NCPA - National Center for Policy Analysis

Are Tax Credits the Best Solution for Education?

August 1, 2013

Senator Marco Rubio (R-Fla.) and Congressman Aaron Schock (R-Ill.) recently introduced the Higher Education and Skills Obtainment Act, which would reform the current tax subsidies for higher education by eliminating the current assortment of education tax credits and deductions and consolidating them into one higher education credit called the Higher Education and Skills Obtainment Credit. This proposal reduces some complexity that exists in the present tax benefits for higher education, targets the credits for a narrower population of taxpayers and saves taxpayers money, says Kyle Pomerleau, an economist for the Tax Foundation's Center for Federal Tax Policy.

However, there are still problems with using the tax code to subsidize higher education.

  • Tax credits for higher education are likely contributing to rising tuition costs while not making students any more likely to enroll in college.
  • Although this reform is a step in the right direction toward a simpler tax code, there is still the question of whether the tax code is the right tool for making college more affordable.

Lawmakers have increasingly used tax credits as a way to help students cover the cost of college. From 1998 -- the first year these credits were available -- to 2010, the use and cost of these credits has greatly increased.

Although there are three tax provisions for educational expenses, taxpayers can only claim one of the three available tax benefits.

  • This means a taxpayer must calculate his or her income, school expenses and potential tax savings for each of the benefits above to determine which one would be greater.
  • With any tax provision, the economic cost of the program will exceed its budgetary cost. This means that mere compliance with the tax code will cost society more than any direct cost it has to taxpayers. As the complexity of provisions increases, so does the cost to society.

On top of compliance costs, higher education tax credits have a second economic cost: they are susceptible to fraud. This is due to the high complexity, generosity and lax IRS oversight of many of these programs.

Although not as bad, higher education tax credits also suffer from additional costs due to improper payments. According to the Treasury Inspector General for Tax Administration, "Some taxpayers claimed the Hope Credit for more years than allowed," costing over $232 million. Additionally, since the IRS doesn't require documentation that proves whether a student is eligible or even attends an accredited educational institution, there have been significant improper payments made through the American Opportunity Credit.

Source: Kyle Pomerleau, "The Higher Education and Skills Obtainment Act: A Proposal to Reform Higher Education Tax Credits," Tax Foundation, July 24, 2013.


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