“To determine the effectiveness of all support for higher education, it’s important to look at the full picture, both tax programs and spending programs,” said Phil Oliff, author of the report. “And a first step is to understand what kind of tax expenditures states are providing and how much they cost to assess whether resources are targeted in a way that best helps achieve policy goals.”
Pew estimates the federal government spent nearly $35 billion in fiscal 2014 on tax credits for college savings plans, tuition, books, supplies and student loan interest deductions — about 14 percent more than the cost of Pell grants for needy college students.
The think tank said most states are unaware of the full scope of their support of higher education. Forty-one states and the District provide higher education tax benefits, such as credits for tuition and college savings incentives, in addition to direct spending, but few have comprehensive estimates of the costs. Pew could obtain cost estimates from only nine states and the District. Forgone revenue was equal to more than 25 percent of the financial aid spending in eight of the nine states and the District, according to the paper.
New York, for instance, gave up an estimated $457 million in tax revenue and spent $973 million on financial aid in fiscal 2013, while forgone revenue in Georgia penciled in at $44 million in fiscal 2014 and spending on student aid added up to $570 million, according to Pew. Still, state appropriations for public colleges and universities remained below pre-recession levels in most parts of the country until recently, putting pressure on public schools that have raised tuition to offset the loss of funding.
Oliff, manager of the fiscal federalism initiative at Pew, said the expense of tax benefits is often excluded from federal or state debates about higher education spending. Spending programs and tax expenditures fall under the jurisdiction of different committees at the federal level, and sometimes in state legislatures, so there is no coordination, he said. States rarely have data on the cost of higher education tax benefits, even though Pew found the provisions are a significant share of the support those states direct to families.
The report arrives as congressional Republicans and the White House are planning an overhaul of the tax code. Neither has discussed any specific proposal for addressing higher education tax benefits, but both say everything is on the table. House Ways and Means spokeswoman Emily Schillinger said the congressional committee is “working to consolidate and coordinate the multiple existing education savings incentives.” Meanwhile, a White House spokesman said the Trump administration is open to all ideas for the upcoming budget.
A body of research has shown that the billions of dollars the government spends on tax credits have had meager effects on encouraging people to go to college and supporting them once they’re there. Most of the tax benefits go to families making at least $100,000, according to the Tax Policy Center. The National Bureau of Economic Research found low-income households, who need the most financial help to attend college, don’t owe enough in federal taxes to get the full credit for college tuition, books and supplies.
Tax credits are also more complicated for families to claim than grants. Researchers at the Government Accountability Office found that 14 percent of eligible families failed to claim any of the tax benefits, while 27 percent of families who claimed one tax benefit would have been better off claiming another. Higher education experts say taxpayer funds are better spent providing more money upfront to families rather than offering tax credits after costs are incurred.
Oliff argues that at the very least an effective integration of tax policies will require looking at spending and tax provisions as a single government investment.
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