LC. ll-\.l'X/9» 1 1.8 33/7075 Order Code IB8lO75 ¥: am at - ‘ 5. . -‘T T’ by l Nif? §gQ.NGER FR{5PER§W{ _ ffifiqfiiymg _, 'AfiT’%fJ ngm:~: m R§mRARY &&¥iw Q89 W:%§h!figf3i€%fl Uf’§i\i€3sr3§'»§},»' TUITION TAX CREDITS UPDATED 10/15/85 BY Robert F. Lyke Education and Public Welfare Division Congressional Research Service c°;*'g.':.'*g;:»'°~AP 1 015 Iammsiac mzazzs ~ HIIIHI llllflllilililll Hlllllllll IIINH Ill! O10-103939767 CRS- 1 . IB8lO75 UPDATE-lO/15/85 lSSUE DEFINITION Should taxpayers be permitted to claim tax credits for education tuition payments? Such credits would represent a significant change in the Federal Government's role in education. Currently most Federal aid for elementary and secondary education is provided for specific purposes, such as vocational education, through categorical grants to States and local school districts. Tuition tax credit aid would instead be provided for general educational purposes in the form of tax reductions to students‘ families. Nearly all .such money would assist families of students attending private schools. while most Federal aid for postsecondary education already is provided directly to students and their families, it generally is based on their relative financial need. Tuition tax credits would not be closely related to such need. These proposed changes are controversial, particularly with respect to their cost, whether there should be additional public support of private education, and whether such support would be constitutional. In both the 97th and 98th Congresses, the Senate Committee on Finance reported amended versions of President Reagan's elementary and secondary school tuition tax credit proposal. These measures were not approved by the Senate. The President reiterated his support for tuition tax credits in his FY86 budget proposal, but he did not include them in his May 1985 tax reform ‘oposal. BACKGROUND AND POLICY ANALYSIS This section is divided into lo parts: l. Summary and Major Pros and Cons 2. Current Law and Legislative Options 3. Support for Private Elementary and Secondary . Education 4. Postsecondary Student Financial Assistance 5. Constitutionality 6. Equal Educational Opportunity 7. Cost 8. Tax Expenditure Financing 9. Federal Role in Education 10. Legislative History Prior to the 99th Congress CRS- 2 IB8lO75 UPDATE-10/15/85 1. SUMMARY AND MAJOR PROS AND CONS Tuition tax credits are one possible kind of tax allowance for educational expenses, several other types of which are presently authorized. The particular form of a tuition tax credit can vary considerably, depending on such matters as what portion of tuition payments may be taken into consideration, whether the credit is refundable to those whose tax liability is less than the credit, and what kinds of schools are covered. In his FY86 budget, President Reagan asked Congress to enact a tax credit for elementary and secondary school tuition payments. Under his proposal, a taxpayer could claim credit for 50% of the tuition for certain dependents at such schools, up tota limit of $100 in 1985, $200 in l986, and $300 in l987 and thereafter.% These ceilings would be reduced for married couples filing joint returns with adjusted gross incomes in excess of $40,000 on the basis of a scale so that no credit would be provided for such families with adjusted gross incomes over $60,000. ~Proponents of tuition tax credits might make the following arguments: -- Private elementary and secondary schools serve important functions that merit public support. They enable parents to select the education that is most suitable for their children. Some private schools need public money to maintain their quality and enrollments. ,-- Tuition tax credits are needed to provide tax .relief to families and students trying to meet postsecondary education expenses. while they would not be need based, tax credits, unlike tax deductions, would not give more money to families with higher income. -— The U.S. Supreme Court appears to have relaxed restrictions which in the past have been used to find tax allowances for private school expenses unconstitutional. In any case, the Congress should not assume that its legislation may not be constitutional, but should leave that issue to the courts. -- Tuition tax credits would give lower income families many of the same options for schools that higher income families now have. They would encourage Voluntary integration in private schools. -- Tuition tax credits should be seen not as increasing the Federal budget deficit as much as specifying a particular tax revision. They might be enacted as part of a general tax reform measure. -- Considering the numerous tax expenditures already authorized, to say that there can be no more for education would discriminate against an important social function. Education benefits society as much as the other activities subsidized by tax CRS- 3 IB8lO75 UPDATE-l0/15/85 allowances. The cost of education tax expenditures can be weighed against other Federal spending in the annual budget process. -- Tuition tax credits would be simple to administer. In contrast to current categorical grant programs, they would have neither the specified purposes nor the associated requirements that result in Federal control of education. ‘ Among the organizations supporting tuition tax credits are the Council for American Private Education, the Lutheran Church-Missouri Synod, the National .Association of Independent Schools, the National Society for Hebrew Day Schools, and the United States Catholic Conference. Opponents of tuition tax credits might make the following arguments:, -- Public money should be used to support only public schools, many of which need additional financial support. Public schools play a critical role in American society, promoting equality of educational opportunity and harmony among different ethnic and economic groups. —— Much postsecondary education tuition tax credit money might go to families and students with relatively high income. There would be no needs test for tuition tax credits, as there is for most Federal postsecondary student financial assistance programs. -- The U.S. Supreme Court may find tax credits for private elementary and secondary education expenses to be unconstitutional unless comparable credits are authorized for public elementary and secondary education expenses. —— some elementary and secondary tuition tax credit money might go to families with relatively high incomes, thereby impeding equality of educational