The Senate passed the tax bill on Tuesday night, making a slew of changes that would affect the quality of K-12 education and colleges and universities. The House has to re-vote on the bill Wednesday morning after a couple education provisions were changed.
The tax bill includes reductions of the deductions taxpayers can make for state and local taxes as well as provisions that would expand 529 savings plans — that have until now only been used for higher education — to cover the costs of private K-12 schools. The bill would also get rid of Qualified Zone Academy Bonds, which public schools with 35 percent or more of students on the free and reduced lunch program are eligible to use and which charter schools often take advantage of. Those schools depend on those funds for rehabilitation and renovation projects. In addition, there are several higher education provisions related to university endowments and charitable contributions.
Experts on K-12 and higher education policy say the tax bill is a giveaway to corporations and could hamper public investment in K-12 schools and public universities. The finally bill doesn’t include a change to teacher tax deductions — which was eliminated in a House bill last month — so teachers can still deduct $250 for supplies they buy out of their own pockets. The provision on a tax on tuition waivers for graduate students was also removed.
But the overall picture for students is grim, said Ben Miller, senior director for Postsecondary Education at the Center for American Progress.
“You’re definitely seeing folks breathe a sigh of relief because these narrow provisions are gone,” Miller said. “But it’s like saying, ‘Thank god my paper cut healed while someone cut off my arm.’ The long-term damage of the overall bill is quite bad.”
How the bill would affect K-12 students
One of the biggest changes for K-12 schools is a $10,000 cap on the deduction for state and local taxes. Policy experts say that cap will make it more challenging for states and localities to raise taxes, and state and local money are a huge chunk of school funding.
Some states have higher percentages of taxpayers taking these deductions and a higher average deduction. For example, in New York, a high-tax state, 35 percent of taxpayers take state and local tax deductions and the average state and local tax deduction is $22,169. In Idaho, 28 percent of taxpayers take these deductions and the average state and local tax deduction is $8,862, according to Education Week.
“The existence of that deduction [is responsible for] state and local funding of public education, which is the biggest line item or near the biggest line item in most states and certainly local expenditures,” said Neil Campbell, director of innovation for K-12 Education Policy at the Center for American Progress. (Editors’ note: ThinkProgress is an editorially independent news site housed at CAP.) “You know it’s clear that in a lot of communities, it will make raising revenue more challenging because people will feel the full change in raises in rates going forward at the local level.”
The expansion of 529s, which would allow families to save up to $10,000 for private school, would also benefit mostly wealthy families and take states by surprise, Campbell explained, since only wealthy people could afford private school tuition a year before their child begins school.
“It’s not going to help lower income people afford these private schools. It’s just going to be a tax shelter for the wealthy who are already send their kids to private schools,” Campbell said.
Thirty-four states and Washington, D.C. offer a full or partial state income tax deduction for their contributions to the state’s section 529 plans.
“Many states offer deductions and credits for 529 contributions and this could mean that people could deduct from state income tax contributions, basically pay their kids’ tuition a year in advance into a 529, and get a tax deduction for doing that. So it’s private school tuition but only for people wealthy enough to afford private school tuition a year early,” Campbell said.
He added that states have not built this use of 529 accounts into their budgets. “They offer those credits to encourage people to save for college and send them to the public university system. They didn’t create those credits and deductions to subsidize private schools.”
The bill would also put an end to Qualified Zone Academy Bonds, which are particularly important to the charter school community, because charter schools often use them for repairs and renovations. One last-minute change to the bill spared a tax exemption for bonds that paid for the construction of sports stadiums that was in peril in a previous version of the bill. This was a priority for President Donald Trump, according to The Wall Street Journal.
“That’s an interesting last-minute change, making the borrowing for paying back bonds for sports stadiums tax-advantaged, but borrowing for schools lost some of those tax advantages at the municipal level, so I think that is a contrast of priorities,” Campbell said.
