By Elizabeth Lower-Basch

This week, the House of Representatives is expected to take up H.R. 3393, the Student and Family Tax Simplification Act.  When this bill was introduced last fall by Reps. Diane Black (R-TN) and Danny Davis (D-IL), CLASP along with our partners in the Higher Education Tax Reform Consortium had applauded it as an important step forward in simplifying the multiple tax benefits that support higher education and in making these credits more useful to low-income students.

In particular, the bill includes a number of provisions consistent with the Consortium’s recommendations:

• It would make permanent the partially refundable American Opportunity Tax Credit (AOTC), which is currently scheduled to revert to the non-refundable Hope credit at the end of 2017.  It would also index the value of the AOTC to inflation, starting in 2018. 

• It would Increase the portion of the credit that is refundable. Under current law, students who don’t earn enough to owe federal income taxes can receive only up to 40 percent of the AOTC as a refundable credit.  In other words, students who qualify for the maximum $2,500 credit can receive up to $1,000 as a refundable credit.  The bill would make the first $1,500 of the credit refundable.  This would particularly help students attending the lowest-cost institutions, such as community colleges, who now do not receive even the full $1,000 refundable credit if they have less than $4,000 in qualified expenses. 

• It would improve coordination between Pell grants and the AOTC and would ensure that Pell grants are never counted as taxable income, even when they are used for educational costs other than tuition.  A similar proposal is in President Obama’s budget. 

• Under the original bill, the costs of the expanded refundability would have been offset by lowering the income eligibility limits for the AOTC and by eliminating the Lifetime Learning Credit.

When the bill was brought to the Ways and Means Committee on June 25, Chairman Dave Camp (R-MI) amended it to restore the current income limits, which would keep the credit available to higher-income families.  This change would increase the estimated cost of the bill by more than $60 billion over 10 years, according to the Joint Committee on Taxation.  The bill does not pay for these changes through other provisions but would increase the federal budget deficit. 

CLASP has deep concerns about this change, particularly since the Ways and Means Committee has also approved a series of bills that would make permanent a number of corporate tax preferences at a cost of $581 billion over 10 years.  Passing these separate bills will make it harder for Congress to eventually come to agreement on a balanced package that includes tax reform and sequester replacement.  Moreover, to the extent that new funds are available for higher education, we would prefer as much as possible of these funds to be provided through Pell Grants, rather than tax credits

In the Ways and Means Committee markup last month, some members also expressed concern that non-traditional students would be adversely affected by the elimination of the Lifetime Learning Credit, as the AOTC is only available for four years per student.  CLASP recognizes that many students now take longer than that to complete an undergraduate degree.  In the Consortium’s recommendations, this issue was addressed by proposing to replace the four-year limit with an equivalent dollar cap on benefits from the AOTC.  Even though this provision was not incorporated into HR 3393, CLASP believes that low-income students will still on average benefit more from the increased refundability of the AOTC since they cannot benefit from the Lifetime Learning Credit unless they earn enough to owe federal income taxes, as it is not refundable.

In the end, all the Democrats on the Ways and Means Committee voted against the amended H.R. 3393, including Representative Davis, who had developed the original bill.   The bill will now move to the House floor, where it is likely to pass along party lines. While CLASP supports the original intent of the bill and the provisions to make education tax credits simpler and more targeted to low-income families, we cannot support it in its current form.  Addressing education tax credits using a piecemeal approach, while not addressing the larger threat of cuts to programs from budget caps and sequestration, is not likely to improve the overall condition of low-income students.