option is that taxpayers may cash in savings bonds to use for education costs without paying tax on the interest, as long as they make no more than $93,150 ($147,250 married filing jointly).[33] And finally, a direct transfer to an educational institution to pay for tuition on behalf of a minor is not a taxable gift.[34]

Reform Considerations

The structure of the education provisions creates a host of problems and falls short of ideal tax policy, as well as the stated intent of the programs. Specifically, issues arise with regard to neutrality, administrability, simplicity, and efficiency.

Neutrality

When determining the appropriate tax treatment for higher education, Congress should consider that there are both investment and consumption elements to higher education. Research also indicates that at least some education may be a form of signaling to employers, and as such there may be an over-investment in higher education. [35]

Given these elements of educational expenses, it is not straightforward that the tax code should subsidize education.

While theory would suggest that it is neutral to allow a deduction for educational expenditures in that they reflect an investment, it would not be neutral to allow a deduction for, or to subsidize, the consumption and signaling components of educational expenses.

As previous Tax Foundation research suggests, “Overall, the net effect of these conflicting proper tax policies suggests that actually allowing no deductibility and having little subsidization of higher education may be the proper policy.”[36]

Recently, Senators Amy Klobuchar (D-MN) and Ben Sasse (R-NE) introduced Senate Bill 275 which would provide lifelong learning accounts to pay for education expenses including skills training, apprenticeships, and professional development.[37] This raises another neutrality issue: most tax provisions apply to undergraduate or graduate level education, and not other types of education.

Administrability and Simplicity

The mix of credits and deductions under current law creates a complex system of education provisions which taxpayers must navigate.

For example, eligibility for the American Opportunity Credit, the Lifetime Learning Credit, and the tuition and fees deduction can overlap, leaving families to decide which to claim for each student.

In 2009, the Government Accountability Office found that about 14 percent of filers failed to claim a credit or deduction for which they appeared eligible, leaving an average of $466 on the table for a total of $726 million.[38] The report also found that another 275,000 made a suboptimal choice of which credit or deduction to claim, with the result of failing to increase their tax benefit by an average of $284.[39] With a simpler system, filers could more easily find the credits and deduction they qualify for.

These complexities lead to administrative problems as well. Similar to the difficulty taxpayers face in navigating the swath of provisions, the Internal Revenue Service (IRS) is not well suited to be a benefits agency. The IRS lacks many of the resources and competencies required to educate taxpayers about the provisions and undertake enforcement actions necessary to prevent fraud. The Treasury Inspector General for Tax Administration (TIGTA) released a report in 2011 that found billions of dollars of education credits that appeared to be erroneous. Some of the key findings included:[40]

  • 7 million taxpayers received $2.6 billion in education credits for students for whom there was no supporting documentation in IRS files that they attended an educational institution.
  • 370,924 individuals claimed as students who were not eligible because they did not attend the required amount of time and/or were postgraduate students, resulting in an estimated $550 million in erroneous education credits.
  • 63,713 taxpayers erroneously received $88.4 million in education credits for students claimed as a dependent or spouse on another taxpayer’s tax return.

If lawmakers want to provide tax benefits for higher education, they ought to consider consolidation so that the provisions are simpler for taxpayers and administrators to navigate. A simpler system would lead to greater understanding among filers and better administration at the IRS.

Efficiency

Given that lawmakers have decided that the tax code should be used to make higher education more affordable and help more individuals attend college,[41] we can evaluate whether current policies are successfully accomplishing those goals. Evidence suggests that they are not.

Despite the expanding size and scope of federal benefits for higher education, student loan debt is growing, reaching $1.56 trillion in Q3 2018.[42] The Federal Reserve has observed that “federal student loans are the only consumer debt segment with continuous cumulative growth since the Great Recession….Student loans have seen almost 157 percent in cumulative growth over the last 11 years.”[43] The growth in debt indicates that current policy is not addressing the fundamental issue of growth in the cost of college.[44]

Further, economic evidence casts doubt on the ability of the programs to even influence decisions of whether to pursue higher education. For example, a 2014 paper examined the federal tax credits and their effect on college outcomes, finding “no or very small causal effects” on attending college and further, that the federal government and society will earn zero return on the tax credits.[45] Another study by the same authors in 2015 found no evidence that the tuition and fees deduction affects attending college at all, attending full-time versus part-time, attending four- versus two-year college, or a number of other factors.[46]

Reform Discussions

These tax provisions fail to address the underlying causes of increasing costs for higher education, lead to complexity and administrability issues for taxpayers and the IRS, and violate principles of sound tax policy, all while not effectively helping the people Congress intended to help. Lawmakers have recently considered ways to consolidate the education provisions; however, a more thorough review is warranted.

