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Higher Education and Tax Reform

​​Tax Reform and Higher Education​​

what's at stake?​

 

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On Nov. 16, the House of Representatives voted 227-205 to approve its tax reform measure, the Tax Cuts and Jobs Act (H.R. 1). On the same day, the Senate Committee on Finance passed its version of the bill, also known as the Tax Cuts and Jobs Act, out of Committee. The full Senate plans to vote on the bill the week of Nov. 27. The text and summaries of each bill are below, along with answers to common questions about the legislation and how it could affect higher education.

HOUSE BILL SENATE BILL
Comparison of the higher education provisions in the House and Senate versions (PDF; 100 KB)
Full text (Congress.gov) Description of the Chairman’s Mark (PDF; 900 KB)
(Joint Committee on Taxation)
Summary of the Higher Education Provisions in the House Tax Bill (PDF; 100 KB) Summary of the Higher Education Provisions in
the Senate Tax Bill
(PDF; 100 KB)
Section-by-Section Summary (PDF; 900 KB)
(Committee on Ways and Means)​
Letter to the Senate Finance Committee on the Tax Cuts and Jobs Act (PDF; 100 KB)
From ACE and approximately 50 other higher education associations
Letter to House Ways and Means Committee Leaders on the Tax Cuts and Jobs Act (PDF; 100 KB)
From ACE and approximately 50 other higher education associations

Letter to the House in Advance of the Floor Vote on the Tax Cuts and Jobs Act (PDF; 100 KB)
From ACE President Ted Mitchell

Q: The House has now passed its tax reform bill, and the Senate will be voting on its bill soon. What exactly is the goal of tax reform? How is it different from tax cuts?

A: As currently contemplated by Republican policymakers, tax reform would restructure the tax code to make it simpler, with fewer tax brackets and provisions benefiting certain segments of society. Standalone tax cuts—without changes to the tax code that would take away current benefits—don't qualify as reform but would be much easier to enact. Tax cuts could make changes to existing provisions in the tax code to lower the tax burden for specific industries or taxpayers, but would likely expire after a certain period of time. 

The House bill cuts taxes by a total of $1.5 trillion. Republicans often say the total tax cut is $5.5 trillion over 10 years, but most of the reductions are paid for by raising taxes elsewhere. The tax cuts that are financed by taking on new debt add up to $1.5 trillion. For various reasons, it is unclear whether Congress will be successful passing tax reform or simply pass legislation enacting time-limited tax cuts.

For various reasons, it is unclear whether Congress will be successful passing tax reform or simply pass legislation enacting time-limited tax cuts.

Q: How does the tax code help students and families?

A:  The tax code contains a number of provisions, enacted independently over time, that together create a framework that functions as a kind of “three-legged stool” intended to advance three important goals: 1) encourage saving for higher education; 2) help students and families pay for college; and 3) assist with the repayment of student loans. This framework serves the needs of low- and middle-income students and families as they invest in themselves and in higher education.

In addition, students and families benefit from the non-profit tax-exempt status of public and private colleges and universities through charitable giving, endowments, and tax-exempt bond financing benefits, all of which help institutions to provide financial aid and advance their teaching, research and public service missions.

Q:  What are the major priorities for higher education in tax reform, and how could they be impacted if the current proposals are approved by Congress?  

Charitable giving and endowments

  • Charitable giving is vital in helping colleges and universities achieve their teaching, research and public service missions. Tax policy should encourage Americans to give more generously to charitable organizations, including colleges and universities.
  • Charitable donations are the primary source of endowment funds. Colleges and universities use their endowment resources for student financial aid and to support faculty, libraries, laboratories, student services and other critical education-related activities.
  • Both the House and Senate bills would double the standard deduction for individuals and couples and reduce the number of taxpayers who itemize, significantly reducing the value of the charitable deduction and leading to a drop in donations to all nonprofits, including colleges and universities.  
  • Both bills would also create a new excise tax of 1.4 percent on endowments at certain private colleges and universities, reducing the value of these endowments and redirecting dollars away from students and those institutions to the federal government.

Student and family benefits

  • Priorities include preserving and strengthening the American Opportunity Tax Credit and Lifetime Learning Credit, the above-the-line deduction for qualified tuition and related expenses, the tax exemption of tuition waivers for graduate students, the student loan interest deduction, and Sec. 529 College Savings Accounts.
  • The House bill would repeal the Lifetime Learning Credit (LLC), the Hope Scholarship Credit, while slightly expanding the American Opportunity Tax Credit (AOTC) to a fifth year (and at half the value). Because of this, part-time students, graduate students, and lifelong learners would no longer qualify for these education deductions. 
  • As written, the House bill would repeal the Student Loan Interest Deduction (SLID). In 2014, 12 million taxpayers benefitted from SLID (7 million more than in 2011). 
  • The House bill would repeal Sec. 117(d)(5), which provides for the tax exemption of tuition waivers for graduate students serving as teaching and research assistants. Close to 145,000 graduate students received a tuition reduction in 2011-12.
  • The Senate bill preserves AOTC, LLC, Hope Scholarship, SLID, Sec. 117(d), and Sec. 117(d)(5). 

