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Looking Towards November: Taxing Issues

By Jane Bryant Quinn
Tuesday, October 8, 1996

NEW YORK -- When it comes to pocketbook issues, there's something pleasantly fresh about this campaign. The voters, for once, aren't fired up about income taxes.

Both candidates have played the tax card -- Bob Dole with his 15 percent rate cut; President Clinton with tax cuts for students, homeowners and others. Yet neither man has touched a nerve.

The voters apparently doubt that Dole can cut taxes and balance the budget, too. Unlike Dole, Clinton offset his tax cuts with proposed spending cuts and revenue raisers. Many of them, however, almost certainly couldn't pass.

Most Americans probably don't even know what Clinton's tax cuts are, which may be just as well. They make good politics but not necessarily good policy.

Take the tax cuts proposed for students. Clinton would give most students a tuition tax credit worth up to $1,500 a year and indexed to inflation. It could be used for the first two years of college or community college, or for a one-year certificate program at a training or technical school.

The credit is refundable, so students too poor to owe taxes would get a government check. To keep the credit the second year, students would have to maintain at least a B-minus average and not be convicted of a drug-related felony.

Clinton also backs a tax deduction for tuition of as much as $10,000 a year. You could use it not only for degree and certificate programs but also for single courses taken to improve your job skills. The deduction would go even to taxpayers who don't itemize.

Both tax breaks phase out for couples with incomes between $80,000 and $100,000 and singles between $50,000 and $70,000. Together, they're projected to cost $43 billion over six years.

But most of the education tax cut goes to people who'd attend college anyway. "Instead of increasing enrollment it's a windfall for middle-class families," says policy analyst Larry Gladieux of the College Board in Washington, D.C.

President Clinton's deputy economic adviser Gene Sperling says that's exactly the point. "We're redeeming the president's pledge for a middle-class tax cut, in a way that's targeted on education," he says.

But what about the poor, who rely on federal Pell Grants? If such a student sought a $1,500 tax credit, it would be reduced by the amount of his or her Pell. So they get virtually no help. Adjusted for the consumer price index, the purchasing power of the maximum Pell has dropped 36.5 percent since 1975, Gladieux says.

The 1997 budget, approved last week, raises Pells by $230. That's the largest single-year increase in 20 years but a pittance compared with the new program for the middle class.

Economist Martin Sullivan, of the nonprofit Tax Analysts in Arlington, Va., adds that Clinton's program poses administrative burdens.

What paperwork would you need to show the IRS that a student got a B-minus average?, he asks. How would the government check on what your college cost or track drug convictions? How would it fight the fraud that accompanies refundable tax credits, especially when the IRS's budget is being cut?

"I don't think this program was expected to get through the legislative process," Sullivan told my associate Kate O'Brien Ahlers.

Another Clinton tax break, lobbed straight at the middle-class voter, would virtually end the capital gains tax when you sell a home.

Under the plan, your current exemptions would be repealed -- specifically, the exemption for people 55 and up and the tax-deferred rollover when you buy a new home of equal or higher value.

In their place, couples could take a $500,000 profit tax free, every two years. Singles could take $250,000. You'd owe a current tax on profits over that amount.

This proposal makes more sense than the tuition plan. Even under current rules, only 4 percent of the people who sell homes each year pay a capital gains tax on the sale, says U.S. Treasury official Eric Toder. So forgiving the rest of the tax isn't such a big deal. The six-year cost of this bill comes to a modest (for Washington) $1.4 billion.

If passed, this tax break would simplify your life. In most cases, you'd no longer have to keep track of the money you spend improving your home. And you could trade down to a smaller house or apartment without paying a tax.

Still, there's a policy downside here, says Harvey Rosen, professor of economics at Princeton University. The change would exacerbate the advantage that homeowners hold over renters and make residential real estate an even more attractive investment than factories and equipment. That's not good for the country in the long run.

Jane Bryant Quinn welcomes letters on money issues and problems but cannot offer individual financial advice.

© Copyright 1996 Washington Post Writer's Group

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