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What A Tax Overhaul Could Mean For Students And Schools

Dec 7, 2017
Originally published on December 7, 2017 9:24 am

The House and Senate are working to reconcile their versions of a tax plan, but one thing is certain: Big changes are ahead for the nation's schools and colleges.

K-12

Let's start with K-12. There, Republicans from both sides of Congress generally agree on two big changes.

Saving for private school

Taxpayers can currently save money for college through a 529 plan, where earnings grow tax-free. Many states also offer deductions for contributions. In the proposals, Republicans want to let taxpayers use 529s to pay for K-12 tuition at private and religious schools, too. Families can already do that with a different plan — Coverdell Education Savings Accounts — but these have low contribution limits and aren't open to high-income Americans. The move to expand the 529 would dramatically increase who could use these plans and the money they could save.

"I think the only taxpayers who will be in a position to benefit from the 529 change are very rich people," says Nora Gordon, an economist and associate professor at Georgetown University. She says using these accounts to save for elementary or high school won't help much unless you can afford to set aside a lot of money early on. No wonder, when the Government Accountability Office studied 529s and Coverdells a few years ago, it found "families with these accounts had about 25 times the median financial assets" of those who didn't use them and "about three times the median income."

While the proposed expansion of 529 plans would largely help affluent parents who use private schools, Republicans are proposing another change that could hurt funding for the nation's public schools.

The SALT (state and local taxes) deduction

Up to now, taxpayers who itemize their deductions — generally high-earners who make up about a third of households in the U.S. — have gotten a break from the federal government for paying state and local taxes.

Think of it as a kind of rebate — courtesy of Washington — that ultimately helps state and local governments pay for important things, like schools, among other things.

Republicans now want to cut that discount, getting rid of the income and sales tax deductions and putting a $10,000 cap on the deduction for property taxes.

"This bill is going to make it more painful for residents to increase local property taxes to pay for public schools," says John Friedman, an associate professor of economics at Brown University.

On average, nearly half of public schools' funding (45 percent) comes from local taxes, often property taxes. In the past, when locals hiked these taxes to help pay for their schools, the federal government made the hike hurt less with that SALT deduction. So imagine, if Congress caps the property tax deduction, for high earners who already pay a lot — in places like New York, New Jersey, Connecticut, even Texas — a new hike would hurt more than it used to.

"This is a really big deal for some states and no deal at all for other states. And the states that it's a really big deal for are blue states," says Nora Gordon of Georgetown. "They're states with higher cost of living, higher property values and states that spend more on their state and local government."

While local taxes provide nearly half of public school dollars, state taxes account for much of the rest (46 percent). Kim Rueben of the nonpartisan Tax Policy Center says states often use these sales and income taxes to help their poorest schools.

"The money from the state ends up helping to prop up school districts that have less ability to raise money from the property tax," she says. Getting rid of these deductions, Rueben says, will make state-level taxes more painful for some and, again, could make it harder to raise money for schools in the future.

Important context: All this is happening with many school districts still reeling from the Great Recession. According to a recent analysis from the Center on Budget and Policy Priorities, after adjusting for inflation, "twenty-nine states provided less overall state funding per student in the 2015 school year than in the 2008 school year, before the recession took hold."

Higher education

The two tax bills are farther apart when it comes to higher education.

In the House: fewer tuition benefits

We've heard a lot about graduate students' reaction to the proposal to tax their tuition waivers as income.

As Ariana Figueroa reported for NPR:

"Many grad students — especially in Ph.D. programs — receive tuition waivers in exchange for teaching classes or doing research. Under current law, that money isn't taxed as income. But the House bill calls for those tuition waivers to be counted as income and subjected to income taxes.

That means graduate students would be paying taxes on money they never receive."

The House bill also cuts or reduces other higher education tax benefits:

  • The Hope Scholarship Credit
  • The Lifetime Learning Credit and tuition deduction
  • The deduction on interest for those repaying student loans
  • The American Opportunity Tax Credit, which students and families can use to offset college tuition payments, is limited to exclude part-time and graduate students, although it is also extended for a fifth year.

Together, the axed benefits are worth about $6.5 billion a year to students and families, according to the American Council on Education.

The Senate bill doesn't include any of the above.

State funding for public higher education may also be in jeopardy, for the same reasons we discussed above — a consequence of getting rid of the deductions for SALT. Scaling back, or cutting federal discounts to taxpayers may cause a squeeze on funding for state universities and colleges.

