The Higher Education Tax Deduction, the most regressive of all the government’s tuition tax break programs, expired in December. But unfortunately, we may not have seen the last of it.
As our sister blog Ed Money Watch reported last month, the U.S. Senate Finance Committee has approved legislation that would revive the tuition tax deduction program, which allows students and their families to subtract from their taxable income up to $4,000 a year in tuition and fees. Under the measure, filers would be able to continue claiming the benefit in tax years 2012 and 2013.
Congress created the tuition tax deduction as part of President George W. Bush’s broader tax cut legislation in 2001. Private college leaders championed the deduction, saying it would be more helpful to students attending their high-priced schools than the Hope and Lifetime Learning tax credits that the Clinton administration and Congress created in the late 1990s to make college more affordable for the middle class. Powerful lawmakers from Northeastern states, where these institutions are heavily represented, took up the cause and convinced their colleagues to include the deduction in the larger tax cut package.
At the time, student aid advocates and experts objected to the proposal because they said that it would primarily help the highest income families eligible for the benefit -- those earning between $100,000 and $160,000 annually. That’s because a tax deduction is subtracted from the amount of a family’s income that is subject to taxation. As a result, individuals in higher tax brackets would receive greater savings than those in lower brackets who paid the same tuition. In addition, low-income families who pay little or no income tax wouldn't receive any benefit from it at all.
As I wrote earlier this year in an Education Sector report, entitled Moving On Up: How Tuition Tax Breaks Increasingly Favor the Upper-Middle Class, these concerns were warranted. For the report, I analyzed Internal Revenue Service data collected by the College Board and found that more than half (53 percent) of the $11 billion in savings that filers received through the deduction from tax years 2002 through 2009 went to families making $100,000 or more. Meanwhile, only 12 percent went to individuals and families making less than $50,000.
In other words, the majority of the benefits from the Higher Education Tax Deduction program went to upper-middle income families who, by all indications, would have sent their children to college without the help.
Besides being regressive, the deduction is also duplicative of the other tuition tax break programs that the government offers – such as the Lifetime Learning Credit, a $2,000 non-refundable tax break that is available to students who take at least one postsecondary education course; and the American Opportunity Tax Credit, a $2,500 partially-refundable tax break that is available to help cover tuition, fees, and course material expenses for the first four years of college.
By offering multiple programs that are so similar, policymakers have made it unnecessarily difficult for students and their families to choose the option that is best for them. The Government Accountability Office recently found, for example, that 237,000 of the 588,000 filers who claimed the tuition tax deduction in 2009 would have been better off claiming the lifetime learning tax credit instead. According to the GAO, these filers forfeited about $67 million in tax benefits as a result.
The expiration of the Higher Education Tax Deduction in December made the government’s tuition tax break programs at least somewhat simpler and more progressive. For those reasons, Congress should abandon its efforts to revive the deduction, and instead, let it rest in peace.