At the end of September, the White House and top congressional Republican officials released a nine-page summary plan for tax reform, the “Unified Framework for Fixing Our Broken Tax Code.” The summary framework does not contain legislative language and is silent on a number of higher education issues. However, NACUBO urges campus business officers to prepare presidents, trustees, and other campus leaders for what the framework may portend, as the plan could reshape higher education in many ways.
The overarching goals of the tax writers are to simplify the tax code, stimulate economic growth, and “bring back trillions of dollars that are currently kept offshore to reinvest in the American economy.” The plan centers on efforts to lower the corporate tax rate, reduce the number of individual brackets, and reduce individual rates, and would:
- Collapse the current seven individual tax brackets into three brackets of 12 percent, 25 percent, and 35 percent.
- Raise the standard deduction, thus eliminating the need for most taxpayers to itemize.
- Reduce the corporate tax rate from the current 35 percent to 20 percent.
The framework offers few additional details and includes many bullet points that are ambiguous and could be interpreted in numerous ways.
Given the gridlock in Washington, the forecast for passage is uncertain; lawmakers may be able to move only a small tax cut bill, as opposed to a larger, comprehensive tax reform package; or they may be unable to move any legislation—and tax reform could be stymied, just as efforts to pass an Affordable Care Act repeal bill were thwarted.
Since 2014, when a draft tax reform plan emerged from the House Ways and Means Committee, NACUBO has been analyzing proposals, consulting with tax policy experts, and meeting with congressional offices to better understand what lawmakers are deliberating that might impact students and their families, the higher education workforce, and campus finances.
Most tax policy analysts believe that the recently released framework builds upon the the 2014 proposed plan, that included many concepts, which, if enacted, could reshape the way colleges and universities operate.
Interpreting the 2017 “Unified Framework”
Without details, and given the ever-changing and unpredictable environment on Capitol Hill, it is hard to state with confidence what will be included in a final tax bill. However, NACUBO offers these observations on priority issues of concern based upon analysis, discussion, and dozens of meetings with policymakers, coalition partners, and other interested observers.
Charitable giving. The framework states that it “eliminates most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions.” However, the proposal to significantly increase the standard deduction removes for a substantial number of taxpayers the option to claim the charitable deduction; some estimate that only 5 percent of taxpayers would itemize their tax returns in the future.
While the framework does not eliminate the deduction, it creates a system in which, for many donors, income used for charitable contributions will be taxed. The charitable deduction will cease to be an incentive for giving for a considerable number of donors. Independent Sector recently commissioned a study, which found that “an increase in the standard deduction and a decrease in the top marginal tax rate, would decrease charitable giving, including giving to religious institutions, by as much as $13.1 billion a year (4.6 percent).”
To dampen the effects of this change, NACUBO supports enactment of a universal, or above-the-line, charitable deduction that would allow all American taxpayers to subtract their charitable gifts from their income before they determine whether to take the standard deduction or itemize their tax returns.
Endowments. The framework is silent on endowments. In 2014, tax writers proposed a new excise tax, and lawmakers have subsequently raised questions and offered other proposals to alter endowment management. NACUBO remains attentive to this issue.
Tax-exempt bond financing. The framework does not propose any changes to municipal bonds, but it does not exclude the possibility for changes that could alter access to the tax-exempt market, as proposed in 2014. NACUBO remains attentive to this issue, as well.
Unrelated business income. The framework states, “Special tax regimes exist to govern the tax treatment of certain industries and sectors. The framework will modernize these rules to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.” NACUBO interprets this to mean that lawmakers will propose reforms to the treatment of unrelated business income (UBI) at nonprofit organizations. NACUBO believes it is very likely lawmakers will propose the following:
- Taxing name and logo royalties. Any sale or licensing by a tax-exempt organization of its names or logo would be treated as unrelated trade, and royalties paid with respect to such licenses would be subject to UBIT.
- Separately computed UBIT. Tax-exempt organizations would be required to calculate separately the net unrelated taxable income of each unrelated trade or business.
- Qualified sponsorship payments. The UBIT exception for qualified sponsorship payments would be significantly scaled back.