opportunity. Tax credit money would also benefit schools with few if any low income or minority students, and even schools enrolling students trying to avoid desegregated public schools. -— Tuition tax credits would be costly, particularly if public school expenses are covered. Given current economic problems, no legislation should be enacted that would increase the Federal budget deficit. -- As a tax expenditure, tuition tax credits would not be subject to legislative review by the committees that deal with other education programs. Numerous tax expenditures complicate the tax code. -- There would be no restrictions on the use of tuition tax credit money to ensure it is spent efficiently and for public purposes. (Some CRS- 4 IB8l075 UPDATE-l0/l5/85 opponents believe, contrary to this argument, that tuition tax credits would eventually lead to more government control of private education.) There are national education problems which the Federal Government ought specifically to address with the limited educational funds it has available. Among the organizations opposing tuition tax credits are the American Federation of Teachers, the League of Women Voters of the United States, the National Urban League, the National Education Association, and the National Parent-Teacher Association. 2. CURRENT LAW AND LEGISLATIVE OPTIONS Tuition tax credit legislation would amend the Internal Revenue Code to permit a taxpayer to claim a credit for educational tuition payments made for himself, his spouse, or his dependents. Tuition tax credits are one form of a number of possible tax allowances that an individual might be permitted for educational expenses. At the present time, five such allowances are authorized in the Code: -- Taxpayers may claim a dependent's exemption if they contribute more than half the support of a student dependent, even if such would otherwise not be allowed on the basis of the student's income or age (sec. l5l). ‘ —- Taxpayers need not include in their gross income certain amounts they received as scholarships or fellowship grants (sec. ll7). -- Taxpayers need not include in gross income amounts paid or expenses incurred by their employer for certain educational assistance programs (sec. 127). -- Taxpayers employed by education institutions need not include in their gross income amounts paid by their employers for their tuition, or for the tuition of their spouse or dependent children, under a qualified tuition reduction program (sec. ll7). -— Taxpayers need not include in their gross income portions of educational loans discharged due to their working in certain geographical areas or for certain classes of employers (sec. lO8). In addition, the deduction permitted for trade or business expenses (sec. 162) has been construed to authorize deduction of expenses for education that the law or an employer requires for keeping one's salary, status, or employment; or for education that maintains or improves skills that are needed for one's present employment, trade, or business. Other provisions of the Internal Revenue Code provide indirect reimbursement for education expenses (for example, credits for certain child care expenses, or deductic for interest paid for educational loans) or provide economic benefits to schools (for example, deductions for charitable contributions to nonprofit educational institutions). ‘ CRS- 5 IB8lO75 UPDATE-l0/15/85 For many people, whether tuition tax credits should be allowed as well pends on the particular form of credit proposed. One key question is whether there in fact would be a credit or whether there might be a deduction. A tax credit would result in taxpayers who made equal payments for allowable tuition charges receiving tax benefits that are equal, while a tax deduction would result in their receiving benefits that are proportional to their marginal tax rates (which under current law generally increase as taxable income increases). Setting aside then issue of refundability (discussed below), for all taxpayers who made the same allowable tuition payments (say. $1,000), a credit would reduce their taxes by the same dollar amount (perhaps by 35% of what was paid, or $350) while a deduction would .reduce the taxes of those with high taxable income more (perhaps $490) than those with low taxable income (perhaps $210). Another possible allowance variation would be to have a tax‘ deferral rather than a credit or a deduction. Under a deferral, taxes for allowable tuition payments could be postponed until a later tax year, such as after the student ceases to attend school. The taxes owed would then have to be paid, perhaps along with interest charges, over a certain time period. It would also be possible to have a deferral for money that is saved in anticipation of future tuition payments. (In his State of the Union address on Jan. 25, 1983, President Reagan announced that he would seek to establish special education savings accounts that would encourage middle- and lower-income families to save for their children's college education. Under the legislative proposal submitted to ingress on Mar. 17, 1983, families would be permitted to contribute up to $.l,000 per year to special savings or investment accounts for their minor children without the interest or dividends those accounts earn being subject to Federal income tax, provided the children later use the accumulated funds to help pay for their postsecondary education expenses. On Feb. 4, 1985, the President again urged that Congress enact his proposal. [For more information, see the CRS report, Education Savings Accounts: An Analysis of President Reagan's Proposal, by Bob Lyke.] A second important question is whether the tuition tax credit would be refundable. It is possible for the amount of a tax credit to exceed the amount of taxes that people with relatively low taxable income have to) pay. If the credit were refundable, such people would be eligible to receive a payment equal to that portion of the credit which could not be used to offset their tax liability. If the credit were not refundable, they could not receive this payment; in effect, the credit they might receive would be reduced. Third, a tuition tax credit might be made available without any income limitation, or it might be restricted to taxpayers with incomes below a certain level, such as $40,000. The amount of the credit that could be claimed might be proportionally reduced as taxable incomes increase. A fourth question is what proportion of educational