The $30+ billion per year we spend through the federal tax code on higher education disproportionately goes to the households who need help the leasta€”to the parents who could already finance the education of children who were already college bound.
Eliminate extraneous and unfair tax spending programs, like the deduction for higher education expenses. Reform the largest higher education tax credita€”the American Opportunity Tax Credita€”so that it encourages college savings. Expand the Savera€™s Credit so that it can help families save for college instead of just for retirement. Eliminate public benefit asset limits that force families to choose between making ends meet today or investing in the educational aspirations of their children. Testimony of Scott Hodge Before the Senate Committee on Finance: Are Tax Credits the Proper Tool for Making Higher Education? Founded in 1937, the Tax Foundation is the nation’s oldest organization dedicated to promoting economically sound tax policy at the federal, state, and local levels of government. For 75 years, the Tax Foundation’s research has been guided by the immutable principles of economically sound tax policy that were first outlined by Adam Smith – taxes should be neutral to economic decision making, they should be simple, transparent, stable, and they should promote economic growth. In other words, the ideal tax system should do only one thing – raise a sufficient amount of revenues to fund government activities with the least amount of harm to the economy. Inequality is on the minds of many these days and it is commonly thought that the Bush-era tax rates are a principle cause.
To some, America may be the land of the haves and have-nots, but at the heart of that disparity is that some have a sheepskin while the others don’t.
Considering the financial benefits of getting a college degree, higher education policy has shifted in recent years away from traditional loan and direct subsidy programs (such as Pell Grants) toward the use of various tax credits and deductions.
The  question is, is the tax code the proper tool to increase access to higher education and make college more affordable? First, these tax credits violate the principles of sound tax policy by greatly increasing the complexity and distortions in the tax code. Tax credits and subsidies undermine market forces and can actually cause price inflation for the very thing they are intended to make more affordable.
The extensive use of tax credits has already knocked a record 58 million Americans off the tax rolls – 41 percent of all filers have no income tax liability after taking their credits and deductions.
The over-use of tax credits has turned the IRS into an extension of – or substitute for – other government agencies. Housing suffers a similar problem because of the plethora of tax and spending subsidies intended to promote home ownership.[1] Economists find that the mortgage interest deduction gets capitalized into the price of homes and may amplify price volatility[2], which then offsets whatever effect it has on promoting home ownership. Subsidized student loans and education credits are similarly fueling higher college costs by disconnecting student-consumers from the true cost of higher education. The cure for what ails these industries is to be weaned off the tax code, not the granting of more subsidies through increased credits and deductions. Over the past two decades, lawmakers have increasingly asked the tax code to direct all manner of social and economic objectives, such as encouraging people to buy hybrid vehicles, purchase health insurance, buy a home, replace the home’s windows, adopt children, put them in daycare, take care of grandma, purchase school supplies, go to college, and the list goes on. In too many respects, the IRS has become an extension of, or rather a substitute for, every other Cabinet agency – from Energy and Education to HHS and HUD. Today, as can be seen in Chart 3, a record number of Americans – 58 million, or 41 percent of all filers – now have no direct connection with the basic cost of government because they pay no income taxes. As a result of removing millions of people off the bottom of the tax rolls, we have dramatically reduced the number of people with “skin in the game.” According to the Congressional Budget Office, the bottom two quintiles – representing the bottom 40 percent of taxpayers – now have a negative income tax liability.
The means that for all practical purposes, the bottom 60 percent of taxpayers have little or no connection with the basic cost of government. Chart 5 details the growing cost of non-refundable and refundable tax credits over the past two decades.[5] In 1990, the combined value of these credits was roughly $20 billion, after adjusting for inflation.
By 2000, non-refundable tax credits had grown to a budgetary cost of $46.5 billion, in 2012 dollars. A decade later, the combined budgetary cost of both the non-refundable and refundable tax credits reached a remarkable $224 billion in 2010. As of 2010, refundable cash payments to nonpayers comprised over half ($120 billion) of the total cost of tax credits. Chart 6 illustrates the gradual growth of the budgetary costs of education tax credits since 1998, while Chart 7 documents the number of tax returns claiming those credits each year since 1998.