Human resources and employee benefits

  • As employers, higher education is focused on preserving Sec. 117(d), Sec. 117(d)(5), and Sec. 127, which allow universities to offer employees and graduate students tax free tuition remission and scholarships.  
  • The House bill would repeal Sec. 117(d), Sec. 117(d)(5), and Sec. 127, which would make tuition waivers and exemptions included under estimated gross income (EGI) and increase the taxable income for many campus employees, as well as graduate students.  The Senate bill preserves these provisions. 

Higher education finance

  • Tax-exempt bond financing, including qualified 501(c)(3) private-activity bonds, advance refunding bonds, and Build America Bonds, supports the missions and continued financial health of colleges and universities by providing critical resources for college and university infrastructure.
  • Colleges and universities also prioritize provisions concerning tax exempt organizations, including those on unrelated business income and executive compensation.
  • The House bill would terminate private activity bonds, utilized by private universities and colleges, to build dorms, classrooms, and research infrastructure. This provision would essentially prevent private colleges and universities from using lower-cost tax exempt bond financing. The Senate bill preserves private activity bonds.     
  • Both the House and Senate bills would also repeal advance refundings bonds. These are an important financing tool that allows well-managed state and local governments to respond to credit market conditions to reduce the cost of government. Tax-exempt advance refundings provide institutions—public and private—with an important tool for refinancing outstanding debt at lower interest rates and generates significant interest savings over decades, lowering costs. Higher borrowing costs can result in diminished investments in infrastructure, fewer jobs, reduced public services, and increased service charges and other fees.
  • The Senate bill contains several proposals that would increase Unrelated Business Income (UBIT) owed by many colleges and universities, including treating name and logo royalties as unrelated business taxable income, and computing unrelated business taxable income separately for each trade or business in a so-called “basketing” fashion.

Q:  What happens now that legislation has started moving forward?

A:  Congress is moving quickly on tax reform legislation. The House passed its version of the bill on Nov. 16. The Senate Finance Committee passed the bill out of committee that same day, and the full Senate plans to vote on the bill the week of Nov. 27. Once the bill passes the Senate, the two chambers will then need to resolve any differences and pass a final bill before year's end.

Most provisions of the bill, if passed this year, are scheduled to take effect Jan. 1. If the process carries over to next year, lawmakers could make it retroactive or set a new implementation date. date.

Q:  How can colleges and universities participate in the conversation about tax reform? 

A: Higher education leadership, staff, faculty, and students should actively engage in advocacy activities to remind Congress of our community’s priorities.​ Also, please make use of our Contact Congress pages to help reach your congressional delegation about the specific higher education provisions most important to you. 



Who We Are


For more information or to share resources, email Steven Bloom, director, ACE Government Relations. ​

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charitable giving and endowments



 

 lateSt news

 
 

 Background

 
 

 Talking Points

 
Charitable Deduction

CASE Talking Points on the Charitable Deduction and H.R. 1

Council for Support and Advancement of Higher Education

Endowments

Endowments and Charitable Giving

National Association of College and University Business Officers

 

 Testimony & Letters to Congress

 

Charitable Giving

Now more than ever, the ability of colleges and universities to fulfill their teaching, research and public service missions depends upon charitable giving. According to the Council for Aid to Education, colleges and universities in 2016 received about $41 billion in charitable gifts, an increase of 1.7 percent over the previous year.

Private donations work in concert with federal and state investments in student aid to ensure access to higher education for students regardless of their socioeconomic status. Charitable gifts also support teaching, groundbreaking research and technological innovation, and the public-service activities of colleges and universities. In short, the partnership between private donors and colleges and universities has delivered enormous economic benefits to our society.

What's at Stake:

The House and Senate bills, as currently written, would double the standard deduction for individuals and couples and reduce the number of taxpayers who itemize, significantly reducing the value of the charitable deduction and leading to a drop in donations to all nonprofits, including colleges and universities. 

