Yes, there really is a tax break for upper-income graduate students and Congress won’t let it expire – AEI – American Enterprise Institute: Freedom, Opportunity, Enterprise

In an earlier Evidence Speaks post this year, Susan Dynarski and Judith Scott-Clayton summarized important research showing that federal tax benefits for college tuition have had no measurable impact on increasing college-going behavior.[1] Moreover, they note that the benefits are numerous, overlapping and complicated. Yet for all their flaws, these tax breaks enjoy such strong support from lawmakers that even the oddest one, which quietly expires each year, is always revived in a last-minute bill just in time for the tax filing season. The tuition and fees deduction (“the deduction”) was recently extended for a seventh time in an omnibus budget bill in February.[2] Out of all the tuition tax benefits the government offers, this one should be relatively easy to let go because of whom it unintentionally targets.

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Here is how the deduction works. Tax filers can deduct up to $4,000 of tuition and fees paid for higher education in the tax year. It is an “above-the-line” deduction, meaning filers can claim it without having to itemize deductions. As a deduction, filers earn a benefit equal to their marginal tax rate. The maximum benefit any filer could extract from the deduction is $880, the top marginal tax rate of those who are eligible (22 percent) times $4,000. There is no limit to the number of times a filer can claim the deduction, so long as he has incurred tuition expenses, and it does not matter what type of credential he pursues. There is, however, an income limit. Taxpayers with adjusted gross incomes above $80,000 ($160,000 for joint filers) cannot claim it.

There is nothing odd about those terms per se, but they interact with other tax benefits the government offers for tuition such that only upper-income graduate students benefit from the deduction. First, undergraduates, while eligible for the deduction, don’t claim it because a different tax credit only for undergraduates is more beneficial: the American Opportunity Tax Credit, which is worth up to $2,500 in tax relief for filers earning up to $90,000 ($180,000 for joint filers).[3] Tax filers can claim only one tuition tax benefit although they usually qualify for more than one. Second, graduate students with lower and middle incomes are also eligible for the deduction, but they can claim the $2,000 Lifetime Learning Credit, which almost always delivers a bigger tax break than the tuition and fees deduction.[4] But the Lifetime Learning credit has a lower income cut-off than the deduction. Those earning over $66,000 ($132,000 for joint filers) in 2017 cannot claim it.[5]

That’s how the deduction ends up targeting upper-income graduate students. While graduate students would always obtain a larger benefit from the Lifetime Learning Credit, they cannot claim it if they earn more than $66,000 ($132,000 for joint filers). They can, however, claim the deduction until their earnings exceed $80,000 ($160,000 for joint filers). Thus a narrow band of graduate students, those earning between the income limits for the two benefits, are the only students who would claim the deduction. At those levels, their incomes are higher than the incomes of about 80 percent of U.S. households.[6] Of course, tax filers can unintentionally claim a less generous benefit if they are eligible for more than one, such as an undergraduate claiming the deduction when she was eligible for the American Opportunity Tax Credit, which does happen.[7]

What the data say about eligible students

Using a representative sample of graduate students in 2011-12, Kim Dancy of New America and I estimated that just 8 percent of graduate students would benefit from the deduction. Meanwhile, 64 percent of graduate students would benefit most from the Lifetime Learning Credit. The rest of graduate students (28 percent) were ineligible for any tax benefit because they have no taxable income, their tuition was fully covered by grants and scholarships, or their earnings were too high.[8] The analysis assumes that tax filers claim the benefit that provides them with the largest tax reduction if they qualify for more than one. These numbers have likely shifted in recent years, with even fewer students benefiting from the deduction, because Congress has increased the earnings cap for the Lifetime Learning Credit to account for inflation but left the limits for the deduction unchanged.

We also estimated the average benefit graduate students would claim through the deduction for the 2011-12 academic year. At $621, it was smaller than the $859 average benefit that filers eligible for the Lifetime Learning Credit could claim.[9] Due to small sample sizes, however, we were unable to reliably assess important characteristics of filers eligible for the deduction, such as field of study.

The deduction didn’t start out as a graduate school tax break

As is often the case in public policy, lawmakers did not set out explicitly to provide a tax break to upper-income graduate students. In fact, graduate students were never the target group for the tuition tax breaks; undergraduates were always the focus. Although graduate students have been eligible for the tax benefits since their inception, changes to the policies over the years have left the deduction benefiting upper-income graduate students alone.