expenses might be counted for purposes of the tuition tax credit. Allowable expenses might include just tuition payments per se, or they might include other required tpenses (such as laboratory fees) or even other costs (such as fees for UOOKS or field trips). Either all of the allowable expenses might be counted, or just a proportion (such as one-third or one—half). A maximum dollar limit (such as $250 or $500) might be applied for each student. CRS- 6 IB8lO75 UPDATE-10/15/85 Fifth, tuition tax credits can vary with respect to the schools for which tuition payments could be taken into consideration. The principal distinction is between institutions of postsecondary education on the r e hand and elementary and secondary schools on the other. Among postseconda_y institutions, the program might be limited to only colleges and universities, with or without graduate or professional schools, or it might include technical or vocational schools as well. Both elementary and secondary schools might be included, or only one or the other. Also important is the question of whether to include tuition payments made to public schools (perhaps limited to those cases where children attend schools outside their district) and to proprietary schools (that is, schools that are operated for profit). Sixth, the tuition tax credit might cover allowable tuition paymentsi made lfor any person enrolled in school, or they might be restricted just to those who are studying full-time. Another distinction that might be drawn is between those who are enrolled to obtain a degree and those who are simply taking courses. Seventh, the tuition tax credit might become effective upon enactment of the legislation, or its effective date might be delayed, perhaps just for certain categories of schools or students. Finally, tuition tax credit legislation might include sections specifying what the purpose of the tax credit is. There might also be provisions dealing with a number of other matters, such as whether schools must meet certain nondiscrimination standards or whether postsecondary education student assistance programs may take into account the amount of a credit .a family receives. For a summary of President Reagan's proposal, see the opening paragraph of section 1, above. 3._ SUPPORT FOR PRIVATE ELEMENTARY AND SECONDARY EDUCATION Private education in the United States undoubtedly would benefit financially from a tuition tax credit for elementary and secondary education tuition payments (see section 4, below, for a discussion of a postsecondary education tuition tax credit). Exactly how much it would gain depends on how many additional families elect to enroll their children in private, schools and on what portion of the tax money credited to parents is shifted to the schools themselves, perhaps in the form of higher tuition payments. The extent to which either of these things would occur is not known, Nonetheless, it is reasonable to presume that an elementary and secondary tuition tax credit would contribute to an increase in the 4.2 million private school students there currently are in the country (a number that represents about lO.2% of all elementary and secondary school students) and that some tax credit funds would indirectly benefit many of the Nation's 27,700 private schools (which represent about 25% of all of the elementary ,and secondary schools in the country). [For additional information on private schools in the United States, see CRS IB8lO49, Nonpublic Elementary and Secondary Education: Providing Federal Aid, by Jim stedman.] Private elementary and secondary education in (the United States is primarily financed with private funds, but many private .schools and their students receive public financial assistance of one sort or another. For CRS- 7 IB8l075 UPDATE-l0/l5/85 example, some States provide private schools standardized tests and scoring services, and some loan their students textbooks and give them free ansportation to and from school. The Federal Government provides private school students with compensatory instruction and other services under the Education Consolidation and Improvement Act, the Education of the Handicapped Act, and other Federal education legislation; it also reimburses many private schools for part of the cost of student lunches they serve. In addition, many States and the Federal Government have tax expenditures that benefit private schools and their students. Reliable data on the total amount of public financial assistance to private education are not available. Proponents of elementary and secondary tuition tax credits generally ‘believe that there should be more public support for private education in the United States. One argument they make is that private schools serve important functions that merit public aid. In their view, private schools ‘maintain cultural and educational diversity in a country where public school programs have grown increasingly similar. They enable parents to select the schooling that is the most suitable for their children, particularly with respect to their moral development. It is also said that they provide educational opportunities for students who for one reason or another cannot succeed in public schools. Tuition tax credit proponents also argue that some private schools need public aid to maintain their quality and enrollments. Constantly rising costs have forced a number of schools to cut their programs or to set their fees higher than many parents can afford. Unless extra funds become available, such schools may decline in quality or even close. Sopponents of elementary and secondary tuition tax credits generally believe that private education should not receive additional public support, or even any public support at all. The principal'argument they make is that- public funds should be used only to support public schools. Scarce resources should not be diverted to private schools, it is claimed, even if they do have financial problems, when public schools need additional help. Some argue that this is particularly true at the present time, when Federal funds for many education programs are being cut and several States are facing serious fiscal problems. Opponents of tuition tax credits also argue that public schools play a critical role in American society. They stress the widely held View that the public schools, more than any other institution, have been responsible not only for instilling democratic values but also for forming what common culture there is in the United States. 