Currently, the charitable deduction is only available to the roughly 30 percent of U.S. taxpayers who itemize their tax returns. If lawmakers enact the tax proposals being discussed on Capitol Hill—all of which include a doubling of the standard deduction threshold—only 5 percent of U.S. taxpayers would be able to deduct their charitable gifts. The result would be a significant decline in charitable giving to educational institutions and other charitable organizations, according to a study commissioned by Independent Sector. A Nov. 7 memorandum from the Joint Committee on Taxation (JCT) found that 41 million donors would give around $241.1 billion in 2018 under current law, as opposed to nine million donors giving approximately $146.3 billion under the House plan. That would be a $95 billion dropor 40 percentin the use of the charitable deduction under H.R. 1

To solve this problem, higher education has joined with the Charitable Giving Coalition and other allies in the nonprofit sector to support the enactment of a universal charitable deduction. A universal charitable deduction would provide a charitable giving incentive to all by allowing taxpayers to subtract charitable gifts from their income before they determine whether to take the standard deduction or itemize their tax returns. The Independent Sector study found that the inclusion of the universal charitable deduction in tax reform would result in a $4.8 billion increase in charitable giving.

 
 

Endowments

The partnership between higher education and donors has been critical in helping create and sustain endowments, which play an increasingly critical role in the financing equation of higher education and in making a college education affordable. While the vast majority of the nation’s 4,700 colleges and universities do not have significant endowments, colleges and universities with larger endowments use those resources to provide substantial student financial aid to enhance access, particularly for low- and middle-income students. Indeed, the institutions with the largest endowments often have the lowest net price because they provide significant grant aid to students.

Institutions also depend on their endowments to support new and emerging fields of study and research, along with nearly every aspect of an institution’s operation. Each dollar spent from an endowment to deliver an education—from libraries to laboratories—reduces the cost to all students. At many institutions with the largest endowments, funds from endowments are the largest source of financial support, ranging from 20-50 percent of their operating budgets.

Endowments are collections of hundreds or thousands of individual funds established by donors and managed and invested by institutions to serve current and future needs. Institutions only solicit and accept gifts that further that mission and align with strategic institutional priorities. Endowments are not savings accounts or rainy day funds being built up to demonstrate wealth but instead provide a steady and reliable long-term funding source to support students, research, and other programs that would otherwise be paid for by tuition, state and federal funding, or other resources.

What's at Stake:

Both the House and Senate bills would create a new excise tax of 1.4 percent on endowments at certain private colleges and universities, reducing the value of these endowments and redirecting dollars away from those institutions and their students to the federal government. 

Part of what is driving this proposal is the suggestion that colleges and universities could hold down tuition increases and lower the cost of attendance by creating new federal mandates on university endowments. It ignores the fact that many institutions are already devoting a great deal of their resources, including from endowment funds, to increase access for these students. It also reflects a lack of understanding about how university endowments operate and the restricted nature of endowed funds. 

However well-intentioned, “one size fits all” federal mandates such as payout requirements or excise taxes will do more harm than good, redirecting funds away from their charitable purpose while making it more difficult for institutions to meet their legal and fiduciary obligations.

ACE Leadership

student and family benefits

 

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student and family benefits

 

 latEst nEws

 
 

 BacKgrouNd

 
Tax Benefits for Students and Families

National Association of Independent Colleges and Universities

Graduate Students, 117(d)(5), and the Lifetime Learning Tax Credit

Council of Graduate Schools

Preserve the Student FICA Exemption

CUPA-HR: College and University Professional Association for Human Resources

Camp Tax Reform Act of 2014 – Students and Families Provisions
 

 TALkINg POINTS

 

The tax code contains a number of provisions that together functions as a kind of “three-legged stool” intended to advance three important goals:

  1. help students and families pay for college;
  2. assist with the repayment of student loans; and
  3. encourage saving for higher education.

This framework serves the needs of low- and middle-income students and families as they invest in themselves and in higher education. Unfortunately, the Tax Cuts and Jobs Act would make substantial cuts to the education provisions as currently written in the tax code. 

Help students and families pay for college

The House tax bill would repeal the Lifetime Learning Credit (LLC) and the Hope Scholarship Credit, while slightly expanding the American Opportunity Tax Credit (AOTC) to a fifth year (and at half the value). It would also repeal the Student Loan Interest Deduction (SLID) and Sec.117 (d)(5). If these provisions remain in the bill, graduate students and lifelong learners would no longer qualify for these education deductions and tax exemption for tuition waivers for graduate students would be taken away.

The Senate bill, as currently written, preserves these education provisions.

American Opportunity Tax Credit

The AOTC is a partially refundable tax credit of up to $2,500 (with up to $1,000 refunded to filers with no tax liability) toward eligible education expenses for the first four years of college that begins to phase out for individual taxpayers at $80,000 of income ($160,000 for joint filers).

