Tax Reform Legislation Pleases Educators

After days of negotiations in Congress over tax reform legislation, many of the education tax relief provisions contained within the original Senate and House versions of the bills will remain in tact.

After days of negotions by the Joint Committee on Taxation--made up of members of the Senate Finance Committee and House Ways and Means Committee--the Congress narrowly approved a final version of the bill yesterday. Republican leaders plan on sending the legislation to President Clinton when they return from summer recess in September.

The bill--which will result in about $10 billion total in education-related tax cuts--has gained favor among University educators and officials.

"We are generally very pleased with the education tax provisions in the bill," said Karin Johns, director of tax policy for the National Association of Independent Colleges and Universities, a lobbying group in Washington.

Harvard Sees Benefits In Plan

In particular, an allowance for tax-free withdrawals from Individual Retirement Accounts (IRAs) for charitable contributions and an extension of the employer-provided educational assistance tax exclusion will most directly affect the University.

Under current law, individuals who take money from an IRA to make a charitable contribution--which includes those made to colleges and universities faced a stiff tax penalty.

"That severely restricted contributions from that source," said Johns.

Under the new proposal, individuals over age 70 and one-half will be able to make donations with IRA money withdrawn tax-free, starting in 2002.

Education Costs

A tax extension on employer-provided education assistance would benefit University employees who take undergraduate courses at the College.

At Harvard, employees who have worked for the University longer than six months are entitled to take undergraduate and graduate level courses for a charge of 10 percent of the enrollment cost.

Current labor tax laws treat such cost reductions as a taxable benefit. For example, if the enrollment fee for a college course is $4,000, an employee would be taxed on a benefit of $3,600--the difference between the true cost of enrollment and the $400 (or ten percent rate) that Harvard employees actually pay.

The GOP tax reform legislation would extend the exclusion from paying taxes on this benefit through 2003.

Although the Senate's Taxpayer Refund Act of 1999 provided exclusions for both graduate and undergraduate level courses, the compromised legislation only applies to those employees enrolled in undergraduate courses.

But the University still views the extension as a positive step.

According to Kevin Casey, director of federal/state relations for Harvard, in the past the tax exclusion has expired and caused confusion among University officials and employees.

"One of the important features is to have some sense of certainty as it goes forth," Casey said. "To have a permanent exclusion would be preferable but this will provide some level of certainty."

Financing Families

The bill also contains a number of provisions designed to ease the burden of financing higher education.

The joint legislation would raise the annual contribution limit families can make to education savings accounts (ESAs) from $500 to $2000.

In addition, the bill would permit private prepaid tuition plans to enjoy the same benefits as state prepaid plans--allowing families to accrue interest from investments tax-free.

According to Casey, establishment of prepaid private tuition plans was not a "priority issue" for Harvard since the University does not currently participate in similar plans currently existing in Massachusetts.

Students would also directly benefit from a portion of the legislation which allows individuals to earn tax credits for interest on higher education loans for the life of the loan, effectively repealing a current 60-month limit.

Read My Lips

While higher education may stand to gain from this legislation, the reforms might still fail to become law.

President Clinton has promised a veto, calling $792 billion in tax cuts too drastic.

According to a Treasury Department official, the Clinton administration agrees with the repeal of the 60-month time limit on interest tax credits for higher education loans and the extension of tax exclusions on employer-provided educational assistance programs for all levels of higher education.

But the administration does oppose the IRA deduction for charitable contributions, the establishment of private prepaid tuition plans and--most vehemently--a portion of the ESA reform that would allow for deductions to be spent on K-12 education.

The President vetoed the so-called Coverdale bill in 1997 because it contained a similar provision.

"We're very much against expanding education IRAs," said the Treasury official, noting that the broad guidelines allow money to be withdrawn tax-free for programs only tangentially related to education, such as for sports programs or extracurricular hobbies.

But, he added, "there are so many other aspects that raise questions of distributional equity that the education IRA has taken a back seat."

Despite the Clinton administration's disagreement with aspects of the GOP's tax legislation, many of bill's education provisions could still eventually be signed into law.

"We're thinking that they could come back in the fall and pass all of the outstanding bills and put tax provisions into that," said Johns. "So there is another immediate chance of getting some tax provisions done.

Education Costs

A tax extension on employer-provided education assistance would benefit University employees who take undergraduate courses at the College.

At Harvard, employees who have worked for the University longer than six months are entitled to take undergraduate and graduate level courses for a charge of 10 percent of the enrollment cost.

Current labor tax laws treat such cost reductions as a taxable benefit. For example, if the enrollment fee for a college course is $4,000, an employee would be taxed on a benefit of $3,600--the difference between the true cost of enrollment and the $400 (or ten percent rate) that Harvard employees actually pay.

The GOP tax reform legislation would extend the exclusion from paying taxes on this benefit through 2003.

Although the Senate's Taxpayer Refund Act of 1999 provided exclusions for both graduate and undergraduate level courses, the compromised legislation only applies to those employees enrolled in undergraduate courses.

But the University still views the extension as a positive step.

According to Kevin Casey, director of federal/state relations for Harvard, in the past the tax exclusion has expired and caused confusion among University officials and employees.

"One of the important features is to have some sense of certainty as it goes forth," Casey said. "To have a permanent exclusion would be preferable but this will provide some level of certainty."

Financing Families

The bill also contains a number of provisions designed to ease the burden of financing higher education.

The joint legislation would raise the annual contribution limit families can make to education savings accounts (ESAs) from $500 to $2000.

In addition, the bill would permit private prepaid tuition plans to enjoy the same benefits as state prepaid plans--allowing families to accrue interest from investments tax-free.

According to Casey, establishment of prepaid private tuition plans was not a "priority issue" for Harvard since the University does not currently participate in similar plans currently existing in Massachusetts.

Students would also directly benefit from a portion of the legislation which allows individuals to earn tax credits for interest on higher education loans for the life of the loan, effectively repealing a current 60-month limit.

Read My Lips

While higher education may stand to gain from this legislation, the reforms might still fail to become law.

President Clinton has promised a veto, calling $792 billion in tax cuts too drastic.

According to a Treasury Department official, the Clinton administration agrees with the repeal of the 60-month time limit on interest tax credits for higher education loans and the extension of tax exclusions on employer-provided educational assistance programs for all levels of higher education.

But the administration does oppose the IRA deduction for charitable contributions, the establishment of private prepaid tuition plans and--most vehemently--a portion of the ESA reform that would allow for deductions to be spent on K-12 education.

The President vetoed the so-called Coverdale bill in 1997 because it contained a similar provision.

"We're very much against expanding education IRAs," said the Treasury official, noting that the broad guidelines allow money to be withdrawn tax-free for programs only tangentially related to education, such as for sports programs or extracurricular hobbies.

But, he added, "there are so many other aspects that raise questions of distributional equity that the education IRA has taken a back seat."

Despite the Clinton administration's disagreement with aspects of the GOP's tax legislation, many of bill's education provisions could still eventually be signed into law.

"We're thinking that they could come back in the fall and pass all of the outstanding bills and put tax provisions into that," said Johns. "So there is another immediate chance of getting some tax provisions done.