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December 17, 1996
Treasury's Case Against Education Tax Breaks
Joseph J. Thorndike

Full Text Published by Tax AnalystsTM


====== HIGHLIGHT ======

Proposals for education tax breaks are nothing new. Since at least the mid-1950s, federal policymakers have considered plans to offer new credits, deductions, and exemptions, all in the name of fostering educational opportunity. While support on Capitol Hill has often been impressive, executive branch officials have generally opposed such plans.

Joe Thorndike traces the history of these proposals -- including one sponsored by current Senate Finance Committee Chair William V. Roth Jr., R-Del. -- and the Treasury Department's opposition to education tax credits.

====== FULL TEXT ======

Proposals for education tax breaks are nothing new. Since at least the mid-1950s, federal policymakers have considered plans to offer new credits, deductions, and exemptions, all in the name of fostering educational opportunity. While support on Capitol Hill has often been impressive, executive branch officials have generally opposed such plans.

Between 1955 and the early 1970s, the Office of Tax Analysis (OTA) weighed in against various proposals to create tax incentives for higher education. Such preferences, they argued, were expensive, ineffective, and complicated.

Perhaps the most succinct statement of Treasury's position came from then-Assistant Secretary Stanley S. Surrey: "The Treasury," he explained, "is constantly presented with proposals to accomplish all sorts of desirable social objectives through the tax system. In general, these objectives can be accomplished more effectively and economically by other means."

Despite Treasury objections, supporters of education tax preferences were tireless in promoting their plans. Sen. Abraham Ribicoff, D-Conn., introduced several times during the 1960s a bill to provide a graduated tax credit for most education expenses. While enjoying substantial support among legislators, it never made its way to the White House.

A 1977 plan sponsored by Sen. William V. Roth, R-Del., now chairman of the Senate Finance Committee, would have provided a credit of up to $100 per student for higher education expenses. The credit, moreover, would have risen annually until it reached $250 per student in 1980. Roth made the plan a cornerstone of his reelection campaign, prompting Democrats to resist the proposal.

In addition to plans for new tax credits -- some refundable, other not -- suggestions for new education deductions also made the rounds. Some proposals would have allowed deductions only for tuition, fees, and books, while others extended to all types of college expenses, including meals, lodging, and travel costs. Yet another type of proposal would have provided an additional personal exemption for full-time students.

Treasury Opposition

Treasury's historical arguments against education tax credits and deductions fell into four broad categories: cost, efficacy, complexity, and what might be called the domino theory of tax expenditures.

Cost: Most plans involved considerable revenue loss. Troublesome under any circumstances, Treasury argued that such losses would also tend to reduce other resources devoted to education. In particular, OTA predicted that education tax breaks would threaten expansion of more effective programs, such as federally guaranteed student loans.

Efficacy: "Insofar as the objective of the proposed tax allowances is to encourage college attendance by helping to overcome economic obstacles," one study argued, "it is highly doubtful that they would be effective." In most cases, Treasury argued, the tax saving would be too small to be a deciding factor in whether or not to attend college. Universities, moreover, were likely to raise tuition in response to the new allowance, further undermining its effectiveness.

Complexity: New allowances for education expenses would complicate tax laws and administration, Treasury contended, particularly hampering efforts to simplify individual income tax forms.

Domino Theory: Finally, Treasury officials argued that new tax breaks would set a bad precedent for tax policymaking. Given the abundance of worthy causes, granting a preference to one would make it harder to hold the line against others. "It is difficult to choose among these possible allowances," one study pointed out, "and the enactment of one may tend to open the gates to others."

As an alternative to various tax breaks, Treasury officials repeatedly stressed their support for more direct aid to education. In particular, they have argued for expansion of federal student loan programs, contending that such policy initiatives are a more effective means of broadening educational opportunity.

Documents

The full texts of the following documents are available from Tax Analysts:

o "Proposal To Allow a Tax Credit for College Tuition and Fees,"
a study by the Treasury Office of Tax Analysis (OTA),
September 16, 1955. Doc 96-32039 (22 pages)

o "Proposed Tax Credits and Deductions for College Expenses and
Additional Exemptions for College Students," OTA study,
February 6, 1958. Doc 96-32040 (10 pages)

o "Effect of Deduction for Expenses for Higher Education," OTA
study, March 2, 1961. Doc 96-32041 (6 pages)

o "Federal Aid to Education," memorandum to the Secretary of the
Treasury, October 31, 1962. Doc 96-32042 (3 pages)

o "Tax Proposals To Aid Education," memorandum to the Secretary
of the Treasury, November 2, 1962. Doc 96-32043 (10 pages)

o "Tax Proposals To Aid Education," OTA study, February 2, 1963.
Doc 96-32044 (8 pages)

o "Proposals To Aid Higher Education Through Income Tax
Deductions or Credits for College Expenses and Additional
Exemptions for College Students," OTA study, August 20, 1963.
Doc 96-32045 (12 pages)

o "Proposals for Aid to Higher Education Through Tax Deductions
or Credits for College Expenses," OTA study, December 3, 1963.
Doc 96-32046 (18 pages)

o "Tax Aid to Education," memorandum to the Secretary of the
Treasury, December 4, 1963. Doc 96-32047 (4 pages)

o "Senator Ribicoff's Proposed Tax Credit for College Expenses,"
OTA study, January 30, 1964. Doc 96-32048 (11 pages)

o Letter from Assistant Treasury Secretary Stanley S. Surrey to
Sen. Lister Hill, chairman of the Senate Committee on Labor
and Public Welfare, March 5, 1964. Doc 96-32049 (6 pages)

o "Tax Credits for College Expenses vs. the President's Program
of Student Assistance," OTA study, February 18, 1965. Doc 96-
32050 (20 pages)

o "An Evaluation of H.R. 6627 -- A Bill To Provide an Additional
Personal Exemption for a Taxpayer Who Is a Student," OTA
study, August 26, 1965. Doc 96-32051 (6 pages)

o "Comparison of a Tax Deduction (With a Floor) and a Tax Credit
With Respect to College Tuition," OTA study, October 19, 1965.
Doc 96-32052 (17 pages)

o Speech text prepared by Treasury staff for Senate Finance
Committee Chair Russell B. Long, on the Ribicoff Tax Credit
Plan, March 3, 1966. Doc 96-32053 (10 pages)

o "Variations of the Education Tax Allowance," OTA study,
December 14, 1966. Doc 96-32054 (21 pages)

o "Comparison of a Deduction for College Expenses Proposed by
Senator Dodd and the Tax Credit Proposed by Senator Ribicoff,"
February 15, 1967. Doc 96-32055 (15 pages)

o "Tax Credit or Deduction for Tuition," memorandum to White
House counsel John D. Ehrlichman, August 12, 1969. Doc 96-
32056 (20 pages)

o "Income Tax Deductions or Credits for Tuition Costs,"
memorandum to the Secretary of the Treasury, June 14, 1971.
Doc 96-32057 (11 pages)