Prior to mid-1990s, the federal government did not offer widely-available tax breaks for college tuition. The idea first gained prominence when President Clinton proposed a $10,000 deduction for college tuition as part of his “Middle-Class Bill of Rights” reelection platform.[10] After critics noted that a deduction would provide more help to families in higher tax brackets, Clinton added a separate tax credit for the first two years of college to his proposal to provide more even benefits.[11] Congress adopted the president’s idea for the credit in 1997, naming it the Hope Tax Credit, but rejected the additional proposal for a $10,000 deduction. They instead replaced that proposal with a separate credit for “lifelong learning” (i.e., the Lifetime Learning Credit) that families could claim for education after the first two years of college, including graduate school.[12]

Thus, President Clinton’s original idea for a deduction and a credit was replaced with two credits, the Hope Tax Credit and the Lifetime Learning Tax Credit. In keeping with their original purpose to provide middle-class tax relief, Congress capped income eligibility for both benefits at $55,000 ($100,000 for joint filers) in 1997.[13]

With these two tax credits on the books, the idea of a deduction for tuition would be unnecessary and redundant, yet Congress later decided to add one anyway. Seemingly out of nowhere, lawmakers included a $4,000 deduction for tuition and fees in the Economic Growth and Tax Relief Reconciliation Act of 2001, the sweeping bill that included President Bush’s campaign proposal to cut marginal tax rates.[14]

The deduction differed from the two initial tax credits in a key way, which partially explains why lawmakers added it. Families earning up to $80,000 ($160,000 for joint filers) would be eligible as of 2004. That was significantly higher than the income cutoff for the Hope and Lifetime Learning Credits at the time and would therefore offer tax benefits to families with incomes arguably well above middle class. But why not just raise the income limits on the existing credits then? Because creating the new deduction was a way to restrict costs relative to expanding the existing Lifetime Learning Credit in terms of forgone revenue to the government. Recall that the value of the deduction is worth the amount deducted times the marginal tax rate, which at the time it was created would have been $1,120 at the most.[15] That is about half the maximum value of the Lifetime Learning credit.[16]

In other words, the deduction was a way to let upper-income families into the college tax benefit club on the cheap. It also ensured their benefits would be smaller than those of the middle-class families, who were eligible for the credits.

At the time it was created, the deduction was as much an undergraduate benefit as a graduate one. Upper-income families would claim it for tuition paid in pursuit of either degree. According to my analysis referenced earlier, about the same share of graduate students as undergraduates qualified for it prior to 2009.[17] But in 2009, Congress would make it pointless for almost any undergraduate to claim the deduction. That year, lawmakers replaced the Hope Credit with the American Opportunity Tax Credit, which provided larger benefits than the deduction with an income cutoff even higher than the deduction. With upper-income undergraduates now qualifying for American Opportunity Tax Credit, graduate students became the only group left who could benefit from the original tuition and fees deduction.

Conclusion

While Congress never decided to directly create a special tax break for upper-income graduate students alone, opting to extend the deduction year after year is effectively the same thing. The latest one-year extension, which made the deduction available for the 2017 tax year, cost the government over $200 million in forgone revenue.[18]

At a time when an undergraduate education feels financially out of reach for so many families, it’s fair to ask why Congress continues to spend these resources on students who have already earned an undergraduate degree. Moreover, these students earn a median household income of $102,000, according to my analysis.[19] There does not appear to be a good answer to that question other than inertia. Lawmakers have always extended the benefit so they continue to extend it. They may not realize, however, that it no longer benefits undergraduate students.

All of the tax benefits may be a policy failure for not increasing enrollment or being overly complex, but at least those for undergraduates put more money in the pockets of low- and middle-income families working toward their first degree. Today, the deduction does neither. It helps those who already have an undergraduate degree and earn high incomes to boot. While its cost in terms of forgone revenue are relatively modest, those resources would be better spent on aid that encourages students to enroll in and complete an undergraduate degree.