NACUBO firmly believes that colleges and universities, the primary missions of which are related to education, research, and service, should pay taxes on unrelated business activities that do not meet the criteria of the statute. However, recordkeeping and reporting guidelines must be fair and not unduly burdensome, and should not involve a separate, punitive regime of regulations faced only by nonprofits when they’re being treated identically to corporations for taxation purposes.
Workforce Education Tax Benefits
The framework states that lawmakers plan to retain “tax benefits that encourage work, higher education, and retirement security. The committees are encouraged to simplify these benefits to improve their efficiency and effectiveness.” However, the framework is silent on the details, so this language allows room for the preservation of some provisions and elimination of others. It also provides for the possibility that some benefits could be boosted while others could be scaled back.
NACUBO believes that lawmakers are unlikely to target Section 127 for elimination. It is unclear if they plan to expand the program. NACUBO supports the preservation of Section 127. When it was enacted as an expiring tax benefit in 1978, Section 127 was intended to allow employers to completely cover the cost of higher education. Unfortunately, the benefit amount of $5,250 annually has not been increased in almost 40 years.
NACUBO supports proposals that emerged in the last session of Congress to expand and improve the benefit by increasing the $5,250 limit, expanding the eligible uses to include loan repayment, and allowing the benefit to be available to spouses and children of employees.
NACUBO also supports preserving Section 117(d), which permits educational institutions, including colleges and universities, to provide employees and their spouses or dependents with tuition reductions that are excluded from taxable income. NACUBO believes this provision, which is a valuable tool for recruiting and retaining employees at institutions of higher education, is vulnerable to elimination.
Further, NACUBO believes the current student employee federal payroll tax exemption is vulnerable to elimination, based upon statements in the framework.
Saving and Paying for College
NACUBO supports preserving the tools—Coverdell Education Savings Accounts and Section 529 College Savings Plans—that encourage and help families to save for college; believes that there is significant political support for these plans; and predicts that it is unlikely they will be eliminated or weakened.
NACUBO also supports expanding the Student Loan Interest Deduction, but believes that this deduction will be eliminated based on the framework’s fundamental plan to increase the standard deduction. It states that “in order to simplify the tax code, the framework eliminates most itemized deductions.”
NACUBO supports simplifying and adjusting the incentives that help students and families pay for college and employers build a skilled workforce. Taxpayers would benefit from simplification of the current system through the creation of a single, permanent tax credit with automatic inflation adjustments, making it easier to use and overall more effective.
A single, permanent, refundable credit, available beyond the first four years of college, would negate the need for the separate higher education provisions, which currently include the American Opportunity Tax Credit and the Lifetime Learning Credit.
NACUBO believes that the framework supports these goals, but, without further details, it is unclear how the specific credits might be enhanced or diminished.
Other Issues to Consider
A number of other developments remain in play.
State and local tax deduction. The framework calls for the elimination of the ability for taxpayers to deduct state and local taxes (SALT). The deduction impacts the way states and localities budget and has been fundamental to the relationship between levels of government for more than 100 years; it is critical to the stability of state and local government finance.
NACUBO believes that this is the one of the most tenuous elements of the framework and is unlikely to withstand the political pressure from states and municipalities to remove it from consideration. However, NACUBO strongly urges colleges and universities—particularly community colleges and other state colleges and universities—to examine the potential impact of the elimination of this deduction.
Elimination of personal exemptions. The framework also proposes repealing the personal exemptions for dependents “to further simplify tax filing and provide tax relief for middle-income families.” This was one of the most surprising elements of the framework to many tax policy experts in Washington.
Currently, taxpayers can claim an exemption for a child who is enrolled as a full-time student and under age 24. It appears that these students would no longer be considered dependents.
Call to action. The legislative process in Washington has changed. As we have seen with efforts to repeal the Affordable Care Act, congressional leaders may not introduce or make public detailed legislation until they are ready to vote on it. It is highly unlikely that we will have months—or even weeks—to examine, interpret, and consider the details.
If Republican leaders find a path forward to pass comprehensive tax reform legislation in the coming months, there will be no time to “play defense.” Colleges and universities concerned with the implications for their institutions should weigh in with lawmakers now.
RESOURCE LINK After press time, there may have been further developments, and policymakers may have made additional details available. Please check the NACUBO Website at www.nacubo.org, or contact NACUBO’s federal affairs team for the latest updates on tax reform efforts from Washington.