Private college penalties

Both public and private colleges have expressed concern that fewer people are going to be taking the charitable deduction, because of the increase in the standard deduction. They're worried this will lead, in turn, to less money in donations. The American Council on Education estimates about $100 billion less a year in donations across all nonprofits.

There are also some provisions in the House and Senate bills that target private colleges specifically. One provision would levy a tax on investment gains for a small group of private colleges that have very large endowments on a per-student basis. Currently, this money grows tax-free thanks to the colleges' nonprofit status.

This affects about 65 private colleges with extremely large endowments. But even more colleges are worried about it, says Terry Hartle of the American Council on Education.

"Even though public universities are not affected by the endowment tax, they are very much opposed to it, for fear it would set a precedent that would be applied to them in the future."

Culture war?

The tax plans, which passed on party lines in both the House and Senate, are aligned with a broader Republican agenda. On the K-12 side, cuts that impact the source of public school funding are coming hand in hand with special tax benefits for families with means to put aside money for private school tuition.

On the higher education side, Stephen Moore, a conservative economist and adviser to the Trump campaign, told Bloomberg that Republicans are going after university endowments because "universities have become playpens of the left." Amplifying that point, a recent Pew Research Center poll showed there is a sharply rising partisan gap on higher education, with 58 percent of Republicans saying colleges have a negative effect on the country, while 72 percent of Democrats say they have a positive impact.

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STEVE INSKEEP, HOST:

Lawmakers are trying to reconcile two different versions of a tax bill, one passed by the House, the other by the Senate. They do seem to agree - Republicans, anyway - on two changes that affect America's schools. NPR's Cory Turner reports.

CORY TURNER, BYLINE: The first change has to do with something called a 529. That's a plan taxpayers can use to save money for college, where the earnings grow tax-free. Now Republicans want to let taxpayers use 529s to pay for K-12 tuition at private and religious schools. Now, families can already do that with a different plan, but that one has low contribution limits, and it isn't open to high-income Americans. This move would expand both.

NORA GORDON: I think the only taxpayers who will be in a position to benefit from the 529 change are very rich people.

TURNER: Nora Gordon is an economist and associate professor at Georgetown University. She says using these accounts to save for K-12 schooling won't help much unless you can afford to set aside a lot of money early on. When the Government Accountability Office studied these plans a few years ago, it found families who use them had about 25 times the median financial assets of those who don't.

While that change would help largely affluent parents who use private schools, change No. 2 could hurt funding for public schools. And this one is all about SALT - state and local taxes. Up to now, taxpayers who itemize their deductions - generally, high earners - have gotten a break from the federal government for paying state and local taxes. Think of it as a discount, courtesy of Washington, that ultimately helps state and local governments pay for important things like schools. Now Republicans want to limit or get rid of those discounts.

JOHN FRIEDMAN: This bill is going to make it more painful for residents to increase local property taxes to pay for public schools.

TURNER: John Friedman is an associate professor of economics at Brown University. He says, on average, nearly half of public schools' funding comes from local taxes, usually property taxes. In the past, when locals hiked property taxes to help pay for their schools, the federal government made it hurt less with that SALT deduction. But limit the deduction, and some voters and politicians might even call for tax cuts instead.

GORDON: This is a really big deal for some states and no deal at all for other states. And the states that it's a really big deal for are blue states.

TURNER: States like New York, Connecticut and New Jersey, says Georgetown's Nora Gordon.

GORDON: They are states with higher cost of living, higher property values and states that spend more on their state and local government.

TURNER: In addition to wanting to limit the deduction on local property taxes, Republicans in the House and Senate may also get rid of the deductions for state-level sales and income taxes, which are just as important to schools. Kim Rueben of the nonpartisan Tax Policy Center says states have been using these taxes to fund some of their poorest schools.

KIM RUEBEN: The money from the state ends up helping to prop up school districts that have less ability to raise money from the property tax.

TURNER: Getting rid of these discounts, Rueben says, will make state-level taxes more painful, and that could make voters less likely to approve new money for schools. And all of this is happening with many of America's public schools still reeling from the Great Recession. According to the Center on Budget and Policy Priorities, after adjusting for inflation, 29 states provided less overall state funding per student in 2015 than they did back in 2008.

Cory Turner, NPR News, Washington.

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