Footnotes

[1] Sue Dynarski and Judith Scott-Clayton, “The Tax Benefits for Education Don’t Increase Education,” Brookings Institution, April 2018, https://www.brookings.edu/research/the-tax-benefits-for-education-dont-increase-education/.
[2] Bipartisan Budget Act of 2018, Public Law 115–123, § 40203 (2018).
[3] Internal Revenue Service, “Instructions for Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits) (2017),” https://www.irs.gov/pub/irs-pdf/i8863.pdf.
[4] There are some circumstances when the deduction might produce a larger benefit than the Lifetime Learning Credit if a filer paid tuition and fees below $4,000 and he is in the highest tax bracket of those eligible for the deduction. For example, a filer in the 22% tax bracket who deducts $3,000 in expenses receives a $660 tax reduction; under the Lifetime Learning credit his benefit would be $600.
[5] Ibid.
[6] Author’s calculation using the American Community Survey, 2016.
[7] Government Accountability Office, “Improved Tax Information Could Help Families Pay for College,” May 2012, https://www.gao.gov/assets/600/590970.pdf
[8] Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015, 6–7, https://na-production.s3.amazonaws.com/documents/graduate-students-and-tuition-tax-benefits.pdf.
[9] Author’s calculation using the National Postsecondary Student Aid Study 2011–12. See also Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015.
[10] William J. Clinton, “Address to the Nation on the Middle Class Bill of Rights,” December 15, 1997, www.presidency.ucsb.edu/ws/?pid=49591.
[11] Douglas Lederman, “The Politicking and Policy Making Behind a $40-Billion Windfall: How Clinton, Congress, and Colleges Battled to Shape Hope Scholarships,” Chronicle of Higher Education, November 28, 1997.
[12] Taxpayer Relief Act of 1997, Public Law 105–34 § 201 (1997).
[13] Taxpayer Relief Act of 1997, Public Law 105–34 § 101 (1997).
[14] Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107–16 § 431 (2001).
[15] The top marginal tax rate for filers eligible for the deduction was 28 percent in the mid 2000s.
[16] See endnote 4. for an explanation of how sometimes when tuition and fees are below $4,000, tax filers can qualify for a larger tax reduction through the deduction than if the Lifetime Learning Credit.
[17] Jason Delisle and Kim Dancy, “A New Look at Tuition Tax Benefits,” New America, November 2015, https://static.newamerica.org/attachments/10416-a-new-look-at-tuition-tax-benefits/TaxCredits11.2.277d3f7daa014d5a8632090f97641cee.pdf; and Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015, 6–7, https://na-production.s3.amazonaws.com/documents/graduate-students-and-tuition-tax-benefits.pdf.
[18] Joint Committee on Taxation, “Federal Tax Provisions Expired in 2017” (JCX-5-18), March 9, 2018.
[19] Author’s calculation using the National Postsecondary Student Aid Study 2011–12. See also Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015.

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The Problem With Mandatory Reporting Of Missing Guns Laws

After the post about the police recovering stolen guns, a reader contacted me. He pointed out how gun owners tend to be a little paranoid about the government knowing what they own, thus why they don’t report their guns missing.

It’s a fair point. As a community, we tend to try and keep that stuff as secret as possible.

He also brought up mandatory reporting laws, legislation that’s been proposed in various places that would require gun owners to report lost or stolen guns within a certain amount of time.

Now, I have a major problem with mandatory reporting laws. Part of the reason? Well, it’s part of the same reason why I oppose universal background checks.

They’re unenforceable without gun registration.

Take my firearms for example. I’ve mentioned a couple here and there on this site, but I have a number I haven’t. Let’s say those guns were stolen and I failed to report them for whatever reason. How can I reasonably be caught breaking this law?

Without gun registration, I can’t. No one will know that firearm belonged to me. No one will know if it was stolen, lost, sold, or what. Not a soul.

The only people who will ever be punished are those who are honest enough to report their failure to comply with the law. That’s it.

What’s more, I can easily see this as being used to sell registration to the public. “We have to make people register them, so we know how the bad guys got the guns in the first place. This will also make people follow the reporting laws!”

An unknowledgeable public will shrug and think, “Makes sense.” They’ll back the new law easily enough.

Cries by gun rights groups of the potential downsides will be ignored. “You brought this on yourself,” they’ll say. “If only you and your crowd had complied with the reporting laws in the first place, we wouldn’t need to do this.”

The thing is, they don’t know that anyone failed to comply. All they’ll know is that they have guns with serial numbers not reported as stolen. They won’t have a clue just how they got there. They’ll just use gun owners as scapegoats.

Again.

Yeah, yeah, I hear the anti-gunners now. They think it sounds paranoid.

However, they say the same thing when we point out how they ultimately want to come for our guns. We’re paranoid because no one would want to do that. Except when they do.