The cost of these programs held steady until 2009 with the enactment of the American Opportunity Tax Credit (AOTC).
Meanwhile, as is shown in Chart 7, the number of taxpayers claiming various education credits more than doubled between 2008 and 2010, from 7.7 million to over 16 million.
The table below compares the current value of the non-refundable credits and refundable credits relative to the other large credits in 2010.
Credits are only of value to taxpayers to the extent that they have an income tax liability to which those credits may be applied. As Chart 8 illustrates, roughly 30 percent of the current benefits of education tax credits accrue to taxpayers earning over $100,000 and an additional 18 percent accrues to those earning over $75,000.
Problems with education credits have not reached this level, but there is cause for concern. More recently, the IG has raised red flags about taxpayers improperly claiming the American Opportunity Tax Credit.
I would argue that while we should be appalled by such abuse, we should not be surprised by it.
Moreover, enforcing these credits is simply asking the IRS to be more than a tax collection agency.
While we all understand the value and financial benefit of getting a college degree, using the tax code to “make college more affordable” not only violates the principles of sound tax policy, but also produces serious unintended consequences. These “tax programs” – for lack of a better word – are likely contributing to the rising costs of higher education while helping to knock millions of people off the tax rolls.
These are not the kind of consequences that can be cured by a simple reform of tax credits, but by a wholesale reform of the entire tax code. Since the enactment of the federal income tax in 1913, interest on state and local bonds has been excluded from taxation. Three Major Concerns of the Proposed Debt-Equity Regulation On July 14th, the IRS held a public hearing for the debt-equity rule (section 385 of the IRS code) that the Treasury Department proposed last April.


The AICPA noted that there are currently more than 13 different education-related incentives, and that the requirements, eligibility rules, definitions and income phase-outs vary from incentive to incentive. Provides a 100 percent tax credit on the first $2,000 of eligible higher education expenses and a 25 percent credit for the next $2,000 of expenses.  In addition, the first $1,500 tax credit is refundable.
Provides phase-out limitations of the new AOTC to between $86,000 and $126,000 (married filing joint).  The phase-outs for single filers are half these amounts.
Provide further clarification on whether the new AOTC will have a limitation of one credit per family or if the credit is available on a per student basis.  The AICPA recommended offering the credit on a “per student” rather than a “per taxpayer” basis, providing a potentially larger tax benefit per family. Make the new AOTC 100 percent refundable to minimize the complexity of compliance for taxpayers. Make the new AOTC available for any six years of post-secondary education, including graduate-level and professional degree courses. Review and monitor credit limits continuously to ensure they remain consistent with the rate of rising tuition costs.  Although the new AOTC is indexed for inflation, the rate of increase for tuition costs is often higher than the inflation index. This is the subject of CFEDa€™s new Upside Down report focused on higher education tax spending.
Higher education tax spending is an enormous percentage of all federal higher education support. Tax-incentivized college savings has ballooned, but high-income households are receiving the support. A large new federal investment in educational opportunity need not require a large new influx of federal dollars.
Use these savings to provide a savings account to every child born in the country every year. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.
Registered Representatives of Kestra IS and Investment Advisor Representatives of Kestra AS may only conduct business with residents of the states and jurisdictions in which they are properly registered. Thank you for the opportunity to speak to you today on the issues surrounding education and taxes. At the bottom end of the income scale, about 70 percent of low-income Americans have a high school degree or less, whereas at the other extreme 78 percent of those earning over $250,000 have a college education or better.
But there are serious practical reasons we should be wary of using such policies and this will be the focus of my testimony today. It is clear that higher education is headed down the same path as health care and housing for the same reasons.
