Congress hammered out a new tax plan which was signed by President Trump prior to Christmas. While negotiations removed many troubling pieces from the bill, the new plan will lead to numerous – and potentially difficult — changes to higher education institutions and those involved in it.
Here’s a round-up of how higher education and key stakeholders will be affected:
For Colleges and Universities
- The final plan creates a 1.4 percent excise tax on investment income for private higher education institutions that have assets valued at $500,000 per full-time students and an enrollment of at last 500 students. This option, which was proposed by the Senate, will affect 36 prominent national institutions. Politics got ugly in relation to this provision with the last-minute inclusion of Berea College, which has an endowment and student enrollment large enough to quality. However, the college uses its endowment to fund the majority of its students’ tuition since the average student’s family income is $29,000. Berea is located in Kentucky, the home state of Senate Majority Leader Mitch McConnell.
- The bill eliminates the charitable deduction that covered 80 percent of the amount paid by college sports fans for tickets to athletic events.
- The final version requires unrelated business income from higher education recreation or fitness centers, sports camps, facility rentals and golf courses to be counted separately for tax purposes. Colleges can no longer use losses in one business area to offset tax liability for gains in another area.
- The final plan maintains tax-exempt private activity bonds that lower the cost of building for colleges.
- The new tax bill makes interest on newly issued advance refunding bonds taxable.
- The plan keeps the tax code provision allowing graduate students to receive waived or discounted tuition without the tuition being counted as taxable income.
- The final plan keeps tax benefits for student loan borrowers. They will be able to deduct up to $2,500 paid toward student loan interest from taxable income annually, a provision that would have been eliminated in the House version.
- The bill provides a tax exemption for student loan debt that is discharged for death or disability.
For Higher Education Administrators
- According to The Chronicle of Higher Education, the bill imposes a 21-percent tax on annual compensation in excess of $1 million paid to any nonprofit organization’s five highest-paid employees. This provision applies to colleges but is believed to exempt medical faculty members who work at academic hospitals.
- The tax bill cuts the 30-year-old drug tax credit in half. Previously, companies could write off 50 percent of research costs to develop drugs for diseases that strike fewer than 200,000 people. Patient groups fear this will slow development of new medications.
- The final bill requires companies to take a longer time – five years or more — to write-off research-related expenses.
For Higher Education Employees
- The final tax plan keeps the tax-exempt tuition benefits provided to spouses and dependent children of college employees. This reverses the proposal initially included in the House version.
- The tax bill increases the standard deduction to $24,000 for joint filers and $12,000 for individuals. Some higher education leaders believe these changes will reduce the incentive for individuals to donate to colleges and universities. In addition, many states have laws requiring that the state’s tax rates have to change with federal rates. According to The Chronicle of Higher Education, these state laws could lead to a decline in tax revenues earmarked for public institutions of higher education.
- The bill allows deductions of up to $10,000 in state and local taxes from the federal tax bill. Public higher education leaders in high-tax states such as California and New York are concerned that caps on these deductions will dampen support for funding state higher education.
- The final plan expands Section 529 college savings accounts to cover K-12 expenses up to $10,000 per year. Participating families can use these funds to pay for children to attend public or private K-12 schools. However, according to Nat Malkus, deputy director of education policy studies at the American Enterprise Institute, this will cause states to lose funding as these deductions are tax-deductible, e.g., for those families in New York who put in $10,000 into one of these accounts, there is a tax savings of $600 on the NY State income taxes. That isn’t a bad thing, but it will cut down on the amount that public schools will get funded going forward. Additionally, both Betsy DeVos and George Murry, chairman of the U.S. Conference of Catholic Bishops Committee on Catholic Education, have acknowledged that this tax break will do little to assist low-income students, especially since, according to Morris, research shows that those who use the 529 deductions are used by “wealthier families.”
The stealth and breakneck speed at which this bill was passed in both houses left many higher education leaders rightfully concerned. The Brookings Institution noted that the speed of the passage in both legislative houses was designed to control the legislative process so that Republicans could claim a major political win in the first year of the Trump administration and also offer good news to sway voters in Alabama (which didn’t happen as their candidate, Roy Moore, lost in a highly watched Senate race). “But the biggest consequences of speedy passage might not be realized until after the bill is finished,” Brookings staff noted. “A rushed process can produce errors in legislation and creates the possibility for unintended consequences, especially in a policy area as complicated as the tax code.” In fact, errors should be expected since legislators passed the bill without public hearings — and many senators admitted that they did not even read the proposed legislation before voting for the bill.
