The 1997 Budget Deal - What It Means to Taxpayers

Policy Backgrounders | Taxes

No. 144
Wednesday, February 04, 1998
by Bruce Bartlett


Whereas the child credit and capital gains and estate tax relief were major priorities of the Republican Congress, the Clinton administration was keen to initiate new tax incentives for education. The principal education provision that passed was the Hope scholarship program, which provides a tax credit up to $1,000 for the first year of tuition at a postsecondary institution and $500 for the second year. The credit is not refundable and is phased out for families with AGIs above $80,000. It will reduce federal revenues by $76 billion over the period 1997-2007, according to the JCT.

Although politically popular, new tax subsidies for higher education have been heavily criticized by economists. Economist Robert Moore argues that current tax treatment of education expenses already approximates the tax treatment of physical capital. He views additional tax incentives for education as tilting the tax code in favor of human capital and against physical capital.34

Other economists emphasize that the tax credit targets the wrong people. Since it is not refundable, it is not available to the poor who most need education subsidies. Its main effect will be to cut the taxes of families who would have sent their children to college anyway.35 Thus the credit is unlikely to increase aggregate human capital in the economy by very much. Economist Julie-Anne Cronin estimates an increase in enrollment of just 150,000 students per year.36

Furthermore, the education credit may engender tuition inflation, especially among two-year colleges. In 1994-95 fully one-third of such colleges charged students less than $1,000 to attend.37 Raising tuition to the $1,000 credit level will cost them virtually nothing. But they may need to expand facilities if demand increases.

"The most needy don't qualify for the new education credit, and those who qualify are not needy."

In summary, the new education credit does little to increase the availability of higher education. The most needy do not qualify, and those who qualify are not needy. The benefits may be entirely negated if tuition levels rise in response to the credit.

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