4. POSTSECONDARY STUDENT FINANCIAL ASSISTANCE A tax credit for postsecondary education tuition payments undoubtedly would benefit most students enrolled in postsecondary education. As with an elementary and secondary tuition tax credit, some postsecondary tuition tax credit money might be shifted to the schools themselves, perhaps in the form of higher tuition charges. However, in contrast to elementary and secondary education, where generally only families of students attending private schools could claim the credit, a postsecondary education tuition tax credit would benefit nearly all students since public as well as private stsecondary institutions typically charge tuition. (According to the College Board, the average annual tuition charges at public 4-year colleges in the 1984-1985 academic year is $1,126; at private 4-year colleges it is $5,016; at public 2-year colleges it is $598; at private 2-year colleges it is $3,404.) 'At the present time there are approximately 3,200 institutions CRS- 8 IB8l075' UPDATE-l0/15/85 of higher education in the United States (about 1,500 of them public and 1,700 private); together they have approximately 12,300,000 students (about 9,600,000 of them in public institutions and 2,700,000 in private ‘institutions). Reliable data are not available on how many oth postsecondary educational institutions there are (such as proprietary and vocational schools), nor on how many students they have. At present, the Federal Government provides approximately $13 billion for postsecondary education student assistance. Much of these funds is made available through two large Department of Education programs: Pell Grants (FY85 budget authority: $3.3 billion) and Guaranteed Student Loans (FY85 budget authority for Federal obligations: $3.1 billion; estimated FY85 new loan volume based on funds generated from non—Federal sources: - more than $7.5 billion). In addition, there are various smaller Department of” Education student assistance programs such as Supplemental Educational Opportunity Grants, National Direct Student Loans, and the College Work—Study Program. Funds for postsecondary education students are also made available through such agencies as the Veterans Administration, the National Science Foundation, and the Public Health Service. [For current information on funding for postsecondary education student assistance, see CRS IB84047, Student Financial Aid: FY85 Budget, by David 0sman.] Opponents of tuition tax credits argue that Federal money for postsecondary student financial assistance should be channeled into existing programs, not new ones. They claim that this is particularly the case at the present time since Congress is reducing the overall funding for some .of the existing programs and the assistance eligibility levels for others. Opponents also point out that with the exception of Social Security student benefits, existing Federal postsecondary student financial , assistan programs are need based, that is, they typically limit the amount of.money la student is'eligible to receive to his unmet costs of attending‘ school (legislation has been enacted to phase out Social Secuirty student benefits for postsecondary students). Tuition tax credits would not be need based: students or their families would be reimbursed for part of their tuition payments regardless of whether the money is needed to pay for schooling (and regardless of family income). Opponents might cite Congressional Budget Office figures showing that with a hypothetical $250 refundable credit covering 50% of postsecondary tuition cost, nearly 60% of the funds would go to families with incomes greater than $30,000, nearly 30% would go to lfamilies with incomes between $15,000 and $30,000 and only a little more than 10% would go to families with incomes less than $15,000, (see section 6, below, for estimates on what proportion of elementary and secondary tuition tax credit money would go to these family groupings). Proponents of tuition tax credits argue that the credits should not be compared directly with existing Federal student financial assistance) programs. Their purpose is tax relief for families overburdened by educational expenses; they do not so much modify principles underlying existing programs as supplement them. According to proponents, families paying postsecondary education tuition charges are making an investment in education which the tax laws ought to encourage; the fact that the credit would benefit some kinds of families (in general, those that pay more taxes) more than others does not negate the need for giving them tax relief. It is sometimes pointed out that there are other provisions of the tax code that benefit high income families more than low income families, such as t} deduction that is allowed for mortgage interest payments. Finally, proponents of tuition tax credits stress that the amount of the tax credit (at least of a refundable tax credit) does not increase with income, as the amount would CRS- 9 IB8l075 UPDATE-10/15/85 with a tax deduction. As a result, the credit would represent a higher /percentage of income for a low income family than it would for a high income mily. [For information on President Reagan's proposal for Education Savings Accounts to help families save for postsecondary education expenses, see the CRS report, Education Savings Accounts: An Analysis of President Reagan's Proposal, by Bob Lyke.] 5. CONSTITUTIONALITY The issue of whether a Federal tuition tax credit would be constitutional arises because of the First Amendment's prohibition that "Congress shall make no law respecting an establishment of religion or prohibiting pthe free exercise thereof...." Since 80% of private elementary and secondary schools have religious affiliation, as do nearly 50% of private institutions of higher-education, some people believe that tuition tax credits would be unconstitutional. In recent cases involving public aid to‘ religiously affiliated schools, the United States Supreme Court has developed three guidelines for assessing constitutionality. One test is whether the aid program has a secular purpose, that is, whether the aim of the program, explicitly stated or not, is something other than the advancement of religion. A second is whether the aid program would bring about excessive entanglement of government and éligion, that is, whether the program would involve government in how such schools are administered, or perhaps would result in political divisions along