Educational experts strongly criticized President Reagan’s proposal to eliminate the federal income-tax deduction for state and local taxes last week. They argued that such a move would put pressure on states and localities, especially those with high income taxes, to reduce their taxes. This would greatly hinder the implementation of new taxes to fund education reform efforts. In a letter to members of Congress’s tax-writing committees, a coalition of 15 major education groups expressed their concern, stating that the loss of federal deductibility would undermine the primary revenue sources for public schools.
The proposal is a crucial part of President Reagan’s plan to revamp the tax system. This plan involves lowering individual income-tax rates, eliminating various current deductions, and increasing certain corporate taxes. The outlines of the proposal were announced by Mr. Reagan in a nationally televised address last Tuesday. Subsequently, a revised version of the plan, originally drafted by the Treasury Department last fall, was sent to Congress the following Wednesday.
In defense of the proposal to end the state and local deductions, President Reagan argued that it primarily benefits a small number of wealthy individuals in a handful of high-tax states. He pointed out that the majority of Americans do not even itemize their deductions and, therefore, receive no advantage from the state and local tax deduction. President Reagan characterized this situation as "taxation without representation." The Treasury Department estimated that doing away with the deduction would generate $33.8 billion in federal revenue in fiscal 1988.
On Capitol Hill, opinions regarding the plan and its likelihood of passing this session were mixed. Secretary of the Treasury James A. Baker 3rd expressed optimism, stating that there is a fair chance of getting it through Congress this year. However, Representatives Jack F. Kemp (Republican) and Richard A. Gephardt (Democrat), who are sponsors of tax-reform legislation in Congress, criticized the Administration package. Their plans would limit the deductions for state and local taxes, but not eliminate them. Scott Widmeyer, a spokesperson for the American Federation of Teachers, predicted that the deductibility of state and local taxes would be at the center of the debate on tax reform due to its significant impact. Widmeyer also claimed that President Reagan is favoring corporate interests, such as the oil and gas industry, by singling out state and local tax deductions for elimination. Representatives from the midwestern and northeastern "Rust Belt" states also joined in the criticism of the proposed repeal of deductions for state and local taxes. They argued that the residents of their states, who already pay the highest income taxes, would suffer the most.
An editorial in The New York Times warned that if taxpayers in low-tax states receive a net reduction, it would put tremendous pressure on high-tax states and cities to lower their tax rates and consequently reduce their budgets. Senator Daniel P. Moynihan, a Democrat from New York, stated that the elimination of this tax deduction would leave his state with a difficult choice: higher taxes or reduced funding for education. A study conducted earlier this year by the American Federation of Teachers estimated that eliminating the deduction could cost schools an average of $271 per student, totaling approximately $16.5 billion nationwide. The aft, along with other prominent education groups like the National Education Association, the National School Boards Association, the American Association of School Administrators, the Council of Great City Schools, the Council for Exceptional Children, and the National pta, is leading the opposition to this provision on deductibility. Representatives from private education also expressed their opposition to the proposal to end deductions for state and local taxes.
Educators are also concerned about other aspects of the plan, including:
Helen Blank, the director of the day-care division at the Children’s Defense Fund, a local advocacy group, stated that replacing the dependent-care credit with a deduction fundamentally changes the nature of the credit, making it less progressive. Additionally, this change would mean that non-itemizers, whose numbers are expected to increase under the new plan, would no longer have access to the deduction. However, Blank acknowledged that lower-income families would still benefit from the overall tax plan. The Administration predicts that 40% of the proposed dependent-care deductions would be utilized by families with incomes exceeding $50,000. The plan justifies this by stating that progressivity should be provided through personal exemptions and the rate structure, rather than through targeted credits.
The Treasury Department initially proposed eliminating deductions for charitable donations, a move that was vehemently opposed by various organizations dependent on charitable giving, including private schools, universities, foundations, charities, and museums. President Reagan’s new proposal suggests ending the charitable deduction for non-itemizers starting in 1986, while maintaining it for those who do itemize. The plan argues that non-itemizers generally have lower incomes and lower marginal tax rates, so their contributions are not significantly affected by tax considerations. However, groups that objected to the initial proposal still express concern about the latest one. Independent Sector, a coalition of national voluntary organizations, estimates that $6 billion in charitable deductions could be lost since non-itemizers are the primary contributors to charitable causes.
While it remains uncertain how a change in the tax code will impact financial aid, higher education experts predict that any major change is likely to create administrative difficulties. The uniform formula that colleges and universities use to determine a student’s financial need is based on the federal tax code. Dallas Martin, the executive director of the National Association of Student Financial Aid Officers, explains that because student aid calculations depend on parents’ federal tax returns, the need formula and a new tax system may clash with each other.
The current tax code exempts income from scholarships and fellowships from taxable income, unless they are considered compensation for services. The Administration argues that this is unfair to ordinary taxpayers. President Reagan proposes including scholarships and fellowship grants as taxable income. However, for degree candidates, scholarships would still be excluded from taxation to the extent that they are required and actually spent on tuition and necessary equipment for their courses, but not for expenses such as room and board.
Contrary to speculation among education groups, tuition tax credits were not part of the tax overhaul plan, despite an inaccurately reported article in the New York Times. Senator Bob Packwood, a Republican from Oregon, was misquoted in the article as saying that tax credits would be included in the plan. However, his aides clarified that he was asserting the President’s continued support for tax credits, rather than stating that they were actually part of the plan.
