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Federal Tax Update: November 24, 2017

Federal Tax Update: November 24, 2017

The U.S. House of Representatives has passed its version of tax reform and it includes a number of provisions that are harmful to the higher education sector.  These provisions include the elimination of a number of tax deductions:

  • Private Activity Bonds
  • The IRA Charitable Rollover
  • The Charitable Deduction
  • The Student Loan Interest Deduction
  • Sec 117(d) Tuition Remission Benefits
  • The American Opportunity Credit
  • The Lifetime Learning Credit
  • Coverdell Education Savings Accounts
  • Sec 127 Employer-Provided Education Assistance

The Senate version of the tax bill, which has yet to be passed, preserves these provisions and deductions. But both versions of the tax bill include a 1.4% excise tax on private college endowment investment returns. Comparing the two, the Senate version is better for our sector and in the end, the House and Senate versions will need to be reconciled in conference committee before a final bill can be brought to a vote. Consequently, the House will have to take another vote before any proposal can become final. Both Senators Stabenow and Peters from Michigan are opposed to both the version passed by the House and the yet-to-be passed Senate version. Because of the differences in the bills and the potential elimination of deductions in the reconciled version, we believe it is still important to reach out to your Members of Congress requesting support for changes in the tax bill.

All of our national organizations (NAICU, ACE, CCCU, and others) have issued data and talking points on the impact each of the higher education provisions eliminated in the House version. MICU has identified a few of the more onerous provisions that we would like to highlight with data from Michigan.

Taxing tuition waivers for employees and graduate students. The House’s tax reform bill would treat qualified tuition reductions as taxable income. This would have devastating consequences for families throughout the United States. Currently, colleges and universities can provide their employees with tax-free tuition waivers that help them or their dependents to attend the college or university. This is a great example of a high-value, low-cost benefit. The college benefits by providing a valuable incentive that helps them attract and retain high quality employees – without passing costs on to students in the form of higher salaries. Employees benefit from the significant reduction on costs for them or their dependents to attend the college – especially employees with multiple dependents. However, under the bill the House passed, this would be treated as taxable income. Our employees would see their taxable income jump by the amount of the annual sticker price tuition for each dependent they have attending the university. This would push that family into a higher tax bracket with taxes payable assuming that the tuition benefit was actual income. In Michigan, 20 of our 25 members provided data which shows:

  • 1,196 staff and dependents currently using tuition remission
  • Another 3,430 estimated to use it in the coming five years
  • Total value of recent year's tuition remission = $1.024 billion.

Abolishing the tax exemption for Private Activity Bonds (PABs). Private, nonprofit institutions, including colleges and universities, use qualified 501(c)(3) private activity bonds to obtain low-cost access to capital. This helps ensure continual improvement of facilities like laboratories, classrooms, and other facilities while still keeping costs low for students. Between 2003 and 2012, this allowed nonprofits to raise $554 billion for capital projects. If the tax exemption had been eliminated over that time period, it would have cost these nonprofits an additional $166.3 billion nationally. Increasing the cost of capital for colleges and universities will ultimately raise the cost of higher education for students or reduce the quality of educational facilities and eliminate or reduce important economic development in communities with higher education institutions. In Michigan for MICU members:

                  • 10 out of 20 reporting members are currently using PABs to finance assets

                  • Currently just over $358 million in PABs issued/owed

                  • Members currently plan to issue another $95 million in the coming five years

Thousands of jobs are supported by investments made using PABs. In Michigan, the construction investment multiplier is 18.1, meaning 18.1 jobs in construction and spin-off jobs in other sectors are created and supported for each $1 million invested in construction projects. This means that in rough terms, the current PAB spend is supporting, or did support during construction, 6,850 jobs. The planned investment would create/support an additional 2,260 jobs. These are not just construction jobs but include the direct construction jobs and everything else that comes with it including services, technology, manufacturing, etc. Additionally, the increased cost of issuing bonds will greatly diminish the ability of institutions to raise affordable capital to finance projects. 

There are other aspects to the tax reform plan that may be more significant to your institution and we urge you to highlight those in any communication with your members of Congress or in op-eds with your local papers. Below are links to other talking points and information from our national organizations for handy reference. Also, we’ve included a short video and an email from individuals that would be impacted by the tuition remittance elimination as a template that you could use to create your own. We recommend emailing your members of Congress or sending mail to their Michigan offices as mail to the D.C. offices often takes three weeks or more to be delivered. To find your member of Congress see the link below.

Find your Representative