religious lines. The third test is whether the primary effect, or indeed any principal effect, of the program is to aid religion. For this last test the Court has looked at such things as whether the aid the program provides is only incidential or substantial, whether it is restricted to secular uses, and whether the group it benefits is broad and diverse. Even with these tests, the determination of whether a given program does or does not constitute an establishment of religion in violation of the first amendment is not unambiguous. In its rulings in more than a dozen cases, the Supreme Court has held some programs benefitting religiously affiliated schools to be constitutional and others to be unconstitutional. In one frequently cited case, the Court held in 1973 that a New York State law authorizing tax deductions for tuition payments to private schools was unconstitutional (Committee for Public Education v. Nyquist, 413 U.S. 756 (1973)). However, on June 29, I983, the Court upheld the constitutionality of a Minnesota law providing a tax deduction for tuition and certain other educational expense payments (Mueller v. Allen, U.S. (1983)). Among other things, the Court distinguished the Minnesota case from the earlier one from New York by emphasizing the breadth of the class authorized to claim the deduction: "Unlike the assistance at issue in Nyquist, [the Minnesota provision] permits all parents -- whether their children attend public school or private -— to deduct their childrens' educational expenses. As... our other decisions indicate, a program [like the one in Minnesota] that neutrally provides state assistance to a broad spectrum of citizens is not aadily subject to challenge under the Establishment Clause." The Court did «not consider it important whether public school parents actually claim the tax relief to which they were entitled; in addition, it stated that "whatever unequal effect may be attributed to the statutory classification [including parents of children attending religiously affiliated schools] can be fairly CRS-l0 IB8lO75 UPDATE-10/l5/85 regarded as a rough return for the benefits... provided to the state and all taxpayers by parents sending their children to parochial schools." The Court also noted that while the Minnesota statute does not permit deductions for "instructional books and materials used in the teaching of religious tenet doctrines or worship, the purpose of which is to inculcate such tenets, doctrines or worship," enforcing such exclusions would not excessively entangle the State in religion. Proponents of Federal tuition tax credits argue that the Supreme ‘Court decision in the Minnesota case shows that a properly drawn statute would not be found to be unconstitutional. They might contend that the decision appears to indicate that the Court is relaxing some of the prohibitions that earlier had been used to block public aid to religiously affiliated schools. Opponents of Federal tuition tax credits point out that President Reagan's tuition tax credit proposal would restrict the class authorized to claim the credit just to parents of children attending private schools. Opponents assert that the Supreme Court, following the rationale it gave" for its decision in the Minnesota case, is likely to find such a provision unconstitutional. 6. EQUAL EDUCATIONAL OPPORTUNITY Whether tuition tax credits would further or impede ‘efforts to provide equality of educational opportunity is a matter of debate. Proponents argue that tuition tax credits would give lower income famili many of the same educational options that higher income families now have. In particular, they claim that lower income families now forced to enroll their children in poor quality, and often dangerous, inner city public schools would be able to send them to alternative schools. It is sometimes added that allowing parents to choose schools in this manner might stimulate all schools, public as well as private, to do better. Proponents deny that tuition tax credits would foster more school segregation in the United States. They might point out that Catholic schools, which constitute about three-quarters of all private elementary and secondary schools, together have an enrollment in which more than 8% of the students are black and more than 8% are Hispanic. Proponents alsoe claim that tuition tax credits would further voluntary integration in schools, arguing that parents might not be so reluctant to have their children attend desegregated schools if they believe that the schools, because they are private, will remain stable and maintain their academic standards. Opponents of tuition tax credit argue that since most tuition tax credit money would go to families with relatively high incomes, it would do little to promote equal educational opportunity. According to 1981 Congressional Budget Office estimates, with a hypothetical $250 refundable credit for elementary and secondary education tuition payments covering 50% of tuition costs, approximately 42% of the money would go to families with incomes greater than $30,000, about 42% would go families with incomes between $15,000 and $30,000, and only 16% would go to families with incomes less than $15,000. If the credit were not refundable, families with relatively J W incomes would get even less of the money (see section 4, above, for estimat s on what proportion of postsecondary education tuition tax credit money would go to these family groupings). Opponents also argue that tuition tax credits would benefit schools with few if any low income or minority students. They CRS-ll‘ IB8lO75 UPDATE-l0/15/85 assert that many of the private schools that would be aided attract students who are trying to avoid desegregated public schools. (In January, 1982, the Administration announced that it would no longer deny tax exempt status —- a requirement for tuition tax credit eligibility under many tax allowance bills -- to schools that discriminate by race. The Administration claimed that it lacked statutory authority to make such denials. On May 24, 1983, the United States Supreme Court ruled that the Internal Revenue Service (IRS) had sufficient legal authority to deny tax exempt status to Bob Jones University and Goldsboro Christian School, two schools which the IRS had earlier found to discriminate on the basis of race.) 7. COST Since tuition tax credits would reduce the revenue otherwise collected by the Internal Revenue Service, what they would cost has become an issue (see section 