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Clinton Education Tax Proposals Could Be Inflationary, Roth Warns

Wednesday, April 16, 1997

OnLine

Republican and Democratic Senators criticized the President's education tax proposals at an April 16 Senate Finance Committee hearing on the grounds that the proposals would inflate education costs, and force the Internal Revenue Service to review student grades.

Under Clinton’s tax proposal, a taxpayer would be allowed a maximum $1,500 non-refundable credit against federal income tax for qualified higher education expenses paid during the taxable year for the education of the taxpayer, the taxpayer's spouse, or the taxpayer's dependents. The student must maintain a grade point average of 2.75 based on a scale of 4.0 to qualify.

As an alternative, a taxpayer would be allowed a deduction for qualified higher education expenses paid during the taxable year for the education or training of the taxpayer, the taxpayer's spouse, or the taxpayer's dependents.

Senate Finance Committee Chairman Bill Roth, R-Del., has "genuine concern" that the proposal would inflate education costs, and that the educational institution will be the ultimate beneficiary of the tax breaks, not the students.

The inflation that results when the government provides medical assistance does not discourage the government from providing assistance to citizens, Treasury Assistant Secretary Lawrence Summers told the panel. Similarly, education inflation should not discourage the government from providing educational assistance in the form of tax benefits, he said.

Grade inflation

Roth also said the proposal’s impact on grades could have "a very negative fallout that is not in the national interest." The proposal will put pressure on education institutions not to give grades that are lower than a "B."

Similarly, Roth pointed out that not all colleges and universities maintain the same education standards. A "B" earned at an Ivy League school is not the same as a "B" earned at a community college, he noted.

Sen. Bob Kerrey, D-Neb., similarly questioned the proposal on the grounds that it is inflationary and encourages students to incur debt to pay for college.

Other solutions

Sen. Alfonse D’Amato, R-N.Y., said rather than offering deductions, the debt on college loans should be forgiven in exchange for the performance of community service.

Sen. Connie Mack, R-Fla., said pre-paid college tuition plans would encourage savings, fight inflation, and provide education incentives for the middle class.

Details of President’s Simplification Package Released: The Treasury Department April 16 released further details of its proposal to simplify the tax code and to increase taxpayer rights.

The proposal would increase the standard deduction attributable to unearned income of dependent filers, simplify child dependency rules, modify and simplify the like-kind exchange rules, and impose holding period requirements for certain foreign tax credits.

Softening Deadline: Members of the GOP’s budget negotiations team say the deadline they imposed on talks with the White House are not as firm as they indicated earlier.

Rather than having an outline of the fiscal 1998 budget and later years agreed upon by the end of the week of April 14, the GOP team now wants to see that progress is being made before they move ahead on the budget independently.

"When we get to the end of the week, we’ll have to assess whether we’re making progress," House Republican Conference Chairman John Boehner, R-Ohio, said.

Electronic Filing For Small Businesses Criticized: House Ways and Means Subcommittee Chairman Nancy Johnson, R-Conn., said the electronic payroll tax deposit system should be made voluntary for small businesses.

The threshold at which firms are required to participate in the Electronic Federal Tax Payment System should be increased, Johnson said at a Ways and Means Oversight hearing.

Bills ( H.R.722, S.570) increasing the threshold have been introduced by Rep. Richard Hastings, R-Wash., and Sens. Don Nickles, R-Okla., and John Breaux, D-La.

The problems have been exacerbated by the IRS’s failure to make business leaders aware of the new system, Johnson said. The Service has not been "marketing it as a positive product," she said.

The threshold used to determine whether a business must deposit its federal tax deposits electronically was lowered in accordance with IRS regulations from $47 million in federal payroll deposits to $50,000. The new threshold, which will apply on July 1, means the regulations would apply to about 1.2 million businesses.

Rep. Linda Smith, R-Wash., testified that the electronic payment system harms small businesses. "It will impact millions of small employers who simply are not ready for it, and who do not know or fully understand the extent of their compliance obligations," she said.

"While the EFTPS should be bold, it should also by reasonable and pliant. No government initiative, in particular one involving the voluntary payment of federal taxes, should be so aggressive and rigid that it penalizes small business families and employers," said Smith.

The IRS defended the EFTPS as an easy to use, secure system with flexible payment options.

"To date, EFTPS has processed more than 1.5 million transactions, representing over $50 billion in federal tax deposits" said the IRS’s Chief of Taxpayer Service James Donelson.

"The IRS has worked very hard to inform the taxpayers required to participate. . . As a result, over 970,000 taxpayers of the 1.2 million taxpayers required to enroll in EFTPS by July 1, 1997, have already enrolled. Another 365,000 small businesses heard our message and voluntarily enrolled," he said.

Pamphlet On Revenue Raisers Available: The staff of the Joint Committee on Taxation released an analysis of revenue-raising options included in the President’s Clinton’s fiscal 1998 budget request.

The proposals will be the subject of a Senate Finance Committee hearing April 17.