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When Congress returned to Washington last week, appropriators quickly turned to unfinished business. The bipartisan deficit reduction committee—the so-called supercommittee—commenced its work by naming Republican Mark Prater, a senior-level Senate Finance Committee aide, to serve as its staff director. Sarah Kuehl, a high-level aide for Senate Budget Committee Democrats, will serve as deputy staff director.

As legislators focus on completing the FY12 spending bills and deficit reduction legislation on the order of $1.5 trillion, decisions made this fall could set spending and tax policies for the next 10 years. Given the bruising political debates over this year’s budget agreement to avert a government shutdown and a deal to lift the federal debt ceiling and address deficit spending, Congress is likely headed into weeks, if not months, of heated debate and contentious rhetoric.

On a more positive note, House Majority Leader Eric Cantor (R-VA) recently called for full repeal of the 3 percent withholding requirement and identified this issue as a House Republican priority for passage this fall. Although the 3 percent withholding requirement was enacted in Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222), implementation has been postponed several times. NACUBO believes this requirement will have a disparate impact on large state colleges and universities, as well as some of the nation’s larger community colleges, by imposing significant, unnecessary financial burdens that further exacerbate financial strains on public institutions.

Outlook for Pell Grants

While the debt deal provided $17 billion to help fill a budget gap in the program, CBO estimates provided in August indicate that appropriators still need roughly $1.3 billion to maintain the maximum Pell grant at $5,550 in the FY12 budget.

The Budget Control Act caps discretionary spending. Consequently, if appropriators choose to maintain the $5,550 maximum award, the $1.3 billion could possibly be found through additional cuts to other student aid programs, cuts to other budget lines important to colleges and universities, or even legislative changes to the award calculation and Pell Grant award rules.

Revenue Options Could Affect Higher Ed

Should the supercommittee consider revenue-raising options, legislators may seek to limit tax-exempt interest for newly issued municipal securities. While the savings from lower interest rates on municipal bonds benefits public projects, critics typically view the tax exemption for bond buyers as primarily benefiting those in high-income tax brackets.

Among the revenue-raising ideas offered previously by the Obama Administration has been a limit on itemized deductions, including the tax deduction for charitable contributions. The Administration’s FY 2012 budget proposed limiting at 28 percent the value of tax deductions for charitable donations, state and local taxes, and mortgage interest for families earning more than $250,000. The charitable sector is concerned that the supercommittee will consider this proposal as it seeks to reduce the federal deficit.

Undoubtedly, the foregone revenue for the federal government from each of these politically popular provisions will be closely examined—and measured against other large tax expenditures, such as preferential treatment for home mortgage interest, capital gains, and the deductibility of state and local taxes.


Liz Clark

Vice President, Policy and Research


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