Lifetime Learning Credit

Under this nonrefundable tax credit, taxpayers can claim up to 20 percent of their first $10,000—for a maximum of $2,000, which is not indexed for inflation—of qualified tuition and related expenses paid during each calendar year. The LLC is available for all years of postsecondary education, and there is no limit on the number of years it can be claimed.

Tuition Deduction

The above-the-line deduction for qualified tuition and related expenses permits taxpayers to deduct up to $4,000 per year in qualified higher education expenses from their taxable income. The tuition deduction is particularly beneficial to graduate students who are ineligible for the AOTC. The deduction expired at the end of 2016.

The Student FICA Exemption

Enacted in 1935, this provision supports college students who work on campus by exempting them from paying FICA (Social Security and Medicare) taxes.

Tuition waivers  (Section 117(d)(5))

This exemption reduces the cost of graduate education and mitigates the tax liability of graduate students teaching and researching as part of their academic programs, many of whom earn very little and increasingly finance their own graduate educations.

Assist with the repayment of student loans

As written, the House bill also would repeal the Student Loan Interest Deduction (SLID). In 2014, 12 million taxpayers benefitted from SLID, 7 million more than in 2011. The Senate bill would preserve SLID.

Student Loan Interest Deduction (SLID)

SLID currently permits taxpayers with less than $75,000 of income ($155,000 for joint filers) to deduct up to $2,500 in federal student loan interest payments each year. The current $2,500 interest limit has been in place since 1997.

Exclusion of Discharge of Student Loan Debt

The current tax code provides an exclusion for student loan debt that is forgiven for individuals who worked for a specified time period in certain professions or for a class of employers. This tax exclusion applies to several federal and state loan forgiveness initiatives, including the Public Service Loan Forgiveness program for borrowers working in government and certain nonprofit jobs, the TEACH program to assist future teachers, and the National Health Services Corps Loan Repayment Program. 

Encourage saving for higher education

Section 529 Education Savings Plans and Coverdell Education Savings Accounts

According to Treasury Department, Section 529 Education Savings Plans and Coverdell Education Savings Accounts offer “an attractive and convenient means of saving for college that offer substantial tax benefits.” This long-term planning helps reduce student debt and allows governments and institutions to better target scarce student aid funds to those without the means to save.

What’s at Stake:

Over the past two decades, provisions in the tax code, including various higher education credits, the student loan interest deduction, and tuition waivers, have played an increasingly significant role in helping low- and middle-income students and families finance higher education. During tax reform, we urge Congress to oppose provisions that would repeal or weaken these important tax benefits for students and families.   .

 
 
 

campus employee benefits

 

 BAckgrOUnd

 
Who Benefits from Section 127?

National Association of Independent Colleges and Universities and the Society for Human Resource Management

Expansion of Sec. 127 Benefit Fact Sheet

The Coalition to Preserve Employer Provided Education Assistance

Protect and Expand Employer Provided Assistance

College and University Professional Association for Human Resources (CUPA-HR)

Academic Dreams of Thousands Realized Through 117(d) and Infographics

CUPA-HR: College and University Professional Association for Human Resources

Camp Tax Reform Act of 2014 – Employee Benefits Provisions
 

 TaLKiNG PoiNTS

 
 

 testimony and lettErs TO congress

 

Institutions of higher education are often one of the largest employers in their region. As employers, higher education is focused on preserving Sections 117(d) and 127, which allow universities to offer employees and graduate students tax-free tuition remission and scholarships. 

Qualified Tuition Reduction

  • IRS code Section 117(d) permits educational institutions, including colleges and universities, to provide their employees, spouses or dependents with tuition reductions that are excluded from taxable income. A broad cross-section of college and university employees benefit from Section 117(d), including secretaries and other frontline administrative staff, maintenance and janitorial staff.
  • IRS code Section 127 allows employers to offer employees up to $5,250 annually in tuition assistance which is excluded from taxable income. This provision has been an important means of building and adding to the competencies of the workforce and is a critical tool to help our nation accelerate its economic growth. The top majors among recipients of this benefit include those in the STEM fields. More than 35 percent of degrees pursued by employees using education assistance are master’s degrees.

What’s at Stake:

As written, the House bill would repeal Sections 117(d) and 127, which would make tuition waivers and exemptions included under estimated gross income (EGI) and increase the taxable income for many campus employees, as well as graduate students.  The Senate version of the bill would preserve Sections 117(d) and 127.   

