Tax Breaks

On January 20, 2009, Sen. Barack Obama (D-IL) will be sworn in as the 44th president of the United States. Around the same time, millions of college students across the country will be beginning their spring semesters. And these classes will arrive with sizeable tuition bills. Obama has a plan for helping students tackle these costs -- a tax credit for students who perform community service. But the president-elect should take note. Tinkering with the tax code is a less than ideal way to promote college access and affordability.

The cornerstone of Obama's college plan is the American Opportunity Tax Credit. Worth $4,000 annually, it is available to all college students, regardless of income, so long as they complete 100 hours of public service during the academic year. The tax credit is fully refundable, meaning that if a student's tax liability is less than $4,000, they will have their tax bill paid off and then receive a rebate for any leftover credit amount.

On paper at least, the American Opportunity Tax Credit (AOTC) appears far better than existing higher education tax credits. This is especially true with respect to the Hope and Lifetime Learning tax credits, which were championed by Obama's Democratic predecessor Bill Clinton. The Hope credit is worth up to $1,650 (100 percent of the first $1,100 spent on higher education and 50 percent of the next $1,100) for the first two years of postsecondary enrollment. The Lifetime credit, meanwhile, is worth up to $2,000 (20 percent of the first $10,000 spent on higher education) and may be taken so long as students are enrolled.

By Art Hauptman

Both Sens. Barack Obama (D-IL) and Hillary Clinton (D-NY) have made achieving greater college affordability a high profile issue in their Presidential campaigns. To reach this goal, the two Democratic candidates have proposed expanding Pell Grants and consolidating the current set of tax breaks for college into a single refundable tuition tax credit. Sen. John McCain (R-AZ) has thus far been strangely silent on the topic, despite its importance to so many millions of Americans.

The reach of the Democratic contenders' proposals does not match their rhetoric, however. To truly make college more affordable, the next President will need to push for a much fuller integration of student aid and tax provisions for higher education, as I suggested in my guest post last week.

Any effort to change the current system (or non-system) of student financial assistance should first recognize that federal higher education policy has two distinct goals. The first is to eliminate the chronic gaps in the rates at which students from low-income and high-income families (and between minority students and white students) enroll in and graduate from college. Call this the accessibility problem. The second big goal is to make college more affordable for millions of students from middle class and upper middle class families who have found the ever growing price of college to be a real strain on their budgets. Call this the affordability problem.

On August 9, 2007, President Bush noted that he'd be ok with reducing corporate income taxes and simplifying the tax law. On that same day, he signed H.R. 2272 - America COMPETES Act and called for Congress to finish the work and make the R&D tax credit permanent.

He is not alone in this tendency to call for simplification and lower rates, while also calling for new tax breaks. In his remarks about corporate tax rates he observed that "it's much easier to get something in the code than get it out of the code." A very true statement!

http://www.whitehouse.gov/news/releases/2007/08/20070809-1.html

http://www.whitehouse.gov/news/releases/2007/08/20070809-6.html

So, how do we simplify when we also want to use the tax law to solve all kinds of problems from health insurance to encouraging innovation?

Comments?

This post was originally published at http://21stcenturytaxation.blogspot.com.