Five Questions About the Fiscal Cliff
November 16, 2012
Both college students and higher education institutions have a lot at stake as President Obama and the lame-duck Congress return to Washington, DC to address the "fiscal cliff"- that is; the looming expiration of numerous tax provisions; the federal budget sequester slated to begin in January; the federal debt ceiling; as well as other major economic policy decisions, such as unemployment benefits and the current rates paid to doctors under Medicare. Below are a number questions business officers might have about what lies ahead.
If the federal sequester begins as scheduled in January, how will it impact federal student aid programs?
The Pell Grant, among a select few programs with special treatment, is protected for—one year only—from sequester cuts during federal fiscal year 2013. By and large all other federal student aid programs would be cut 7.6 - 8.2 percent, according to a report released by the White House Office of Management and Budget (OMB) on September 14. Supplemental Educational Opportunity Grants and Federal Work-Study would be cut by 7.6 percent across the board. Federal college access programs, such as TRIO and GEAR UP, would see an 8.2 percent cut. The 1 percent origination fee for unsubsidized Stafford student loans would be raised by 7.6 percent, to about 1.1 percent of a total loan.
Will the sequester cut federally-funded university research?
Yes, federal budgets that support academic research and development will be hard hit. Most federal research budgets at agencies such as the National Institutes of Health, National Science Foundation, and Department of Energy would see an 8.2 percent reduction, but defense research would be subject to a 9.4 percent reduction.
As lawmakers attempt to strike a budget deal, what are the implications for tax-exempt organizations?
Given current concerns about the federal deficit, legislators are considering various spending cuts as well as new revenue sources. Among the revenue ideas that have been offered are numerous proposals to limit itemized deductions, including the tax deduction for charitable donations, and eliminating or limiting tax-exempt interest for all newly-issued municipal bonds. These proposed policies would impose barriers that could limit charitable giving or create turbulence in the tax-exempt bond market.
Will students be impacted by expiring tax provisions?
Yes. The American Opportunity Tax Credit (AOTC) is set to expire at the end of 2012, and without extension, will revert to the Hope Scholarship Credit. The AOTC significantly enhances and broadens the permanent Hope Scholarship Credit by: increasing the credit from $1,800 to $2,500; expanding eligible expenses; making it available for four rather than only two years, increasing the income phase-out thresholds; and making the credit partially refundable.
Additionally, the student loan interest deduction (SLID) allows individuals earning under $60,000 (or $120,000 for couples filing jointly) to deduct up to $2,500 in student loan interest. Individuals earning between $60,000 and $75,000 (and couples filing jointly earning between $120,000 and $150,000) receive a prorated deduction. Unless the current SLID is extended, the deduction will revert to an older law in which student loan interest will be deductible only for the first 5 years of repayment, with more limited income thresholds.
Also expiring at the end of 2012 is Section 127 of the Internal Revenue Code, which allows an employer to offer an employee up to $5,250 per year in tax-free educational assistance for undergraduate or graduate-level courses. This benefit covers tuition, fees, books, supplies, and equipment, and has been an important means of building the competencies of the workforce. Without extension of Section 127, these benefits must be included in an employee's gross taxable income.
The so-called "super committee" failed to come to agreement last year. Can a status quo Congress and Administration find a solution or will we be pushed over the cliff?
President Obama and congressional leaders began official negotiations in earnest on Friday, November 16. Some politicians and others, including corporate leaders, are calling for a "grand bargain," that is, a sweeping deal that would include a myriad of spending cuts and, possibly, some tax increases. Most Washington insiders believe there will be some type of temporary agreement to, at the very least, postpone the sequester and the expiration of some or all of the Bush tax cuts, but that divisions are too deep to come to a major agreement in the lame-duck Congress. Some also believe that the tax proposals on the table are too complicated to implement before the end of the year and that negotiators will need to buy time by punting the discussion into the New Year. Congressional tax writing committees may successfully make the argument that comprehensive tax reform needs to be a longer-term process, and that sweeping changes to the tax code should not be a part of current talks.
NACUBO encourages you to submit additional questions about the post-election environment and the fiscal cliff that you would like to see addressed in future editions of Current. Please submit your question for consideration to Liz Clark .
Director, Congressional Relations