8, below, for analysis of the issue of tax expenditure financing). The extent to which Federal revenues would be reduced depends on the particular form of tax credit authorized. Other things equal, a credit that could be claimed for all tuition expenses would be more costly than one limited to a proportion of such expenses; similarly, a credit that could be claimed by taxpayers of all income levels or for students of all grade levels would be more costly than one restricted in these respects. A credit that included expenses of public school students would very likely be ibstantially more expensive. In January 1985, the Office of Tax Analysis in the Department of the Treasury estimated that the cost of President Reagan's elementary and secondary education tuition tax credit proposal would be as follows: Estimated Revenue Effect of President Reagan's Proposed Tuition Tax Credit, FY86-FY88 (millions of dollars) 1986 1987 1988 359 630 885 (Opponents of tuition tax credits argue that these costs are unjustifiable. Given concern over the Nation's economic problems, particularly about the way the Federal budget deficit may contribute to them, they argue that new measures which in effect increase Federal expenditures are not warranted. Some also argue that tuition tax credits should not be enacted at a time when Federal support for other educational programs is being restricted. Proponents of tuition tax credits argue that they should not be considered a new expenditure; rather, they should be viewed as a form of tax reduction vr families that are overburdened because of the additional investment they dmake in education. Now is said to be an appropriate time to authorize tuition tax credits since Congress is considering other ways to change taxes. Some proponents also question whether tax credits should be considered a Federal expenditure at all since they believe this would imply that ;money cns-12 IB8lO75 'UPDATE:lO/15/85‘ which is not paid in taxes belongs to the government. 8. TAX EXPENDITURE FINANCING Tuition tax credits would be classified as tax expenditures according to the Congressional Budget Act of 1974 (P.L. 93-344) since they would be "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income, or which provide a special credit, a preferential rate of tax, or a deferral of tax liability." Some opponents of tuition tax credits argue that tax expenditures are not an appropriate way for the Federal Government. to finance education. They point out that since tax credit legislation would not normally be considered by the committees that have jurisdiction over legislation authorizing Federal education programs, or that oversee those programs, there would be no committee that could compare all pieces of educational legislation, assess their strengths and weaknesses, and shape them according to a general policy perspective. In particular, it is argued that tuition tax credit legislation needs to be carefully studied in light of existing Federal postsecondary education student assistance programs and Federal efforts to promote equality of educational opportunity (see sections 4 and 6, above). Tuition tax credits would not be subject to annual appropriation reviews, making it difficult to weigh their cost to the government against the revenue needs of other education programs included in the Federal budget. Some people also argue that tax expenditures in general ought to be restricted: in the) view, tax expenditures unnecessarily complicate the tax code, create problems of tax.equity, and place administrative ,burdens on ,the Internal Revenue Service. Tuition tax credit proponents might argue that the tax code already is widely used as a funding mechanism. Numerous tax expenditures are currently authorized, including such familiar provisions as deductions for interest paid for consumer debt or home mortgage loans (see section 2 on p. 4 for Federal tax expenditures related to education). For proponents to say that there could be no additional tax expenditures for education would be to discriminate against an important social function. Proponents might also argue that there are numerous legislative issues for which one congressional committee does not have comprehensive jurisdiction. They could point out that tax expenditures could be subject to comparative evaluations with other. programs through the annual budget process. [For additional information about Federal tax expenditures, including a listing of them by budget function, see "Special Analysis G" in "The Budget for Fiscal Year 1986.“) 9. FEDERAL ROLE IN EDUCATION Tuition tax credits would represent a significant change in the Federal role in education. At present, nearly all Federal funds for elementary and secondary education are provided through categorical programs for particular purposes, such as compensatory education, handicapped education, ' vocational education (though in July 1982, a number of the smaller elementary and secondary programs were consolidated into multi—purpose block grants). Many of these programs have requirements designed to further equality of educational opportunity, such as a provision in the compensatory education CRS-13 - IB8lO75 UPDATE-10/15/85 programs funded under Chapter 1 of the Education Consolidation and Improvement Act that children in low income areas be served first. Tuition x credit money would not be restricted to a particular educational purpose gthough conceivably it might be limited to students at certain kinds of schools), nor would it be explicitly directed toward promoting equal educational opportunity. Most Federal postsecondary student assistance programs currently are need based in that students are not eligible to receive more support to attend school than they require, considering their family income and other resources. Tuition tax credits would not be so restricted. Proponents of tuition tax ,credits argue that these changes are long .overdue. In their view, the many Federal categorical programs must be administered by a large bureaucracy that has gained too much influence over schools and colleges. The programs’ numerous provisions and requirements are .said to generate confusion and paperwork; they are said to frustrate educators‘ efforts to work on the very problems Federal programs were Sdesigned to solve. In contrast, it is claimed that aidi provided through tuition tax credits would be simple to administer; it would not constrain parents and educators who are trying to improve schools; and it would