They keep saying we’re paranoid, but we’re not the ones who are looking for any reason to impose new regulations on gun owners. We’re not the ones terrified of our fellow man being armed. We want those same people to have weapons and to have them on their person whenever they want. If we were truly paranoid, if we truly believed everyone was “out to get us,” we’d be screaming for the opposite. We’d want to be the only ones who have guns.

The truth is, we’ve gotten used to looking a few moves ahead. We know for a fact that we can’t look at what’s being talked about now in a vacuum. We need to also look at how this rule can justify the next one.

In this case, mandatory reporting is just an innocuous-looking gateway. Where it can lead is terrifying, and it’s why we should always oppose such proposals.

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With HB 514, Legislature Unambiguously Embraces School Segregation

There’s a word for what happens when majority-white suburbs pull their children from a majority-minority school district and place them into exclusionary, majority-white schools: segregation. With the advancement of HB 514, lawmakers are unambiguously embracing school segregation as state policy.

HB 514 allows four Charlotte suburbs – Cornelius, Huntersville, Matthews, and Mint Hill – the authority to create and operate their own charter schools. These suburbs can then limit enrollment in these schools to municipal residents. Cornelius is 85 percent white. Huntersville is 77 percent white. Matthews is 78 percent white. Mint Hill is 73 percent white. Students in these majority-white suburbs are assigned to the Charlotte-Mecklenburg Schools (CMS), where white students comprise just 29 percent of enrollment.

To facilitate the funding of the schools authorized by HB 514, a related budget provision (Section 38.8) creates a new authority allowing North Carolina municipalities to spend property tax revenues on any public school that “benefits the residents of the city,” including charter schools. As national school finance expert Michael Griffith notes, similar provisions in other states have led to school funding becoming “divided on class lines and on racial lines.”

It’s quite the one-two punch. First, the General Assembly allows these suburbs to create schools with the legal authority to exclude children from nearby communities comprised mostly of non-white students. Then, these suburbs can then use their out-sized property wealth to provide their racially-isolated schools with resource levels denied to other students in the school district. In other words, these schools will be both separate and unequal.

{snip}

{snip} What message does HB 514 send to the students of color in Charlotte who are witnessing policymakers use their power to create new schools for the exclusive use of their mostly white suburban classmates? Consider also the message delivered to white children in these suburbs who might emerge thinking that racially-isolated, better-funded schools are something that they deserve on the basis of their privileged status.

Furthermore, by exacerbating racial segregation, policymakers will be harming the educational trajectories of CMS students. Inclusive, integrated schools are a proven model for lifting the performance of all students. School integration leads to large, persistent academic gains, lower dropout rates, and higher lifetime earnings for students of color and students from low income families. When schools are integrated, white students become less prejudiced and enhance their capacity for working with others, with no negative impact on white student test scores. But when schools become more segregated, as proposed by HB 514, achievement gaps, incarceration rates, and dropout rates all tend to rise.

{snip}

The result of (HB 514) will ultimately amount to systemic racism. It’s about a system, not personalities, that marginalize communities of color. Supporters of HB 514 do so either because, or in spite of, this fact.

The fact is, we are now 64 years removed from Brown v Board of Education. We’re 53 years removed from the terroristic assassination attempt on Julius Chambers, whose legal heroism culminated in 1971’s Swann v. Charlotte-Mecklenburg Board of Education ruling that forced the integration of CMS. Yet the proponents of school segregation persist. In 2018, we have municipal governments in Cornelius, Huntersville, Matthews, and Mint Hill that are openly segregationist. We also have a General Assembly eagerly using the sanction of law to accede to the segregationist wishes of these communities. The mechanism created by HB 514 will undoubtedly be seized upon by other municipalities seeking to create white-flight schools of their own.

{snip}

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Arizona Senate Puts Coal Tax Relief Bill on Hold

A bill to provide tax relief for Arizona’s Navajo Generating Station (NGS) by exempting income derived from coal mining from the state’s transaction privilege tax (TPT) was held up in the Arizona Senate’s Finance Committee with the legislation falling one vote short of passage.

The bill’s sponsors are working to gain additional support before bringing it up for reconsideration in the wake of the March 14 setback.

Native-American Workforce

NGS, a 2,250-megawatt coal-fired power plant located on the Navajo Nation reservation near Page, Arizona, is the largest electricity power generator in the state. NGS operates under a lease agreement with the Navajo Nation, supplying electricity to customers in Arizona, California, and Nevada. It also provides the power needed to pump water for agriculture and municipal uses from the Colorado River to Phoenix and Tucson through the Central Arizona Project.