Ramifications of the bill for college students
The tax bill still contains several provisions that could reduce donations to colleges and result in cuts to public higher education funding. Since the bill doubles the standard deduction for tax filers, fewer people would be able to itemize charitable contributions, which could lead to less donations to colleges. The bill also includes a tax on the endowment of wealthy colleges, which would affect fewer than 30 colleges in the United States, according to the Chronicle of Higher Education. On Tuesday, the Senate eliminated provisions that exempted colleges from the endowment tax if they had less than 500 students who paid tuition.
The provision limiting deductions for state and local taxes could also hurt public higher education. Overall, state funding for public two and four-year colleges in the 2017 school year was almost 9 billion below funding in the 2008 school year, according to an August report from the Center for Budget and Policy Priorities. Of the 49 states studied, 44 spent less per student in 2017 than in 2008. This funding decline reportedly led to limited course offerings, reductions in faculty members, and campus closures.
A report this month from Moody’s Investors Service changed its outlook on the higher education sector from stable to negative. “Changes to financial-aid programs and tax reform could negatively affect enrollment and tuition-revenue growth, philanthropic support, and the cost of borrowing,” the report read.
Miller said that the tax bill will ultimately pit higher education funding against an increasingly small social services budget.
“Higher education doesn’t tend to to win well when pitted against other benefits like that, and for understandable reasons,” Miller said. “In the grand scheme of things, higher education is very important but people need to eat first and K-12 is a fundamental right in the constitution in a way that higher education is not. The long-term ramifications of the bill overall are awful for education.”
The tax bill won’t do much to stimulate the economy
Still, the biggest point is this: the tax bill is going to lead to a deficit, which won’t exactly help with needed funding for public education.
Although Republicans argue that the bill will supercharge economic growth so much that the bill would pay for itself, a Joint Committee on Taxation report released in November found that the GDP would increase by only 0.8 percent on average over ten years, which couldn’t come close to covering losses from the tax cuts.
Republicans also argue that the tax bill will bring earnings home through “repatriation” of the over $2 trillion of overseas profits U.S. corporations rack up, but that is misleading, wrote Adam Looney, senior fellow for economic studies at the Brookings Institution, since those earnings are already in the financial system.
A 2011 report from the Congressional Research Service looked at the impact of the reduction in the tax on repatriated earnings as part of the 2004 American Jobs Creation Act found that “the studies generally conclude that the reduction in the tax rate on repatriated earnings led to a sharp increase in the level of repatriated earnings, but that the repatriations did not increase domestic investment or employment.”
Economists such as Thomas Picketty have recently found no evidence of meaningful correlation between cuts in top tax rates and economic growth, and even Bruce Bartlett, a policy adviser in the administration of President Ronald Reagan, told the New York Times, “In 1986 we dropped the top income tax rate from 50 to 28 percent and the corporate tax rate from 46 to 34 percent. It’s hard to imagine a bigger increase in incentives than that, and I can’t remember any big boost to growth.”
During a recent Wall Street Journal event, White House chief economic adviser Gary Cohn attended an event where John Bussey, an associate editor at the Wall Street Journal, asked whether CEOs would increase what they put into capital investment, which means to expand their businesses or existing operations. Very few people raised their hands, causing White House chief economic adviser Gary Cohn to ask, “Why aren’t the other hands up?”
Wells Fargo CEO Tim Sloan admitted as much recently, when he said that the money they see from this tax break will be going to shareholders. “Is it our goal to increase return to our shareholders and do we have an excess amount of capital? The answer to both is, yes,” he told CNN Money.
Republicans will likely argue for more federal spending cuts precisely because the tax bill will be so costly, which could in turn hurt K-12 schools, Miller said.
“I think it’s important not to lose sight of the fact that we’re about to add $1.5 trillion to the deficit,” Miller said. “The same people doing it are immediately going to turn around and say, ‘We’re broke and we have to cut spending.'”
Miller added, “It’s hard to know the long-term effect, but there is no world where this giveaway to corporations, millionaires, and billionaires ends up being better for low-income students.”