In addition to the lost revenues from having so many people off the tax rolls, and the social cost of having so many Americans with no skin in the game, our research suggests that the 20 year growth in nonpayers is associated with more than $200 billion in higher transfer spending this year. Instead, the tax code should be overhauled by eliminating all of these provisions while flattening tax rates.
For example, the tax preference for employer-provided health insurance creates a classic third-party payer problem in which patient-consumers are disconnected from the cost of service.
The actual economic benefits of those capitalized costs tend to flow to the home builders and realtors, who have naturally been the most vocal opponents of eliminating the deduction.
In turn, the benefits of these programs get capitalized into tuition costs because universities can boost tuitions without suffering the normal market backlash. The Consumer Financial Protection Bureau reports that the amount of outstanding student loan debt has topped $1 trillion.
But perhaps the most troubling development in recent years is that the efforts of lawmakers to use the tax code to help low and middle-income taxpayers has knocked millions of taxpayers off the tax rolls and turned the IRS into an extension of the welfare state. More worrisome is the fact that the middle quintile – representing the middle 20 percent of taxpayers – has an overall effective tax rate nearing zero, just 1.3 percent. Indeed, to them the IRS is a source of cash benefits because of the growth in refundable tax credits.
Of that amount, the budgetary cost of basic tax credits was around $8 billion, while  refundable credits totaled $12 billion.
The child credit was, by far, the biggest portion of this at more than $25 billion, after adjusting for inflation. To put this cost in perspective, it is larger than the budgetary cost for the tax exclusion for employer-provided health insurance, which is the largest tax expenditure in the federal budget. The largest refundable credits in 2010 were the EITC ($59 billion), and the refundable portions of the child credit ($27.5 billion) and the Making Work Pay Credit ($16 billion). The AOTC is more generous than the Hope Credit – it is worth 100 percent of the first $2,000 of education expenses compared to $1,200. Moreover, the IRS distributed $8 billion in refundable American Opportunity credits in 2009 and another $6.7 billion in 2010. In 2010, some 12 million taxpayers received refundable AOTC credits even though they had no income tax liability.
Because the value of a tax deduction depends upon the marginal tax rate faced by the taxpayer, many of the largest and well known tax preferences – such as the mortgage interest deduction, deduction for state-local taxes, and the deduction for student loan interest –tend to benefit upper-income taxpayers because they are the taxpayers who itemize. As we’ve seen, this is becoming increasingly difficult because so many taxpayers are off the tax rolls because of the plethora of generous tax credits.
They increase the cost of compliance for taxpayers and the IRS, and they are susceptible to fraud. For instance, the Treasury Inspector General for Tax Administration has found that, “Some taxpayers are claiming the Hope Credit for more years than allowed by law.” [9] The limit is two years but some were found to claim the credit for three and even four years. It is asking it to manage a social program – a role far beyond what it is designed to perform. This, in turn, is disconnecting millions of people from the basic cost of government and transforming the IRS into an extension of the Department of Education and the welfare system. Canada does not have a mortgage interest deduction, yet its rate of homeownership is equal to that in the U.S. Maag and Katie Fitzpatrick, “Federal Financial Aid for Higher Education: Programs and Prospects,” Urban Institute, January, 2004. Russell George, Treasury Inspector General for Tax Administration, before the Committee on Ways and Means, Subcommittee on Oversight, U.S. 3393 and Chairman Camp’s discussion draft propose consolidating various credits, including the Hope Credit, the existing American Opportunity Tax Credit, the Lifetime Learning Credit and the deduction for qualified tuition and related expenses, in a new, combined American Opportunity Tax Credit (AOTC).


This new report examines federal higher education tax spending and makes recommendations for expanding educational and economic opportunity by turning this upside-down spending right-side up.
For the last twenty years, this education tax spending has regularly matched or exceeded Pell Grant spending.
