Every year, H&R Block starts running television commercials imploring Americans to “get your billion back,” a plea based on the premise that each year, a chunk of money goes unclaimed by Americans who don’t take full advantage of the array of tax credits and deductions offered to them. Regardless of its numerical accuracy, it’s a fairly accurate representation of the inefficiency of providing public benefits through the tax code. Given that low-income households often don’t have the luxury of professional tax preparation, the tax system might be a particularly brutal delivery mechanism for them. Nowhere is this more apparent than how we currently subsidize the cost of college at tax time.
Along with his highly-touted proposal for two years of tuition-free community college, President Obama proposed several changes to higher education tax policy in the run-up to the State of the Union – including eliminating the student loan interest deduction for new borrowers, consolidating higher education tax credits into the current American Opportunity Tax Credit (AOTC) and increasing its refundability and usefulness for low-income students, reducing the benefits for 529 plans and Coverdell Education accounts, and eliminating a potential tax bomb that awaits students who take advantage of forgiveness programs under the Department of Education’s income-based repayment plans.
Taken together, the higher education proposals from the president’s State of the Union are mostly progressive, and in some cases reflect common sense improvements. But while the community college proposal will continue to garner the most attention, New America’s Ben Miller noted that the AOTC actually costs the government $15 billion – more than twice as much money as the tuition-free community college proposal. For a program that provides little benefit to students with the most need, and with limited evidence of effectiveness at getting more students into and through college, it’s fairly remarkable to see it consistently held up as one of the few bipartisan ideas left.