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Senate Finance Committee Hearing Witnesses Discuss American Opportunity Tax Credit, Endowments and Tax-Exempt Bonds

The Senate Finance Committee held a hearing on Tuesday, June 24, titled, "Less Student Debt from the Start: What Role Should the Tax System Play?" Witnesses at the hearing included Mark Mazur, Treasury assistant secretary for Tax Policy; Jayne Caflin Fonash, director of School Counseling, Loudoun Academy of Science in Sterling, Va.; Scott Hodge, president of the Tax Foundation; Amber Lee, graduate of Willamette High School in Eugene, Ore., and Dean Zerbe, national managing director of alliantgroup.

Chairman Ron Wyden (D-OR), opened the hearing by stressing the need to act on a bipartisan basis on education-related tax reforms. "Simplifying the tax code and making education incentives more user friendly is not just possible—it's essential," he stated. "There are common sense steps I believe this committee can take on a bipartisan basis to help students avoid taking on paralyzing amounts of debt."

In his opening statement, Ranking Member Orrin Hatch (R-UT) said, "I think there is a lot of agreement that the education tax incentives are very complex and, at a minimum, should be consolidated and reformed." He added that lawmakers need to ask themselves a number of questions as they consider such reforms, including "whether federal subsidization of higher education is good policy and whether a tax subsidy would be provided more efficiently by direct spending."

Assistant Secretary Mazur outlined several of the Obama administration's education tax reform priorities including modifying reporting of tuition expenses and scholarships on Form 1098-T information returns filed by institutions of higher education. His written testimony specifically calls to modify Form 1098-T reporting so that institutions of higher education must report amounts of tuition paid. In addition, the proposal would require that, "any entity issuing a scholarship or grant in excess of $500 that is not processed or administered by an institution of higher education report the scholarship or grant on Form 1098-T. Institutions of higher education would continue to report the scholarship and grants that they process or administer. Better reporting of tuition and scholarships will assist taxpayers in preparing their returns and allow IRS to monitor and improve compliance."

Zerbe suggested that the committee consider establishing standards for colleges and universities to be eligible for certain federal tax benefits—including eligibility for tax-exempt bond financing. Zerbe also suggested that the committee consider requiring that large college and university endowments meet a 5 percent-per-year payout rate. Sen. Charles Grassley (R-IA) asked Zerbe, his former staff member, a series of follow-up questions regarding his recommendation that Congress require a minimum 5 percent payout rate from certain large university endowments. Sen. Grassley said he was concerned that a 5 percent payout rate might become a ceiling, rather than a floor.

The witnesses' testimony and the opening statements of Wyden and Hatch are available on the Senate Finance Committee's Web site.

Two days after the hearing, the Senate Finance Committee introduced the "Preserving America's Transit and Highways Act of 2014." The bill includes an amendment that "requires paid tax return preparers who prepare federal income tax returns on which an American Opportunity Tax Credit is claimed to meet due diligence requirements similar to those applicable to returns claiming an Earned Income Tax Credit."

An earlier version of the highway funding bill also would have required colleges and universities to require Box 1 reporting (amounts paid) on IRS Form 1098-T. However, the provision was removed from the subsequent version of the legislation introduced at the mark-up.

House Ways & Means Mark-Up

On Wednesday, June 25, the House Ways and Means Committee approved H.R. 3393, the Students and Family Tax Simplification Act, on a party-line vote with 22 Republicans voting in favor and 13 Democrats opposed.

The Act would combine the Hope Credit, the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit (LLC), and the tuition deduction into a single AOTC and make it permanent. The consolidation however would only apply for four years of education and would detrimentally impact graduate students, as well as some low- and middle-income undergraduate students who are part time or take longer than four years to complete their education.

H.R. 3393, if ultimately passed into law, would require Box 1 (amounts paid) reporting on the IRS Form 1098-T. Rep. Ron Kind (D-WI) raised concerns about this provision saying, "I've heard from many of our universities back in Wisconsin about this provision. It's my understanding from listening to universities that some students are going to get caught in kind of [a] no man's land in the transition of billed or paid and the distinction there."

Rep. Danny Davis (D-IL) noted that conservative and progressive educational organizations and groups have raised concerns that the current education tax benefits are poorly targeted to lowest income families. He also noted that many of the community colleges in his district have raised concerns to him about the difficulty of coordinating the AOTC and Pell Grants.


In 2013, both the House and Senate began groundwork on the overhaul of the federal tax code. In general, most members of Congress agree that the tax code is enormously complicated and that simplification would benefit both the government and taxpayers. However, there are deep divides on fundamentals including the role taxes will play in addressing the deficit and economic growth. A comprehensive deal is unlikely anytime soon, but all aspects of the tax code are being inspected thoroughly.

While Congress is unlikely to pass a major tax overhaul this year, they are expected to pass legislation to temporarily fund transportation programs (the highway bill) and legislation to temporarily renew some tax provisions that expire on December 31, 2014 (tax extenders) before the end of the calendar year. It is possible that lawmakers may try to include piecemeal reforms to the federal tax code as a part of these negotiations.


Liz Clark

Vice President, Policy and Research


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