For four of the largest tax spending programs, the top 40% of households receive more support than the bottom 40%. Since 2001, savings into tax-preferred 529 college savings accounts has grown 954%a€” with total savings now totaling more than $200 billion. Ita€™s clear that higher education support now comes through both tax spending and direct spending.
The amount of such tax credit per dependent minor child of a taxpayer shall be the actual amount expended for such course, or $150.00, whichever is less.
He also wrote a popular best selling book called 100 Smart Money Moves To Make Now and co-hosts the nationally syndicated podcast The Shrimp Tank.In 2008, Ted founded oXYGen Financial to help revolutionize the financial services industry by creating a new company that focused on serving the X and Y Generation. Kestra IS and Kestra AS makes no representation as to the completeness or accuracy of information provided at these web sites. One of the biggest contributors to rising inequality in America today is the growing earnings gulf between workers with college degrees and those without. There is also a strong correlation between the growth in nonpayers and increases in the national debt.
The cost of health care is soaring because we have an unlimited demand for health care due to the belief that someone else is paying the bills. Since 1997, however, lawmakers have increasingly turned to the tax code to help students and families with education costs. Within five years, the number of taxpayers claiming these credits had climbed to over 7 million, while the inflation-adjusted costs increased to over $7 billion.  In other words, the average taxpayer claimed roughly $1,000 in education tax credits.
It also allowed taxpayers with higher incomes can claim the credit – it phases out at $180,000 for joint filers compared to $120,000 for the Hope Credit.
The only way to provide more tax benefits to these taxpayers is to simply write them a check in the form of a refundable tax credit.
As it stands, simply complying with the tax code costs taxpayers an estimate $163 billion each year.
That’s the question asked — and answered — in the annual study, How America Pays for College. This handy infographic by Sallie Mae will help you determine if you can claim the education tax credits or deductions. If there were a Department of Higher Education Tax Spending, its funding would be larger than the discretionary budgets of nine federal cabinet-level agencies. For all but one of these tax programs, the top 40% get more support than all other households combined. Childrena€™s savings programs could be a great tool for expanding educational and economic opportunity, but most working families arena€™t receiving any benefits from this federal 529 bonanza.
But the most important feature of higher education support is not the mechanism through which it is provided, but the effectiveness with which it expands opportunity. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. Nor is Kestra IS and Kestra AS liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site.
According to the National Taxpayer Advocate, tax complexity is the number one issue facing taxpayers and the IRS today. Indeed, as can be seen in Chart 1, the median income for a worker with a 4-year college degree was $75,568 in 2010. The market forces that deliver quality goods at low prices for everything from toasters to automobiles have been disrupted in the health care system because it is tax preferred. And, unlike housing and consumer debt, people cannot walk away from these loans in bankruptcy or dump them in short sales. Refundable credits amounted to $43.4 billion in 2000, nearly all of which was attributed to the EITC.
Roughly two-thirds of these costs were comprised of the non-refundable portions of the Making Work Pay Credit and the Child Credit. Turner, “The mortgage interest deduction and its impact on homeownerhip decisions,” August 2010. In the most egregious casea€”the deduction for higher education expensesa€”the bottom 60% gets, on average, less than nothing. Our tax spending on education is doing a bad job expanding opportunity, but we can expand educational opportunity by turning this spending right-side up. Ted has been featured in over 100 magazines and is often requested to speak at conferences around the world.Ted lives in Milton, GA with his wife Genna and three kids Olivia, Lyla, and Louden. For additional information, please contact Kestra IS Compliance Department at 512-697-6000. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to. The main cause of that complexity has been the proliferation of credits, deductions, and preferences built into the tax code. By contrast, the median income for a worker with only a high school diploma was nearly half as much  – $38,976. Another 24 percent of these costs were attributable to the foreign tax credit and to the education credits. There is even greater income disparity between those with high school diplomas and those with advanced degrees. While the interest deduction for student loans may give them some relief, the benefits of that deduction accrue largely to upper-middle class households.



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