Recent Efforts

An early version of the Tax Cuts and Jobs Act in the House of Representatives included a subtitle, “Simplification and Reform of Education Incentives.”[47] This proposal would have consolidated the tax credits into a single, expanded American Opportunity Tax Credit. It would have consolidated Coverdell education savings accounts into section 529 plans, prohibiting new Coverdell contributions and allowing tax-free rollovers from Coverdell accounts into section 529 plans. It also would have repealed the deductions for interest payments on qualified education loans and tuition and fees and the exclusions for interest on U.S. savings bonds, qualified tuition reductions, and employer-provided education assistance.

Other Solutions

Past proposals range from addressing some overlapping provisions to adding even more options for taxpayers. These proposals have lacked the analysis necessary to be considered true reform. Consolidation of existing provisions should be pursued in conjunction with broader discussions about the effectiveness of tax-related policy tools compared to others that lawmakers could use.

For example, lawmakers could consider solutions that do not use the tax code to effectuate spending priorities and instead pursue policies such as Pell Grants and prepayment plans.[48] Focusing on spending programs like Pell Grants could better target government resources to lower-income students, as opposed to deductions and credits. Likewise, prepayment plans, such as the 529 “prepaid” plans, can help address affordability issues, as families are able to lock in prices and save for college.

Conclusion

The tax code contains several provisions relating to higher education affordability and attainment. Over the past few decades, these provisions have increased in size and scope, but evidence of whether they are accomplishing the stated goals is lacking. Many of the benefits flow to higher-income taxpayers, despite the rhetoric that these provisions are designed to help lower- and middle-income taxpayers. Likewise, research indicates that tax credits and deductions have little to no influence on whether an individual chooses to pursue higher education.

Lawmakers should address questions of administrability, simplicity, neutrality, and efficiency as they relate to the educational provisions. Questions of whether the tax code is the appropriate tool to work toward goals of affordability and attainment should also be explored. Options such as prepaid tuition plans and grants may be a more effective way to help manage the cost of education, while the efficacy of credits, exclusions, and deductions is less clear.

Appendix Table 1
Nonrefundable Education Credit
AGI Number Amount Average
Source: IRS Table 3.3 All Returns: Tax Liability, Tax Credits, and Tax Payments, by Size of Adjusted Gross Income, Tax Year 2016 (Filing Year 2017), author’s calculations.
No AGI 2,119 $862,000 $406.80
$0 under $30,000 2555261 $1,614,258,000 $631.74
$30,000 under $50,000 2,079,000 $2,192,193,000 $1,054.45
$50,000 under $100,000 2,667,197 $3,420,327,000 $1,282.37
$100,000 under $200,000 1,694,393 $2,425,416,000 $1,431.44

Refundable American Opportunity Tax Credit

AGI

Number

Amount

Average

No AGI 103,458 $98,279,000 $949.94
$0 under $30,000 3,706,301 $3,201,494,000 $863.80
$30,000 under $50,000 1,473,865 $1,266,405,000 $859.24
$50,000 under $100,000 1,938,030 $1,816,291,000 $937.18
$100,000 under $200,000 1,541,631 $1,482,048,000 $961.35
Appendix Table 2
Tuition and Fees Deduction
AGI Number Amount Average
Source: IRS Table 1.4.  All Returns: Sources of Income, Adjustments, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2016 (Filing Year 2017), author’s calculations.
No AGI 82,835 $297,976,000 $3,597.22
$0 under $30,000 567,468 $1,518,572,000 $2,676.05
$30,000 under $50,000 163,279 $360,363,000 $2,207.04
$50,000 under $100,000 384,761 $795,196,000 $2,066.73
$100,000 under $200,000 488,759 $938,119,000 $1,919.39

Student Loan Interest Deduction

AGI

Number

Amount

Average

No AGI 79,192 $78,810,000 $995.18
$0 under $30,000 2,424,392 $2,227,231,000 $918.68
$30,000 under $50,000 3,118,877 $3,562,222,000 $1,142.15
$50,000 under $100,000 4,496,698 $5,146,880,000 $1,144.59
$100,000 under $200,000 2,277,021 $2,431,008,000 $1,067.63

Notes

The author would like to thank Alec Fornwalt for his research contributions.

[1] Scott A. Hodge and Kyle Pomerleau, “Is the Tax Code the Proper Tool for Making Higher Education More Affordable?” Tax Foundation, July 15, 2014, https://taxfoundation.org/tax-code-proper-tool-making-higher-education-more-affordable/.

