The dust has begun to settle since the passing of last month’s tax bill, which is informally known as The Tax Cuts and Jobs Act. Being neither an accountant nor a tax specialist, It’s difficult to discern what remains in the final passed version of the bill, given that many of the Senators and Representatives who voted for the hastily passed legislation seem surprised by some of the contents. Yet, we must try to understand what the impact of the bill will be on educational matters.
With regards to education issues, some of the news is good. The utterly ludicrous proposal to scrap a 2002 Congressional provision that allowed teachers to deduct up to $250 for out-of-pocket expenses for their classrooms was dropped. (A survey of teachers indicated that they spend up to $500 out-of-pocket for their classrooms.) Also left in place are deductions of up to $2,500 for student loans (depending on personal income) as well as tuition waivers for graduate students, the removal of either which could be devastating for students who seek higher education.
This is good news for students of higher learning, but how will the tax changes affect the 90% of our nation’s students who attend public elementary and secondary schools? Unfortunately, the new tax bill includes changes that can insidiously affect our schools and our students. No less than five major public school advocacy groups, which represent public school superintendents, school business officials, and rural schools, drafted a letter dated December 15, 2017 prior to the final bill’s passage stating their opposition to it, “The comprehensive tax bill includes provisions that undermine the strength of our nation’s public school systems and compromises the ability of these systems to adequately and effectively provide educational opportunities and services to the students they serve.” Educational advocates are concerned not only about changes in the use of tax-free college savings accounts (529 Plans), but also restrictions on the amount tax payers can deduct for state and local taxes, which in turn are used to fund public education.
Tax-free 529 savings plans were designed to allow families to save for their children's college educations. Interest and capital gains in the accounts were tax-free. Withdrawals were tax-free only so long as they went to pay for higher education costs. However, Senator Ted Cruz proposed allowing unlimited tax-free disbursement of up to $10,000 per child from 529 college savings funds for “public, private or religious elementary or secondary schools.” Opponents of this change decry it as a win for school choice and Education Secretary Betsy DeVos. Even prior to the passage of the new tax law, critics of 529 college-saving plans already argued that these plans were merely a tax benefit for the wealthy. Richard Reeves, a senior fellow at the Brookings Institution, said, “I have yet to find a specific part of the tax code that is more skewed to the affluent than 529s.” Indeed, the Government Accountability Office in 2010 reported that parents who set up these accounts had triple the median income than those who did not and were twice as likely to be college educated.
According to Sasha Pudelski, assistant director for policy and advocacy at the American Association of School Administrators, which represents public school superintendents across the country, “It’s crazy that we’re eliminating the ability of people to deduct their state and local taxes that go directly to local services, including schools . . . while at the same time providing a $10,000 incentive for folks to send their kids to private schools.” Even school choice supporters acknowledge this change will be ineffective in helping families without means to choose the private school they wish for their children. Michael J. Petrilli of the pro-school choice Thomas B. Fordham Institute queries, “Are there people out there who cannot afford school choice and will now be able to? No.” Families without means who use this deduction may additionally be jeopardizing their children's future college educations with the depletion of the funds.
Nat Malkus, the deputy director of education policy at the American Enterprise Institute, a school-choice group, reported that 33 states allowed funds in 529 Plans to be used for private schools prior to passage of the bill. However, this state deduction was rarely used by taxpayers because federal taxes did not similarly allow the deduction. Because of the new federal relief which allows the $10,000 deduction, however, this option is likely to be much more attractive to tax payers, causing states to lose a portion of their taxable base. According to Malkus, this change will benefit private school students at the expense of poorer students. “This is a federal action that changes state tax bases that directly fund public education, and disproportionately go to poor schools.” Malkus said. “As it takes funds out of those tax bases, it gives them directly, in a dollar-to-dollar transfer, to families paying private school tuition.”
Public school advocates are concerned that states, cities, and counties will find it more difficult to fund school districts because state and local taxes will no longer be fully deductible. This may put intense pressure on some states, particularly those with higher property and state income tax burdens, to reduce taxes or make it more challenging to get support for new bond levies for school districts. Additionally, with the increase in the standard deduction and elimination of the personal exemption, philanthropic donations may diminish, which can affect not only public primary and secondary schools, but also private colleges and universities.
The National Education Association teacher’s union expressed concern that the $10,000 cap of deductions for state and local taxes could place more than 130,000 education jobs at risk. (Though a concern, the number is still lower than what the NEA had estimated (250,000 jobs at risk) from the original House version that did not allow taxpayers the first $10,000 deduction.)
To further complicate matters for school districts, school districts will no longer be allowed to use cost-effective, tax-free “advance refund bonds” to refinance school bond debt. According to John Musso of the Association of School Business Officials International, advance refund bonds “are a cost-effective way for districts to refinance high-interest debt at lower-interest rates, potentially saving hundreds of thousands of taxpayers’ dollars in lower debt payments. Another tool used by school districts to reduce total capital costs—qualified school constructions and Qualified Zone Academy Bonds—has also been eliminated.
The net effect of this "tax reform" will be to systematically undermine the effectiveness of public education. However, ill consideration of the bill and its rush to passage will clearly have unexpected consequences, and not just in education. The entire legislative process for this bill violates the wise philosophy of the Iroquois nation which requires us to work and live for the benefit of the next seven generations. But even though our legislators did not, we as educational advocates must look ahead and monitor closely the effects of the new tax law as it is rolled out and prevent as best we can its negative impact on our children; and undo this damage in subsequent legislation.
