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The Senate GOP Tax Bill is Still Very Bad for Public Higher Education

Mark Huelsman

The tax bill that passed the House of Representatives earlier this month was unquestionably harsh on college students, their families, and certain colleges and universities. By proposing to tax tuition waivers and benefits as income, it would massively increase the tax bill owed by graduate students and some university employees. By removing the student loan interest deduction and consolidating other tax benefits for tuition-paying students, the bill would eliminate some of the modest breaks that middle-class families can count on through the tax code. By levying an additional tax on the endowments of some wealthy colleges, the bill would seek revenue from one of its favorite bogeymen—the ivory tower—in order to fund tax relief for an even more elite slice of society: wealthy donors and large corporate interests.

In the face of immense public pressure, including this heart-rending profile of Fred Vartour, a Boston College janitor who sent his 5 kids to college through hard work and the tax-free tuition benefits offered by the university, the Senate GOP has backed off some of the House’s harshest provisions in its version of the tax reform bill. The Senate bill, slated to be voted on as early as this week, retains some of the benefits for students, such as non-taxability of tuition benefits and the student loan interest deduction. So students can breathe a sigh of relief, right?

Not exactly. While some fairly valuable tax breaks for students have been kept from the chopping block, the Senate GOP’s tax bill could go a long way toward decimating funding for public colleges and universities, and community colleges in particular—and in many ways is actually more destructive than the plan passed by the House.

How can a proposal to change tax breaks for individuals and families affect funding for higher education? Right now, families can deduct state and local taxes—be they sales taxes, property taxes, or income taxes—from their federal tax liability. In the House bill, families would still be able to deduct some property taxes up to $10,000, but would not be allowed to deduct income taxes or sales taxes. The Senate, however, eliminates the ability to deduct any state and local taxes at all. Geographically, the pain would be felt disproportionately by upper-middle class families in blue states.

On its face, eliminating the state and local tax deduction (also known as SALT), would be relatively progressive. After all, upper-middle class and wealthy households can deduct more in taxes than less-wealthy families; limiting their ability to do so increases their tax liability, which seems fair. But there are two major problems with the proposal to end the SALT deduction. First, both the House and Senate have structured their tax reform plans to provide the vast majority of benefits to wealthy households. In other words, eliminating a benefit that helps a large portion of middle- and upper-middle class households in order to pay for a much larger tax cut for even wealthier households (and companies) is not many people’s idea of a good deal.

But second, and more importantly, the state and local tax deduction makes it easier for states to fund essential services, especially its colleges and universities. Public higher education is often the largest discretionary portion of state budgets. As per-student state funding has been on a relatively steady decline for the better part of 4 decades, one of the only things preventing the bottom from falling out has been the existence of the state and local deduction. If families can deduct state and local taxes from their federal tax liability, it makes them more likely to support state taxes that fund things like education. Through the deduction, the federal government is essentially offering a “discount” on state and local taxes, and thus, state spending on critical public services. As Michael Dannenberg of Education Reform Now explained in an article for Democracy in March of this year:

“An individual in the 28 percent marginal income tax bracket that itemizes and deducts $5,000 in property taxes reduces his or her federal tax bill by $1,400. Of $5,000 raised locally for education, the individual pays $3,600 and the federal government pays $1,400.

Thus the federal deduction for state and local taxes makes using those taxes to fund education and other public goods or services more attractive, because it makes state and local taxes a cheaper source of revenue for regular people than they otherwise would be.” 

States, already facing budget pressures, would have a far tougher time raising revenue. This would very likely result in cuts to public colleges or more likely, increases in tuition. Community colleges would be hardest hit—they already receive far less in state funding than wealthier public colleges, despite serving a larger and more working-class population.

Community colleges have not engaged in any kind of runaway spending over the years, and cannot cut programs without significant harm to their student population. Nor do they have the option of hiking tuition unreasonably; affordability is baked into the very mission of community colleges, and a massive tuition spike would likely push students away, in ways that tuition hikes at the public flagship colleges may not. But were this tax bill to pass, community colleges would be facing a far greater battle in getting equitable funding from the state, or in many cases, local government.

If this were not enough, Congressional Republicans are also attempting to put far more pressure on states by eliminating essential provisions of the Affordable Care Act. By removing the individual mandate, the Senate’s tax bill would eliminate insurance options in some states and put more pressure on state budgets. This wouldn’t just hurt blue states, it could cause major harm to red states as well. As in many of the GOP plans to gut the Affordable Care Act, states may have to step in and cover essential healthcare needs—once again drawing money away from the less life-or-death area of higher education. The result is the same as the elimination of the SALT deduction: a smaller pot of money at the state level for public services, including public college.

Make no mistake: the Senate Republicans have not spared students by retaining a few of the tax breaks for students and borrowers. By starving the beast at the state level, the Senate’s proposal could spell real long-term trouble for the three-quarters of students who attend a public college or university.