[2] See generally Michael Schuyler and Stephen J. Entin, “Case Study #8: Education Credits,” Tax Foundation, Aug. 7, 2013, https://taxfoundation.org/case-study-8-education-credits/.

[3] Gerald Prante, “Education Tax “Subsidies” – Justified or Not?” Tax Foundation, May 13, 2008, https://taxfoundation.org/education-tax-subsidies-justified-or-not/.

[4] Ibid.

[5] Ibid.

[6] Michael Schuyler and Stephen J. Entin, “Case Study #8: Education Credits.”

[7] Ibid.

[8] A tax credit directly reduces tax liability. A deduction reduces the amount of income subject to tax. An exclusion excludes certain types or amounts of income from tax.

[9] George B. Bulman and Caroline M. Hoxby, “The Returns to the Federal Tax Credits for Higher Education,” National Bureau of Economics, December 2015, 27-29, https://www.nber.org/chapters/c13465.pdf.

[10] Internal Revenue Service, “American Opportunity Tax Credit,” https://www.irs.gov/credits-deductions/individuals/aotc.

[11] Modified adjusted gross income is the same as adjusted gross income for most tax filers. It is calculated by adding back certain exclusions and deductions to adjusted gross income. These include the foreign earned income exclusion, foreign housing exclusion, foreign housing deduction, and exclusion of income by bona fide residents of American Samoa or Puerto Rico. See Internal Revenue Service, “American Opportunity Tax Credit.”

[12] Internal Revenue Service, “Lifetime Learning Credit,” https://www.irs.gov/credits-deductions/individuals/llc.

[13] Internal Revenue Service, “Education Benefits — No Double Benefits Allowed,” https://www.irs.gov/credits-deductions/individuals/education-benefits-no-double-benefits-allowed.

[14] Meaning, the portion of the education credit the taxpayer used to offset tax liability and not receive as a refund.

[15] Internal Revenue Service Statistics of Income, Table 3.3 All Returns: Tax Liability, Tax Credits, and Tax Payments, by Size of Adjusted Gross Income, Tax Year 2016 (Filing Year 2017)

[16] Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2018-2022,” Oct. 4, 2018, https://www.jct.gov/publications.html?func=startdown&id=5148.

[17] It is likely that Congress will reauthorize this provision.

[18] Internal Revenue Service, “Publication 970 (2017), Tax Benefits for Education,” https://www.irs.gov/publications/p970.

[19] For example, if expenses were paid using the tax-free portion of a distribution from a Covedell education savings account or qualified tuition program or other tax-free educational assistance.

[20] Joint Committee on Taxation, “Federal Tax Provisions Expired in 2017,” March 9, 2018, 20, https://www.jct.gov/publications.html?func=startdown&id=5062.

[21] Note that the maximum benefit of the tuition and fees deduction in 2018 would be $880, because eligible taxpayers would be in the 22 percent bracket or below.

[22] Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2018-2022.”

[23] Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2017 – 2021” May 25, 2018, https://www.jct.gov/publications.html?func=startdown&id=5095.

[24] See Internal Revenue Service, “Publication 970 (2017), Tax Benefits for Education.”

[25] Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2018-2022.”

[26] Margot L. Crandall-Hollick, “Tax-Preferred College Savings Plans: An Introduction to 529 Plans,” Congressional Research Service, March 5, 2018, https://fas.org/sgp/crs/misc/R42807.pdf.

[27] Internal Revenue Service, “Publication 970 (2018), Tax Benefits for Education,” 83.

[28] Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2018-2022.”

[29] Ibid.

[30] Margot L. Crandall-Hollick, “Tax-Preferred College Savings Plans: An Introduction to Coverdells,” Congressional Research Service, March 13, 2018, https://fas.org/sgp/crs/misc/R42809.pdf.

[31] Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2018-2022.”

[32] Internal Revenue Service, “Publication 970 (2017), Tax Benefits for Education.”

[33] Ibid.

[34] 26 U.S. Code § 2503 – “Taxable gifts,” https://www.law.cornell.edu/uscode/text/26/2503.

[35] Gerald Prante, “Education Tax “Subsidies” – Justified or Not?”

[36] Ibid.

[37] Senate Bill 275 – “Skills Investment Act of 2019,” 116th Congress, https://www.congress.gov/bill/116th-congress/senate-bill/275?q=%7B%22search%22%3A%5B%22S.275%22%5D%7D&s=3&r=1.

[38] Government Accountability Office, “Higher Education: Improved Tax Information Could Help Families Pay for College,” May 2012, 27, https://www.gao.gov/assets/600/590970.pdf.

[39] Ibid.