not give the Federal Government the control it now has over American education. Opponents of tuition tax credits argue that it is essential to specify some conditions on recipients of Federal aid. They could claim that without restrictions there would be no assurance that public funds get used efficiently or for public purposes. For example, tuition tax credit money might only result in higher prices for education if schools simply charged ire for what they now provide; or it might only supplant current sources of —-upport if parents spent the money they now pay for tuition on other things. (Contrary to this argument, some opponents believe that tuition tax credits would eventually result in more government control ,of private education.) Opponents also argue that it is important for the Federal Government to identify the purposes for which its money ought to be used. In their view, there are national education problems that require national attention and resources. without such direction, Federal money would be used only for general educational expenses, which traditionally has been the responsibility of the States, local communities, and parents. 10. LEGISLATIVE HISTORY PRIOR TO THE 99TH CONGRESS Congress has considered tuition tax credit legislation a number of times in recent years. The Senate passed tuition tax credit measures in ~1967, .1959, 1971, 1976, and 1977, but it was not until 1978, when both the House and the Senate passed such measures, that tuition tax credit legislation came close to obtaining final congressional approval. [For details of this legislative activity, including references to recorded votes, see CRS report "Legislatlve Activity on Tuition Tax Credits Prior to the 97th Congress," -by Bob Lyke. In April 1978, the House Committee on ways and Means reported H.R. 12050, the Tuition Tax Credit Act of 1978, with amendments. As reported, the bill wuld provide a nonrefundable tax credit for 25% of undergraduate ‘postsecondary education expenses, up to a limit of $100 in 1978, $150 in 1979, and $250 in 1980. when H.R. 12050 was passed by the House on June 1, 1978, it was amended to include graduate postsecondary education expenses, up to the same limits, as well as elementary and secondary tuition expenses,‘ up CRS-14 IB8l075 UPDATE-10/15/85 to a limit of $50 in 1978 and $100 in each of 1979 and 1980. In the Senate, the Committee on Finance reported H.R. 12050, which it renamed the Tuition Tax Relief Act of 1978, with amendments in early Augu_, of 1978. (In February the committee had previously reported H.R. 3946, a House-passed bill dealing with import duties on wool, striking its language and substituting provisions for a refundable tax credit for 50% of tuition expenses for elementary, secondary, undergraduate, or postsecondary vocational schools, up to certain limits. This bill was never considered on the Senate floor). As reported, H.R. 12050 would provide a nonrefundable tax credit for 50% of undergraduate tuition expenses, up to a limit of $250 prior to Oct. 1, 1980, and $500 thereafter; it also would provide such a credit for elementary and secondary tuition expenses, though only after Sept. 30, 1980, up to a limit of $250. when H.R. 12050 was passed by the Senate on Aug. 15, 1978, the undergraduate tuition expense provision was expanded to include postsecondary education education in general, while the elementary and secondary provision was deleted. Authorization for credits was limited (to the period before Jan. 1, 1984. On Oct. 3, 1978, the Conference Committee on H.R. 12050 reported a version of the bill that would provide a nonrefundable credit for 35% of postsecondary education tuition expenses, up to a limit of $100 in 1978, $150 in 1979, and $250 in 1980 and 1981. No credit was authorized for elementary or secondary school tuition payments. The House rejected this proposal, voting on Oct. 12 to recommit the Conference Report. The Conference Committee submftted a second report on Oct. 13, amending the version of the bill it had reported earlier to include-a nonrefundable credit for 35% of secondary (but not elementary) school expenses, up to a limit of $50 in 1978 and $100 in 1979, 1980, and 1981. On Oct. 15, shortly before it adjourn, for the remainder of the session, the Senate rejected this second proposal. During the final days of the session one other attempt was made to authorize tuition tax credits. On Oct. 6, the Senate amended H.R. 13511, the Revenue Act of 1978, to include a nonrefundable tax credit fora 35% of postsecondary education tuition expenses, up to a limit of $100 in 1978, $150 in 1979, and $250 in 1980 and 1981 (the same provisions reported in the first report of the Conference Committee on H.R. 12050, described above. On Oct. 15, the Conference Committee on H.R. 13511 reported a version of the bill that excluded any tuition tax credit. Both the House and the Senate immediately approved the bill in this form. Thus no tuition tax credit legislation was enacted during the 95th Congress. One reason for this was strong opposition from President Carter, who threatened to veto any such measure. Another was that shortly before adjournment Congress instead enacted the Middle Income Student Assistance Act (P.L. 95-566). Among other things, this Act reduced the assessment rate applied to parental discretionary income in applications for Basic Educational Opportunity Grants (now named Pell Grants) and eliminated the family income limit for determining eligibility for interest subsidies for Guaranteed Student Loans. Because of these provisions, some people argued that tax credits for postsecondary education tuition payments were no longer necessary. In the 97th Congress, the Senate Committee on Finance held hearings " June 1981, on S. 550, a bill introduced by Senators Packwood and Moynih.l that would authorize tax credits for elementary and secondary as well as postsecondary education tuition expenses. In April 1982, President Reagan outlined the Administration's elementary and secondary education tax credit ,$40,000 and $50,000, respectively. -9 '-iympic equipment from tariff duties. CRS-15 IB8lO75 UPDATE-l0/15/85 proposal and in June 1982, bills to implement this were introduced in the House (H.R. 6701) and the Senate (S. 2673). Under these bills, ternal Revenue Code would be amended to allow a nonrefundable tax ior 50% of the tuition for full-time elementary or secondary enrollment, limited to $100 per student in 1983, $300 in 1984, and $500 in 1985 and each year