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GOP Tax Plan Has Few Details But Portends Major Changes for Higher Education

October 2, 2017

Last week, 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.” Both the full framework and a one-page summary are available. 

Given the gridlock on Capitol Hill, it is unclear if there is a path forward for tax reform. Nevertheless, NACUBO urges business officers to understand what is at stake and to assess the potential the plan has to reshape their respective institutions.

The aggregate impact of the various tax reform proposals currently under consideration (but not disclosed in last week’s framework) could be considerable for our nation’s institutions of higher education, impacting budgeting and planning at schools large and small, with detrimental effects on both revenue streams and expenditures.

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. The GOP plan 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 numerous ways. While there are indications that some NACUBO priorities might have support from Republican tax writers, there are many other elements of the framework that indicate several potential provisions are looming that could adversely impact colleges and universities.

Background

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 the recently released framework builds upon the menu of concepts that were included in that 2014 proposed plan. Thus, there is potential that the way higher education institutions operate could be reshaped by forthcoming legislation. In July, a NACUBO webcast, “What Should College Leaders Know About Tax Reform?” explained the issues and urged campuses to take steps to respond. The webcast is available on demand at no cost for NACUBO members.

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.

Institutions can use NACUBO’s statement to the Senate Finance Committee as a guide and consider these talking points on:

College and university government relations staff are invited to contact advocacy@nacubo.org for additional information about weekly NACUBO tax reform updates.

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 the bill that is ultimately enacted. 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: Vulnerable

  • 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.
  • 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 the option to claim the charitable deduction for a substantial number of taxpayers. 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 commissioned a study that 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).”

Endowments: Mixed Outlook

  • NACUBO objects to the endowment excise tax proposed in the House Tax Reform Act of 2014.
  • 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: Mixed Outlook

  • NACUBO requests that lawmakers protect and maintain tax-exempt bond financing, including qualified 501(c)(3) private-activity bonds. Access to these bonds contributes significantly to the financial health of colleges and universities across the United States.
  • 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.

Unrelated Business Income: Vulnerable

  • NACUBO objects to the House Tax Reform Act of 2014 proposals to treat name and logo royalties as unrelated business taxable income (UBI); modify rules concerning qualified sponsorship payments; and compute UBI separately for each trade or business.
  • 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 UBI at nonprofit organizations. NACUBO believes it is very likely lawmakers will propose:
    • Name and logo royalties: Any sale or licensing by a tax-exempt organization if its names or logo would be treated as unrelated, and royalties paid with respect to such licenses would be subject to unrelated business income tax (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, whose primary missions 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 regime of regulations faced only by nonprofits when they’re being treated identically to corporations for taxation purposes.

Workforce Education Benefits: Mixed Outlook

  • NACUBO supports the preservation of Section 127. Further, 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.
  • 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.”  This nonspecific language allows room for the preservation of some provisions and elimination of others. It also means 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 also supports preserving Section 117(d)—the qualified tuition reduction—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.
  • NACUBO supports the current Student FICA exception and believes it is vulnerable to elimination, based upon statements in the framework.

Saving and Paying for College: Mixed Outlook

  • NACUBO supports preserving the tools that encourage and help families save for college: Coverdell Education Savings Accounts and Section 529 College Savings Plans. NACUBO believes there is significant political support for these plans and that it is unlikely they will be eliminated or weakened.
  • NACUBO supports expanding the Student Loan Interest Deduction but believes 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. A single, permanent, refundable credit with automatic inflation adjustments, 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 the framework supports these goals, but it is unclear how the specific credits might be enhanced or diminished without further details.

Other Issues to Consider

State and Local Tax Deduction: Mixed Outlook

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.

The Government Finance Officers Association has prepared a study that provides a state-by-state analysis of the impact of eliminating the SALT deduction.

NACUBO believes that this is the one of the most tenuous elements of the framework and is unlikely to withstand intense 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, “to further simplify tax filing and provide tax relief for middle-income families, the framework repeals the personal exemptions for dependents.” 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.

ADDITIONAL RESOURCE

NACUBO in Brief podcast episode: NACUBO's Liz Clark Details the Higher Ed Implications of the Republican Tax Plan

Contact

Liz Clark
Director, Federal Affairs
202.861.2553
E-mail

Mary Bachinger
Director, Tax Policy
202.861.2581
E-mail

Megan Schneider
Assistant Director, Federal Affairs
202.861.2547
E-mail