Despite the widespread use of various tax credits to address college affordability, the tax code is not the right tool to make college more affordable and increase access to higher education, the Tax Foundation states in a new report.
According to the report, education tax credits were a $17.4 billion program claimed by over 7 million taxpayers in 2011, up from a $4.5 billion program claimed by only 4.7 million taxpayers in 2008. And while these tax credits are intended to help reduce the cost of higher education, student loan debt has increased in the last decade from just over $400 billion to nearly $1 trillion in 2012. In addition, the cost of college rose 70 percent at the same time, allowing colleges to “capture the maximum value of tax credits,” the report states.
The tax credits are also poorly targeted toward low- and middle-income families, the report states. About 30 percent of the current benefits of education tax credits accrue to taxpayers earning more than $100,000 per year with an additional 18 percent accruing to those earing more than $75,000 annually.
“In other words, “ the report states, “many tax credit dollars are going towards future doctors and lawyers: those who would be more likely than not [to] be able to pay back a loan … amount[ing] to reverse distribution up the income ladder.”
The report notes that the overuse of tax credits - which are “prone” to improper payments and fraud - has turned the Internal Revenue Service into a spending agency, a role for which is it not equipped.
The Tax Foundation argues that the tax credits “violate the principles of sound tax policy by greatly increasing the complexity and distortions in the tax code.” Moreover, “there is little evidence that they have accomplished what they intended to do” and should therefore be eliminated within a comprehensive tax reform package.
By trading the elimination of education tax credits for lower marginal tax rates through tax reform, the Tax Foundation states that the economy would grow by $19 billion per year and 121,000 jobs would be created.
There are other solutions Congress should consider in combination with tax reform, the report says, including simplifying savings opportunities in the tax code, such as universal savings accounts. Congress could also encourage new markets designed to incentivize colleges to keep their costs low, such as pre-paid tuition plans.
“Finally, if the goal is to help low-income students with college costs, it would make far more sense to shift resources away from tax programs like credit and focus the funds on spending programs like Pell Grants which are more targeted and less susceptible to improper payments and fraud,” the report states.
For more on how we can help disadvantaged students make the most of their education tax credits check out this Student Aid Perspectives piece!
Publication Date: 7/21/2014