Senate Panel Approves Education Bill

Wednesday, May 19, 1999

OnLine

The Senate Finance Committee May 19 approved a $4 billion education bill that expands education individual retirement accounts, extends and expands the Section 127 exclusion for employer-provided education benefits, and makes other changes.

The measure was approved 12 to 8, with Democrats and Republicans breaking party ranks. Two moderate Republicans, Sen. Jim Jeffords, R-Vt., and Sen. John Chafee, R-R.I., strayed from their party and three Democrats joined the majority, including conservative Sen. John Breaux, D-La., and Sen. Bob Graham, D-Fla., who strongly supports the bill’s provision on tax-free distributions from qualified tuition plans. The other Democrat voting for the bill was Sen. Bob Kerrey, D-Neb.

Last year’s version of the education bill ran into trouble, and ultimately was defeated, over President Clinton’s and others concern that the education individual retirement account provisions would harm public schools.

Sen. Max Baucus, D-Mont. , at the markup lamented the doomed bill. "We find ourselves making a political statement and not doing things for our kids," said Baucus, who was acting in the absence of Senate Finance Committee ranking Democrat Sen. Daniel Patrick Moynihan, D-N.Y.

Prior to the markup, Senate Finance Committee Chairman Bill Roth, R-Del., modified the proposal before the panel by further expanding the exclusion for employer-provided education benefits, under Section 127.

The bill extends the exclusion for undergraduate education until December 31, 2003, and re-imposes the exclusion for graduate education from January 1, 2000, until June 30, 2004. The prior version imposed the exclusion only until December 21, 2003. Money leftover from the offsets offered earlier paid for the additional six months of coverage for graduate students.

The proposal also was modified to allow taxpayers to claim the HOPE or lifetime tax credits and receive an exclusion from income for amounts distributed from education IRAs and from qualified tuition programs.

Partisan Rancor

No amendments were approved by the panel, but Republicans and Democrats hotly debated a Democratic amendment that would have omitted the controversial education IRA language, added new tax increases, and boosted the bill’s proposals designed to aid public school construction.

The amendment, defeated 12 to 8, would have paved the way for $25 billion extra in financing for public school construction by expanding the availability of tax-exempt financing. Public schools need about $125 billion to pay for needed repairs, reported Sen. Kent Conrad, D-N.D., a sponsor of the amendment. Sen. Charles Robb, D-Va., was another sponsor.

Other offsets in the amendment included correcting a drafting error with the estate tax that would have limited the applicability of the unified credit, repealing the lower-of-cost-or-market accounting method, imposing uniform amortization periods on intangible assets, and denying the deductibility of punitive damages.

Though the Democratic amendment failed, the choice of tax increases is important because Congress may decide to use the same offsets again. Often when a tax increase is used in a bill, a precedent is set, so that the increase is used again and again until it is enacted.

Many of the tax-increase proposals in the bill have been used on other measures that have not been enacted, including proposals to --

• shorten the foreign tax credit carryback from two years to one year and to lengthen the carryforward from five years to seven years,
• limit the nonaccrual experience method of accounting to amounts to be received for the performance of qualified professional services,
• impose information reporting on cancellation of indebtedness by non-bank financial institutions,
• extend Internal Revenue Service user fees, and
• curtail the use of Section 357(c) to get a step up in basis.

Also included in the bill are tax increases Congress has not previously approved, including the proposals --

• to deny the deduction for charitable split-dollar life insurance,
• to allow employers to transfer excess defined benefit plan assets to a special account for health benefits of retirees,
• to impose pre-funding limits on certain employee benefits,
• to repeal the installment method for most accrual-basis taxpayers, and
• to add an item to the list of taxable vaccines.

Prognosis

When the education bill comes before the Senate in June or July, Democrats again will offer an alternative that will sweeten the pot for public schools even more and will attempt to embarrass the GOP, congressional aides said.

Like last year, the bill is turning into a political statement, rather than a vehicle for tax cuts or increases. Republicans want to use the bill to highlight their support for using tax incentives to pay for education needs and Democrats want to stress their support for public education.

An Associated Press poll shows that 56 percent of Americans surveyed pay a tax preparer to file their tax returns, according to subcommittee chairman Rep. Amo Houghton, R-N.Y. "Something is wrong when so many taxpayers with relatively straightforward returns lack confidence in their ability to fill [tax returns] out," Houghton said.

Tax reform has been near the top of the political agenda for several years, but has not emerged as the top issue. For the issue to move forward, the President would have to take an active interest in the issue, political observers say.

Correction – Our story on Monday ("Senate Panel to Mark Up Education Tax Bill May 19") incorrectly stated the proposed change to the foreign tax credit carryforward. The report should have said Roth’s proposal would curtail the carryback from two years to one year, not the carryforward from two years to one year. The report also should have said the carryforward would be extended from five to seven years, under the proposal. The errors have been corrected in the stories now on DT Online.

|  Home   |  Personal Finance Advisor  |  Tax News & Views  |  Growth Company Services  |
|  Contact us!  |  Guest Registry   |   Site Search  |

Tax News & Views is produced by the Financial Counseling Specialists and
the Legislative & Regulatory Services Group at .

Copyright © 1999 . All rights reserved. Copyright and Legal Information.
For feedback or suggestions contact the webmaster@dtonline.com.