Education tax credits were introduced as a new subsidy for higher education in 1997 and have cost, on average, $4.6 billion a year in lost tax revenue since their enactment. The introduction of the Hope Credit and the Lifetime Learning Credit marked a dramatic increase in education spending through tax expenditures. Prior to 1997, tax incentives for higher education expenses totalled less than $2 billion in estimated lost revenue. The education tax credit program expanded the number of federal agencies involved in education policy making and increased the complexity and cost of administering the income tax system. This book provides analysis of the education tax credit program in the context of issues facing Congress in regard to higher education. This report begins with a review of the economic rationale for subsidising education, then describes federal subsidies for education in general and the education tax credits in particular. An analysis of the education credits follows and the report concludes with a discussion of education tax credit policy options. The Taxpayer Relief Act of 1997 established two permanent federal income tax credits, effective since tax year 1998, for qualified post secondary education expenses -- the Hope Scholarship credit and the Lifetime Learning credit. The Economic Growth and Tax Relief Reconciliation Act of 2001 created a temporary higher education tax deduction beginning in 2002. The Hope credit was introduced to help ensure that students have access to the first two years of undergraduate education. The Lifetime Learning credit and tuition and fees deduction provide support for students in any year of undergraduate and graduate study; they are unique in that they are available to individuals taking occasional courses. Only one of the three tax benefits may be taken in the same tax year for the same eligible student's qualified expenses. Key features of the credits and deduction dictate who the provisions benefit and the value of assistance they confer. Among these are the non-refundable nature of the credits (i.e., persons must have income tax liabilities and the liabilities must exceed the maximum amount of the credits in order to claim their full value), the deduction's availability whether or not taxpayers take itemised deductions, and the statutory limits on benefit amounts and on taxpayers' income. Accordingly, middle-and upper middle-income individuals are the targeted beneficiaries of these tax incentives. All three benefits apply to the tuition and fees required for enrolment that are not offset by grant aid (e.g. qualified scholarships) and other tax benefits (e.g. Coverdell Education Savings Accounts and Section 529 Plans). The Hope credit has had a maximum value of $1,500 per student since its inception; the Lifetime Learning credit, $2,000 per return since 2003.
This book provides background information for the Higher Education Act (HEA) reauthorisation process about the direct assistance for education expenses provided through the federal income tax system. Key features of the benefits are explored. Also explored is the relationship of the traditional student aid delivery system with the tax system as a conduit for post-secondary education assistance, identifying specific issues that may be important for congressional consideration during HEA reauthorisation. It also presents newly generated estimates of the value of the credits available to varied eligible recipients. In the absence of actual data, modelling approaches that simulate tax credit values offer perhaps the most promising way to examine the targeting of the education tax credits. Two different modelling approaches are applied in the analysis presented in this book.
Education tax credits were introduced as a new subsidy for higher education in 1997 and have cost, on average, $4.6 billion a year in lost tax revenue since their enactment. The introduction of the Hope Credit and the Lifetime Learning Credit marked a dramatic increase in education spending through tax expenditures. Prior to 1997, tax incentives for higher education expenses totaled less than $2 billion in estimated lost revenue. The education tax credit program expanded the number of federal agencies involved in education policy making and increased the complexity and cost of administering the income tax system. This report provides analysis of the education tax credit program in the context of issues facing Congress in regard to higher education. This report begins with a review of the economic rationale for subsidizing education, then describes federal subsidies for education in general and the education tax credits in particular. An analysis of the education credits follows and the report concludes with a discussion of education tax credit policy options. Economists believe that education causes positive externalities since it generates both private benefits for individuals and social benefits for the public at large. Such social benefits may be of better citizenship, higher degrees ...
