Senate Passes Tax Bill With Major Implications for Higher Ed

Legislation would tax largest private college endowments, create new cost burdens for business unrelated to educational mission and could put new strains on state budgets that fund public universities.

December 4, 2017
 

The U.S. Senate early Saturday morning narrowly approved major tax legislation roundly opposed by higher education leaders and student groups. The bill, like the House of Representatives' tax plan passed last month, got no public hearings and senators themselves complained they had no opportunity to read the legislation even as last-minute amendments were offered affecting issues like private college endowments and education savings plans.

The 51-to-49 Senate vote sets up negotiations with House leaders over substantial differences between the two bills. Most in higher education view the House version as substantially more harmful for students and colleges than the Senate bill, but many also have major concerns about the Senate legislation.

Both bills would create significant potential new tax burdens for higher education institutions and would, college leaders predict, adversely affect charitable giving and state budgets that support public colleges and universities.

Senate lawmakers approved multiple amendments Friday to provisions that would affect higher education. One allows taxpayers to deduct only up to $10,000 for state and local property taxes. Previous language eliminated state and local deductions entirely. Even with that change, however, higher education leaders say the cap could put strains on state budgets. The fear is that wealthy taxpayers in states that invest substantially in public colleges and other services will push to cut spending generally, since they will no longer receive a tax break on their state and local payments.

Like the House bill, the Senate legislation imposes a new 1.4 percent excise tax on the largest endowments held by private colleges. But thanks to an amendment offered Friday, the tax will apply only to endowments valued at $500,000 per full-time student. Previously, that provision would have applied to endowments valued at $250,000 per student. But although the tax will apply to only the wealthiest private institutions, higher education leaders call it a flawed idea that sets a worrying precedent.

Another amendment blocked by senators Friday would have specifically exempted from the endowment tax Hillsdale College, a private institution in Michigan with ties to Betsy DeVos, the secretary of education, and an institution praised by many conservatives.

Also like the House legislation, the Senate tax plan doubles the standard deduction for tax filers, a change that charitable groups say would hurt incentives for donating to tax-exempt entities like colleges. (See a complete breakdown of provisions in both bills ahead of Friday's amendments here.)

But the Senate plan does not include provisions to strip many tax benefits for students pursuing a college or graduate degree or paying off their loans, making it a significant improvement over the House bill, said Ted Mitchell, president of the American Council on Education, in a written statement. Student and faculty groups staged protests across the country this week against the elimination of the student tax benefits. The protests focused in particular on a provision of the House bill that would tax graduate student tuition waivers as income -- a change those groups say would make graduate education unattainable for many students.

"We are especially pleased that the Senate recognizes the importance of education benefits that help millions of middle- and lower-income students and families finance a college education," Mitchell said. "We hope that any final legislation will leave these critically important benefits in place."

In addition, the final Senate bill dropped a proposal to add consequential new costs for business activities unrelated to a college's core academic mission -- everything from the rental of laboratory facilities to income from special events. It also did not include taxes on royalty income generated from licensing of a college's name and logo. Those activities by colleges have little apparent connection to academics, but higher education groups said costs from those taxes would have an effect on colleges' ability to pay for student support.

And Mitchell said changes to the standard deduction and new caps on state and local tax deductions were problematic provisions of the Senate bill.

"As a result, we are deeply concerned that at a time when postsecondary degrees and credentials have never been more important to individuals, the economy and our society, the tax reform proposal approved by the Senate could make college more expensive and undermine the financial stability of higher education institutions," he said. "This is simply wrongheaded."

  House Plan Senate Plan
Education Tax Benefits    
American Opportunity Tax Credit Consolidates AOTC and Lifetime Learning Credit and adds a fifth year with half the benefits. Repeal of Lifetime Learning Credit would mean no tax credit for part-time students. No changes to AOTC
Discharge of student debt Discharge of student debt from death or disability would be excluded from taxable income. No change
Student Loan Interest Deduction Repeals tax deduction for interest paid on federal student loans. Under current law, borrowers can deduct up to $2,500. Not included
Graduate student tuition Eliminates Section 117(d)5 of tax code, which allows institutions to waive or reduce tuition costs for graduate students without tax implications. No change
College employee dependent benefits Would no longer exclude tuition benefits for college employees' spouses or children from taxable income. No change
Employer-provided education assistance Would no longer exclude employer-provided education assistance from taxable income. Tax-exempt benefits are currently capped at $5,250 per year for undergraduate and graduate course work. No change
Endowment Tax Applies a 1.4 percent excise tax to private college endowments valued at $250,000 per full-time student. Provision included in final Senate legislation applied excise tax to private college endowments valued at $500,000 per full-time student.
Charitable Contributions    
Charitable deductions Increases standard deduction from $12,700 to $24,000 for joint filers and from $6,350 to $12,000 for individuals. Charitable groups say the change will reduce the incentive for charitable giving to entities like colleges. Increases standard deduction to $24,400 for joint filers and $12,200 for individuals.
College athletic seating rights Eliminates rule providing for charitable deduction of 80 percent of amount paid to purchase tickets to athletic events. Same as House plan
Unrelated Business Income Tax    
Research income Tax-exempt organizations could exclude from unrelated business tax only income from research that is available to the public. Not included
Name and logo royalties Not included Would tax royalties a college derives from licensing its name or logo. But provision was dropped from final legislation passed by Senate.
Business income taxed separately Not included Requires that unrelated business income be counted separately for tax purposes, meaning colleges could no longer use losses in one business area to offset tax liability for gains in another.
Tax-Exempt Bonds    
Termination of private activity bonds Effectively eliminates tax-exempt private activity bonds that lower the cost of building for colleges. Not included
Termination of advanced refunding bonds Interest on newly issued advance refunding bonds would become taxable. Same as the House plan
State and Local Tax Deductions Deductions for state and local property taxes would be capped at $10,000. Higher ed advocates say limiting the deductions will mean less support for taxes that support community colleges and public universities. Final Senate legislation would allow taxpayers to deduct up to $10,000 in state and local taxes.

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