What Impact do the Trump Tax Cuts Have on Education?

by Dr. Watson Scott Swail, President & Senior Research Scientist

Yesterday the Trump Administration, through the auspices of Steve Mnuchin and Gary Cohn, released a trial balloon to test their tax plan in the media and Congress. True to Trump’s word, this is potentially the biggest change in the tax system in generations, starting with the reduction of corporate tax from 35 to 15 percent and continuing through the elimination of the death tax, the doubling of the standard individual deduction, and the elimination of all but two tax deductions from the code for individuals and families.

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Not many people like the tax code, so the thought of changing the system doesn’t really produce the same ill-will that the health care discussion does. People don’t like taxes. Everyone wants to pay less.

But, in the end, someone has to pay for any tax cut. George Bush provided a large tax cut in his early years in the White House. The problem was that it wasn’t balanced with cuts in spending and federal spending and the deficit went through the roof.  The early reviews on Trump’s plan is that it could cost the government (e.g., taxpayers) $2 trillion in revenue over the next decade. The Administration says that the trickle down from the corporate cuts will boost the economy which, in turn, will pay for the tax plan. Certainly there will be some effect from cutting the corporate tax, but not likely anywhere near $2 trillion worth. To put this in perspective, the entire federal budget totals $3.65 trillion. A reduction of the corporate tax rate will not make up that gap in revenue.

It isn’t necessarily that people don’t agree with cutting the corporate tax and eliminating the death tax, or even reducing the number of tax brackets from 7 to 3 (although that is relatively meaningless in the end, whether it be 3 or 23; it is a graduated rate). People do care about the cost of it and whether it can be revenue neutral. This plan is not revenue neutral.

An important part of the plan is the simplification of the tax system, in part, by eliminating many of the standard deductions that are currently in place. Two major deductions have been left alone, including the mortgage deduction and deductions for charitable giving. President Trump said on the campaign trail that he would eliminate the mortgage deduction. However, 32 million people used this deduction in 2016 and the political reality is that people would have a conniption if it were to be removed. Therein lies the tricky trail for retooling the tax code: taxpayers want it simplified, but only if you leave their deductions alone.

There are several potential impacts to education in this tax plan. The first is the student loan interest deduction. This allows borrowers with incomes under $80,000 to deduct up to $2,500 of their loan interest from their taxes. This would be gone. Second, taxpayers who receive educational benefits from their employers are allowed up to $5,250 in tax-free benefits to help with their higher education. This would go away and those benefits would be fully taxable. The American Opportunity Tax Credit (AOTC), an annual credit of $2,500, would also disappear. And as a colleague mentioned to me yesterday, the elimination of deductions for state and local taxes paid could have a serious impact on K12 and higher education funding at the local and state level, forcing higher taxes at those levels. He also mentioned that even teachers would get hurt since they get to deduct classroom supplies that they personally purchase. All gone.

Finally, what does the federal government do with student loan forgiveness? There is currently a plan in place to allow students to have their student loans eliminated after 20 years if they work in the non-profit world during that time. There are many stipulations, but the Administration has talked about removing this program which would have a huge income on people who plan their careers around this benefit. Regardless, there is the issue whether this is a taxable benefit.

As with all public policies, there are ramifications attached to the Administration’s tax plan and people should be well aware. Few details, other than those mentioned, were provided yesterday. Mnuchin said they were working to get more details negotiated with Congress. At some point, the Congressional Budget Office (CBO) will score these policy positions and provide estimates of the cost and benefit of the plan. Until then, we don’t really know the impact of the Trump Administration’s proposal.

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About Educational Policy Institute

The Educational Policy Institute is a Washington, DC-based research think tank on education and the social sciences. EPI conducts evaluation and policy studies on various educational issues from Pre-K to workforce outcomes in the United States, Canada, and beyond. Visit us at educationalpolicy.org.
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