[40] U.S. Department of the Treasury, “Recovery Act: Billions of Dollars in Education Credits Appear to be Erroneous,” Treasury Inspector General for Tax Administration, Sept. 16, 2011, https://www.treasury.gov/tigta/auditreports/2011reports/201141083fr.html.

[41] George B. Bulman and Caroline M. Hoxby, “The Returns to the Federal Tax Credits for Higher Education.”

[42] The Federal Reserve, “Consumer Credit outstanding (Levels),” Board of Governors of the Federal Reserve System, https://www.federalreserve.gov/releases/g19/HIST/cc_hist_memo_levels.html.

[43] Riley Griffin, “The Student Loan Debt Crisis Is About to Get Worse,” Bloomberg, Oct. 17, 2018, https://www.bloomberg.com/news/articles/2018-10-17/the-student-loan-debt-crisis-is-about-to-get-worse.

[44] Scott A. Hodge and Kyle Pomerleau, “Is the Tax Code the Proper Tool for Making Higher Education More Affordable?”

[45] George B. Bulman and Caroline M. Hoxby, “The Returns to the Federal Tax Credits for Higher Education.”

[46] Caroline M. Hoxby and George B. Bulman, “The Effects of the Tax Deduction for Postsecondary Tuition: Implications for Structuring Tax-Based Aid,” National Bureau of Economic Research, September 2015, https://www.nber.org/papers/w21554.

[47] Tax Cuts and Jobs Act, H.R. 1, As Ordered Reported by the Committee, Section-by-Section Summary, https://republicans-waysandmeansforms.house.gov/uploadedfiles/tax_cuts_and_jobs_act_section_by_section_hr1.pdf.

[48] Scott A. Hodge and Kyle Pomerleau, “Is the Tax Code the Proper Tool for Making Higher Education More Affordable?”


Source: Tax Policy – Evaluating Education Tax Provisions

Opportunity Zone Rules Hike Concerns Over Tax Breaks for NFL Stadiums

Opportunity Zone Rules Hike Concerns Over Tax Breaks for NFL Stadiums

Tax Policy – Opportunity Zone Rules Hike Concerns Over Tax Breaks for NFL Stadiums

Earlier this month, OpportunityDb highlighted 15 National Football League stadiums that are in Opportunity Zones. While the Opportunity Zone program is meant to spur long-term investment in economically distressed areas, these NFL franchises are now eligible for capital gains tax breaks on stadium-related investments.

Here are a few examples (you can read the entire article here):

  • Baltimore Ravens (M&T Bank Stadium in Baltimore, MD)
    M&T Bank Stadium is an eligible candidate for improvements. In fact, some improvements are already underway. Construction of a new escalator and elevator system is part of a $120 million renovation that may be completed by the start of the 2019 season. Renovations to club level concessions and an upgrade of the stadium’s sound system are already underway as well.
  • Las Vegas Raiders (Las Vegas Stadium in Paradise, NV) 
    The new Las Vegas Stadium is a $1.8 billion project that is expected to open in time for the 2020 NFL season. The new construction sits in an opportunity zone tract, potentially making certain investments in the project eligible for Opportunity Zones tax breaks if the developers decide to structure funding under a Qualified Opportunity Zone fund.
  • Denver Broncos (Broncos Stadium at Mile High in Denver, CO) 
    Broncos Stadium opened in 2001. There are plans to tear up the parking lots to the south of the stadium to make way for a new entertainment district. So while there are no announced plans to improve the stadium itself, the adjacent district development may very well benefit from the new Opportunity Zones program.

The OpportunityDb article demonstrates that the program’s requirement that investments must “substantially improve” zone property in order to qualify for tax breaks is quite loose. For instance, while an investment may substantially improve the value of zone property, that does not mean the investment will aid zone residents. It’s unlikely, for example, that any tax break given for a new escalator at M&T Bank Stadium will significantly improve the economically distressed communities in Baltimore.

Ultimately, though, the Opportunity Zone program could be written and implemented perfectly, and it would still be unlikely to help economically distressed communities. Evidence suggests other place-based incentive programs fail to create new economic opportunity because they are structured in a way that encourages firms to cross borders for tax breaks. Even worse, place-based incentive programs could actually displace zone residents if the roles brought into a zone aren’t a good fit for residents.

It’s possible that this program could be different, and opportunity zones could be successful. But decades of experience with place-based incentive programs suggests we should be skeptical. For this reason, future rounds of regulation should focus on gathering the data we’ll need to make this determination.


Source: Tax Policy – Opportunity Zone Rules Hike Concerns Over Tax Breaks for NFL Stadiums