Three tax credits benefit households who pay tuition and fees for higher education. The credits have been justified as an investment: generating more educated people and thus more earnings and externalities associated with education. The credits have also been justified purely as tax cuts to benefit the middle class. In 2009, the generosity of and eligibility for the tax credits expanded enormously so that their 2011 cost was $25 billion. Using selected, de-identified data from the population of potential filers, we show how the credits are distributed across households with different incomes. We estimate the causal effects of the federal tax credits using two empirical strategies (regression kink and simulated instruments) which we show to be strong and very credibly valid for this application. The latter strategy exploits the massive expansion of the credits in 2009. We present causal estimates of the credits' effects on postsecondary attendance, the type of college attended, the resources experienced in college, tuition paid, and financial aid received. We discuss the implications of our findings for society's return on investment and for the tax credits' budget neutrality over the long term (whether higher lifetime earnings generate sufficient taxes to recoup the tax expenditures). We assess several explanations why the credits appear to have negligible causal effects.
The 1997 creation of the Hope and Lifetime Learning Tax Credits marked a dramatic shift in the way in which federal support for college expenses is distributed to students and their families. Unlike other aid programs, the tax credits have exceptionally broad eligibility requirements, and there is a significant delay between when a recipient enrolls in college and when they receive the benefit. When introduced, the projected benefits of the tax credits were $9.7 billion, over fifty percent greater than the total amount spent at the time on the Pell Grant, the primary Federal grant program. This study examines the impact of the tax credits on students, families, colleges, and states. Using several data sources, I analyze the distribution of the benefits and the effect on enrollment decisions and college pricing. Analysis of tax return data suggests that what was intended to be a transfer to the middle class did benefit families with incomes between $30,000 and $75,000 the most. Insufficient tax liability due to low income levels and the interaction of the credits with other aid programs prevents many low-income individuals from qualifying for a benefit. Additionally, many eligible students did not claim a credit, particularly those from minority groups. Further analysis finds no evidence of increased postsecondary enrollment among eligible students in spite of the stated goal to increase access to higher education. On the other hand, some states and public institutions appear to have responded to incentives to increase the prices of colleges at which students face a low marginal cost. However, the results of this analysis are mixed and less conclusive
Taxes fund the services provided by governments. The goal of tax policy is to design a tax system that produces the desired amount of revenue and balances the minimisation of compliance and efficiency costs with other objectives, such as equity, transparency, and administrability. This new book brings to light new issues and challenges in this field.
College costs by United States. Congress. House. Committee on the Budget. Task Force on Tax Expenditures, Government Organization, and Regulation
Half of all non-loan federal student aid is now offered as tax benefits for educational costs in the form of credits, deductions, and college savings accounts. These benefits help students and families offset the costs of their postsecondary education with tax savings. Yet, as explained in the 2013 report, "Reforming Student Aid: How to Simplify Tax Aid and Use Performance Metrics to Improve College Choices and Completion," under current law, the benefits of these tax incentives overwhelmingly go to students from higher-income families who are already most likely to attend higher education institutions. Moreover, the multiple overlapping tax benefits for higher education add to the complexity of the tax code, and can result in taxpayers not claiming the benefits for which they are eligible. In both the initial report, and a follow-up report from "The Reimagining Aid Design and Delivery (RADD) Consortium for Higher Education Tax Reform," a set of changes is recommended, that would both simplify the package of education tax benefits and increase the extent to which they assist students in low- and moderate-income families. With the increased need to make college more affordable for low-income students and their families, policymakers are rightfully paying attention to this issue. In the previous Congress, Representatives Diane Black (R-TN) and Danny K. Davis (D-IL) introduced H.R. 3393, the Student and Family Tax Simplification Act, which combined several tax provisions into an enhanced American Opportunity Tax Credit (AOTC). President Obama's proposed budget for 2016, released in February, contains a proposal that builds on this bill. And in March, Representative Lloyd Doggett (D-TX) introduced H.R. 1260, The American Opportunity Tax Credit Act of 2015 and Senator Charles Schumer (D-NY) introduced S. 699, The American Opportunity Tax Credit Permanence and Consolidation Act of 2015 that takes the current AOTC one step further by increasing and expanding current eligibility limits. While all of these proposals are designed to make the AOTC permanent, to simplify the tax code by consolidating benefits, and to increase the extent to which students and their families who do not have federal income tax liability can benefit, they vary in the details. This brief explains the tax provisions that would be affected by these proposals, compares them all, and examines how different types of students would be affected under each proposal.