In our opinion, this bill was totally unnecessary, and multiple Republican congressmen stated that they had to do this to get a “win” to show that they could govern when in the majority. Hogwash. This is not governing when one party drives something through Congress. Many Republicans said that this is the same thing as what happened with the Affordable Care Act, but there were multiple open hearings held on that bill, and Republicans chose not to act or participate – it was Senator Mitch McConnell who said, “The single most important thing we want to achieve is for President Obama to be a one-term president,” and then-Congressman John Boehner who said, “We’re going to do everything — and I mean everything we can do — to kill it, stop it, slow it down, whatever we can.” That is simply partisan politics which, unfortunately, reflects how this country is today – a zero-sum, I am right and you are wrong, type of game which helps no one.
Whereas this bill is not the “unmitigated disaster” that could have been, there are still multiple areas in it that are unfavorable to education and those who were involved with it. For example, the bill removes the provision in the ACA which requires all people to have insurance or pay a penalty, which will drive up the cost of insurance for everyone in higher ed, whether you are a university paying for your employees, if you are employed by university and have to pay for your portion plus copayments, or an adjunct professor or contract worker responsible for his or her own insurance. In fact, the Congressional Budget Office projects that in 10 years, an additional 13 million people will be uninsured because of this decision.
This plan also will drive up the national debt by somewhere between $1-1.5 trillion, and for the first time, the national debt will equal the GDP. This is a huge line in the sand that is being crossed, and the resulting debt will be a burden on future generations.
Corporations and their CEOs has stated that they do not intend to use the “windfall” that they gained through this bill to create more jobs, but will use the money to pay their shareholders.
The Federal Reserve Board has publicly stated that this bill is not necessary, that the economy is in excellent shape and does not need the “goosing” (however limited) that this bill will bring. In fact, this bill may cause inflation to be driven up, which will result in the Fed pushing up interest rates and negating the economic expansion that this bill will supposedly bring.
All in all, not as bad as it could have been, but still, it wasn’t a warm and cuddly Christmas present under the tree for higher ed or education in general!
Balingit, M. & Anderson, N. (2017). After a high-drama vote, here’s what the Senate tax bill means for schools, parents and students. The Washington Post. https://www.washingtonpost.com/news/education/wp/2017/12/02/after-a-high-drama-vote-heres-what-the-senate-tax-bill-means-for-schools-parents-and-students/?utm_term=.d76931361e58
Berman, E. (2017). Tax bill includes expansion of school choice. WIBC. http://www.wibc.com/news/local-news/tax-bill-includes-expansion-school-choice
Education Dive. (2017). Senate tax bill proposes higher ed changes. https://www.educationdive.com/news/senate-tax-bill-proposes-higher-ed-changes/512150/
Green, E. (2017). How a tuition-free college turned into a casualty of the tax war? New York Times. https://www.nytimes.com/2017/12/20/us/politics/berea-college-bernie-sanders-mcconnell-tax-cut.html
Kelderman, E. & Harris, A. (2017). Final tax bill would spare some higher-ed worries, but could lead to state budget cuts. The Chronicle of Higher Education. https://www.chronicle.com/article/Final-Tax-Bill-Would-Spare/242075?cid=wsinglestory_hp_3
Kreighbaum, A. (2017). Final GOP deal with tax large endowments. inside higher ed. https://www.insidehighered.com/news/2017/12/18/large-endowments-would-be-taxed-under-final-gop-tax-plan
Malakoff, D. (2017). Researchers win some, lose some in final U.S. tax bill. Science Magazine. http://www.sciencemag.org/news/2017/12/researchers-win-some-lose-some-final-us-tax-bill
Quintana, C. (2017). Graduate students mobilize ‘to stop something that can ruin us’. The Chronicle of Higher Education. https://www.chronicle.com/article/Graduate-Students-Mobilize/241901?cid=db&elqTrackId=3e6f40ab4b3d43c38573b87492b85716&elq=f983805ac41b46149c59b2ba0ce84c41&elqaid=16865&elqat=1&elqCampaignId=7309