The plant is jointly owned by the Salt River Project and the U.S. Bureau of Reclamation, who own the largest percentages of the installation, and the Arizona Public Service Co., NV Energy, and Tucson Electric Power, who have smaller shares. NGS employs more than 400 full-time staff, 90 percent of whom are Navajo.

NGS uses coal from the Kayenta Mine, operated by Peabody Western Coal Company under lease agreements with the Navajo Nation and the Hopi Tribe. The coal is delivered to NGS by a 75-mile electric railroad owned and operated by the plant. Ninety-nine percent of the mine’s 340 employees are Native American.

‘A Tax Elimination’

Arizona’s TPT taxes companies’ gross receipts in 16 separate business classifications, including mining, retail, telecommunications, and utilities. Arizona also allows municipalities to levy local TPTs.

HB 2003 would exempt coal from the retail and mining classifications under the state TPT and any municipal TPT and sales taxes. A Fiscal Note prepared for HB 2003 estimated although the proposed exemptions would reduce Arizona’s General Fund by $9.1 million in Fiscal Year 2019, the ongoing revenue loss from a closed NGS would be $12.2 million.

State Rep. Mark Finchem (R-Tucson), HB 2003’s sponsor, says TPT never should have been imposed on coal mining.

“This is … a tax elimination,” said Finchem. “The state does not collect a [TPT] on the wind, the sun, or the water, nor does it collect the tax on natural gas and nuclear fuels, … [so the TPT on coal] never should have been laid.”

Fails Tax Tests

John Nothdurft, director of government relations at The Heartland Institute, which publishes Environment & Climate News, testified HB 2003 would improve energy markets in the state, during a hearing before Arizona House Ways and Means Committee on February 14.

“Arizona’s transaction privilege tax … [is] dissimilar to how other states tax raw materials used to produce energy, such as coal, natural gas, and other fossil fuels,” Nothdurft testified. “Sound tax policy generally abides by four basic principles: It is applied to a broad base; kept at a competitive, low rate; it is non-distorting; and rate-setting and the regulatory process are completely transparent to the state’s citizens.

“Arizona’s transaction privilege tax fails on at least three, if not all four, of these principles,” Nothdurft said.

High Closing Costs

Nothdurft also testified failure to implement the proposed tax reform might cause NGS to close, which would increase energy prices in Arizona.

“Thirty-one percent of Arizona’s electricity generation comes from coal, but this would significantly decrease if NGS is closed,” said Nothdurft. “This is a significant problem, since the cost of coal electricity is much cheaper than other forms of electricity—especially wind and solar, which are heavily subsidized and yet remain more expensive.”

Severe Power Disruptions Forecast

Fred Palmer, a senior fellow at The Heartland Institute, says ending TPT for coal mining would benefit all of Arizona.

“HB 2003 is designed to help extend the commercial life of NGS, a crucial resource for the economic future of the Navajo Nation and the Hopi Tribe, as well as water users, electric consumers, and agricultural interests in Arizona,” Palmer said. “Since a closed NGS will produce no mining tax revenues, opposition to the bill can only be construed as anti-Native, anti-fossil fuels, and anti-growth.”

A recent study by utility consulting firm Quanta Technology confirms NGS is critical to the power supply in the Southwest.

The report states closing NGS in 2019 would result in “power deficiencies which could evolve into potential voltage collapse and outages, load shedding triggers, potential rotating brownouts, failing transformers or transmission lines and equipment damage” affecting Phoenix, Flagstaff, other large Arizona cities, and California cities such as Lugo and Shandon.

Confident in Bill’s Prospects

Although HB 2003 stalled in the Senate Finance Committee, Carlyle Begay, a Navajo and former Arizona state senator for the district where NGS is located, says he is confident HB 2003 will eventually pass.

Finance Committee member Warren Petersen (R-Gilbert), who initially withheld support for the bill, which kept it from moving out of the committee, now supports the proposal, Begay says.

In addition, “we will have enough Democrat votes to pass the bill through the Senate,” Begay said. “The commitment will be in place in case we need it.”

Editor’s Note: This article was published in cooperation with The Heartland Institute’s Environment & Climate News.

PHOTO: The Arizona Capitol Museum building in Phoenix, Arizona. Photo by Gage Skidmore.

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