thereafter. Lower limits would apply to married couples filing joint returns with adjusted gross incomes in excess of $50,000, with no credit available for those with incomes greater than $75,000. On Sept. 16, 1982, the Senate Committee on Finance reported an amended version of S. 2673 in the nature of a substitute to H.R. 1635. The Committee set the limits per student at $100 in 1983, $200 in 1984, and $300 in 1985 and each year thereafter, and lowered the maximum adjusted gross income levels to The Committee also announced it would credit refundable. In addition, the both the credit school seek a floor amendment making the Committee made numerous changes to strengthen the racial non—discrimination enforcement provisions. In the 98th Congress, a bill to authorize President Reagan's elementary and secondary school tuition tax credit proposal was introduced by Senator )Dole on Feb. 17, 1983 (S. 528) and by Representative Gradison on Mar. 1, 1983 (H.R. 1730). The bills were essentially the same as S. 2673 and H.R. 6701 of the 97th Congress, as described above. On May 24, l983, the Senate Committee on Finance ordered reported an amended Version of S. 528 (S.Rept. 98-154). One of the amendments would have reduced the maximum adjusted gross income limit for married couples filing joint returns from $60,000 to $50,000. The Committee also voted to move for a floor amendment to make the tax credit refundable. On Nov. 14, 1983, the Senate.began debate on ithe legislation, nich was proposed as an amendment to H.J.Res. 290, a bill to exempt 1984 On Nov. 16,-1983, the‘ Senate tabled this proposed amendment by a vote of 59 to 38. - LEGISLATION N/A HEARINGS U.S. Congress. House, Committee on Education and Labor. Subcommittee on Elementary, Secondary, and Vocational Education. Oversight on private schools. Hearings, 97th Congress, lst session. May 13-14 and Sept. 16 and 22-23, 1981. Washington, U.S. Govt. Print. Off., 1981. 324 p. Congress. Senate: Committee on Finance. Taxation and Debt Management Generally. Tax Credits. Parts l-2. Hearings, lst session. June 13-14, 1981. Off., 1981. 1003 p. Subcommittee on Tuition 97th Congress, Washington, U.S. Govt. Print. Tuition tax credit proposals. Hearings, 97th Congress, 2d session. July 16, 1982. Washington, U.S. Govt. Print. Off., 1982. 399 p. ----- Tuition Tax Credit -- 1983. Hearings, 98th Congress, lst session. Apr. 28, 1983. Washington, U.S. Govt. Print. Off., 1983. 548 p. REPORTS CRS-16 IB81075 UPDATE-10/15/85 AND CONGRESSIONAL DOCUMENTS U.S. The Educational 23 (legislative Congress. Senate. Committee on Finance. Opportunity and Equity Act of 1982. Sept. day, Sept. 8), 1982. 24 p. (97th Congress, 2d session. Senate. Report no. 97-576) The Educational Opportunity and Equity Act of 1983. June 20, 1983. 27 p. (98th Congress, lst session. Senate. Report no. 98-154) CHRONOLOGY OF EVENTS O5/O8 o2/o4 ll/16 06/29 o5/24 O1/25 President Reagan announced his proposal to simplify taxes. Tuition tax credits were not included. (The proposal, however, would affect several of the tax allowances for educational expenses that are explicitly mentioned in the Internal Revenue Code.) /85 /85 In announcing his FY86 budget proposals, the President again urged that Congress enact his proposals for tuition tax credits and education savings accounts. The Senate ended debate on‘tuition tax credits by voting 59-38 to table a proposed amendment to H.J.Res. 290 that was identical to S. 528 as reported. (H.J.Res. 290 is legislation to exempt 1984 Olympic, equipment from tariff duties.) /83 The U.S. Supreme Court held that a Minnesota tuition tax deduction law does not violate the prohibition in the First Amendment to the Constitution against the establishment of religion. /83 /83 The Senate Committee on Finance amended and ordered reported S. 528. The U.S. Supreme Court ruled that the Internal Revenue Service has sufficient legal authority to deny tax exempt status to schools that discriminate on the basis of race. /83 In the State of the Union stated that he would seek credit legislation (based on a bill subsequently introduced as S. 528/H.R. 1730, that was similar to the one the Senate Committee on Finance reported in the 97th Congress). The President also stated that he would propose new Education Savings Accounts to help families pay college expenses (his proposal was subsequently_introduced as s. 1489/H.R. 2475). Address, President Reagan to enact tuition tax CRS-l7 IB8lO75 UPDATE-l0/15/85 O9/16/82 —— The Senate Committee on Finance reported an amended version of S. 2673, the Administration's tax credit bill, in the nature of a substitute to H.R. 1635. (The Senate did not vote on this legislation.) O6/22/82 —- President Reagan submitted to Congress legislation for implementing the tuition tax credit proposal he announced on Apr. 15, 1982. The bill was introduced by Senator Dole as S. 2673 and Representatives Gradison and Biaggi as H.R. 6701. 02/18/81 -- President Reagan stated in his economic address to the Congress that he would join with others to seek various changes in Federal tax laws, including enactment of tuition tax credits, "at« the earliest date possible," after his program for economic recovery (which would include tax cuts) had been acted upon. ADDITIONAL REFERENCE SOURCES Doyle, Denis P., Public policy and private education. Phi delta kappan, v. 62, Sept. 1980: 16-19. Epstein, Noel and Marshall Smith, Violating the Reagan creed, Apr. 12, 1981, Washington post, D1, D5. Everhart, Robert B., ed. The public school monopoly. Cambridge, Ballinger, 1982. 583 p. Greeley, Andrew M. Catholic high schools and minority students. New Brunswick, Transaction books, 1982. 117 p. 9 James, Thomas, and Henry M. Levin. Public dollars for private schools: the care of tuition tax credits. Philadelphia, Temple University Press, l983. 271 p. Love, Orlan. Freedom of choice for inner-city parents. National review, v. 32, July 25, 1980: 903-907. U.S. Dept. of Education. School finance project. Private Elementary and Secondary Education. [Congressionally mandated Study of School Finance, v. 2] July l983. 97 p. U.S. Library of Congress. Congressional Research Service. The comparison of federal expenditures for public and private elementary and secondary education [by] Jim Stedman. June 9, 1982. [Washington] 1982. 20 p. CRS Report ---—- Education savings accounts: an analysis of President Reagan's proposal [by] Bob Lyke. Dec. 20, 1984. [Washington] 1984.” CRS Report LE 0:: VVA.3Hirx,%C:T0ffi uN:vEFs:awv ST. LOUIS — MO.