 
 

 

higher education finance

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 LATESt NEws

 
Build America Bonds Could Be Zeroed Out by Pending Tax Bills

The Bond Buyer (Nov. 14, 2017)

Taxing T-Shirt Revenue

Inside Higher Ed (Nov. 13, 2017)

Industry Groups Come Out Swinging to Save Tax-exempt PABs

The Bond Buyer (Nov. 3, 2017)

 

 backgrouND

 
National Organization Letter on Tax-Exempt Bonds

Sec. 3602 Advance Refunding Bonds and H.R.1

Securities Industry and Financial Markets Association

Sec. 3601 Private Activity Bonds and H.R.1

Securities Industry and Financial Markets Association

Study on Economic Impact of Proposed Restrictions on Tax-Exempt Bonds

National Association of Health and Educational Facilities Finance Authorities

Protect Tax-Exempt Bonds

National Association of College and University Business Officers

Issue Brief: Tax-Exempt Bonds

Association of American Universities

Letter to Senate Committee on Finance (July 17, 2017)

American Hospital Association
National Association of College and University Business Officers
National Association of Health and Educational Facilities Finance Authorities

Camp Tax Reform Act of 2014 – Tax Exempt Entities and Financing Provisions
 

 talkING poInTs

 
Preserve Tax-Exempt Bond Financing

National Association of College and University Business Officers

Unrelated Business Income Tax

Tax-exempt and nonprofit status enables colleges and universities to focus on their research and education missions, not profits. The current tax treatment of nonprofits helps finance that mission.

In addition to potential disruptions to charitable giving and endowments, some reform proposals could impact budgeting and planning for our institutions by eliminating existing nonprofit provisions and creating new expenses. For example, public and private nonprofit colleges currently have access to tax-exempt bonds that help fund infrastructure projects on campus. And although higher education institutions are tax-exempt organizations, they are still subject to tax on any unrelated business income they may generate. Proposed reforms could change—and complicate—the current Unrelated Business Income Tax (UBIT) rules.

Tax-Exempt Bonds (Internal Revenue Code, Section 103 and Section 141)

Under Section 141, colleges and universities often use private activity tax-exempt bond financing to acquire, construct, renovate, and expand capital infrastructure such as academic buildings, residence halls, modern energy plants, and more. In 2016, higher education bond sales reached $18.4 billion. 

Under Section 103(a), the interest earned on tax-exempt bonds issued by state and local governments is generally exempt from tax. State and local governments can issue two kinds of tax-exempt bonds: governmental bonds and qualified private activity bonds. 

In addition, passage of a large tax cut package could trigger automatic spending cuts that would result in zeroing out the subsidy for Build America Bonds, which were issued between 2009 and 2010. The subsidies were meant to reduce the cost of borrowing for state and local government agencies, including public higher education institutions. 

What's at Stake:

The House tax bill would repeal private activity bonds and advance refunding bonds. The Senate bill would preserve private activity bonds but repeal advance refunding bonds, which are important for private and public institutions. Both bills would end the subsidy for Build America Bonds. 

Section 3601 Private Activity Bonds. These bonds are utilized by private universities and colleges to build dorms, classrooms, and research infrastructure. H.R. 1 would essentially prevent private colleges and universities from using lower-cost tax exempt bond financing. 

Section 3602 Advance Refunding Bonds. Advance refundings are an important financing tool for institutions—both public and private—to refinance outstanding debt  at lower interest rates and generate significant interest savings over decades, lowering costs. Higher borrowing costs can result in diminished investments in infrastructure, fewer jobs, reduced public services, and increased service charges and other fees.

Unrelated Business Income Tax (UBIT) (Section 501)

Under Section 501, colleges and universities are subject to tax on any unrelated business income generated from activity unrelated to their educational, research, and community service missions. An example of an income-generating activity subject to UBIT is income from sales of non-educational materials such as CDs, DVDs, and other gift items by a campus bookstore.

What’s at Stake:

The Senate tax bill contains several proposals that would increase UBIT owed by many colleges and universities including: 

  • treating name and logo royalties as unrelated business taxable income, and
  • computing unrelated business taxable income separately for each trade or business in a so-called “basketing” fashion.

The licensing income at some schools goes directly to academic services and student aid which will, therefore, reduce money available for these activities. The “basketing” proposal, which requires all losses and gains to be calculated by activity rather than in the aggregate (something not applicable in corporate taxation), would result in disparate treatment for nonprofit organizations by holding them to standards and rules not applicable to corporations.

Unfortunately, these provisions will result in increased costs and regulatory burdens on many colleges and universities, which would mean fewer resources that can be devoted to student financial aid and other educational resources. While colleges and universities should pay taxes on unrelated business activities, they should not be held to special standards that result in a higher tax burden that is not imposed on any other sector or industry.