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Education-Related Tax Proposals Reviewed by Committee

Several proposals aimed at improving educational opportunities through tax breaks were discussed during a February 15 hearing of the Senate Finance Committee. Chair Charles Grassley (R-IA) opened the hearing, stating, “Families today have a higher tax burden than ever before. We have an obligation to reduce the burden and free up those hard-earned tax dollars so parents can save and pay for their children’s education.”

Sen. Grassley and ranking member Max Baucus (D-MT) are the sponsors of two proposals described during the hearing. The first bill (S. 152) would allow college graduates to deduct student loan payments beyond the current 60-month limit. The second bill (S. 133) sponsored by Sens. Grassley and Baucus would make permanent a provision allowing employees to receive tuition reimbursements from employers without being taxed on them. The provision in current law, which will expire unless it is extended, provides for up to $5,250 in tax-free reimbursements per year for each employee of a private-sector company.

Sen. Susan Collins (R-ME) testified on a measure (S. 203) that would allow teachers and teachers’ aides to deduct professional development expenses without requiring itemization. The measure, cosponsored by Sens. Jon Kyl (R-AZ) and Mary Landrieu (D-LA), also would provide a $100 tax credit for teachers who purchase books, supplies, and equipment for their students. Sen. Collins cited a study by the National Education Association, which found that “the average public school teacher spends more than $400 on classroom materials.” She added: “This sacrifice is typical of so many teachers for their students.”

Sen. Tim Hutchinson (R-AR) told the committee that he and Sen. Robert Torricelli (D-NJ) are cosponsoring a bill (S. 306) to expand Education Savings Accounts (ESAs) by allowing larger contributions. Under current law, there is an annual cap of $500 on contributions to each ESA; the new proposal would increase that limit to $2,000 per year. The bill also would expand the allowable uses for ESA savings. Currently intended for higher education costs only, the proposed legislation would allow the funds to be spent on K-12 expenses, including tuition, tutoring, special needs services, books, and home computers.

In addition, Sen. Hutchinson said the bill would allow corporations, charitable organizations, foundations, and unions to contribute to ESAs. “Companies and unions could offers ESAs as benefits for their employees that could supplement amounts saved by low- and middle-income families,” he said.

Sens. Joseph Biden (D-DE) and Charles Schumer (D-NY) both testified on a bill they intend to introduce together. The proposal would allow up to $12,000 in annual tax deductions for college tuition and fees. Sen. Schumer said families in the 28 percent tax bracket and lower would qualify, providing a maximum annual benefit of $3,360 per student. In addition, he said, single filers with annual incomes below $50,000 and joint filers with incomes below $80,000 could receive a student loan interest tax credit of $1,500. Sen. Mitch McConnell (R-KY) described a bill he intends to introduce with regard to pre-paid college tuition plans. The measure would allow private institutions to establish tax-free plans similar to those already operated by many state governments. The plan also would provide “important consumer protections to ensure that these new plans operate in a fiscally responsible manner,” Sen. McConnell told the committee.

A related bill (S. 289) discussed by Sen. Jeff Sessions (R-AL) would make all of the interest earned on state-sponsored and private tuition savings plans tax-free. “Currently, the interest earned by families saving for college is taxed twice,” he said, adding: “Families are taxed on the income when they earn it, and then again on the interest that accrues on the savings.”

Sen. George Allen (R-VA) testified on his proposal for an education opportunity tax credit, which would provide a $1,000 per-child tax credit to help defray elementary and secondary education costs. Parents with children in grades K-12, he said, could “apply the credit toward the cost of education-related expenses, specifically computer-related technology, education software, and tutoring.” Noting that the credit would not be applied toward tuition costs, Sen. Allen added, “Parents would be able to take advantage of academic tutorial services, bring technology into their homes, or purchase education software and afford Internet access.”

Sen. Tom Harkin (D-IA) described a bill he intends to introduce in an effort to improve the physical condition of public schools. The bill would leverage $1.7 billion in tax credits over five years to pay the interest on $25 billion in school modernization bonds. Sen. Harkin said it is a “disgrace” that “the nicest places our kids see are shopping malls, sports arenas, and movie theaters—and the most rundown place they see is their school.” Reps. Nancy Johnson (R-CT) and Charles Rangel (D-NY) are expected to introduce a House version of the measure.

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