Davis and Black Unveil the Student and Family Tax Simplification Act

Davis and Black Unveil the Student and Family Tax Simplification Act

October 30, 2013

Legislation simplifies tax code so families can more easily afford the cost of a higher education

(Washington, DC ) Today, Representatives Danny K. Davis (D-IL) and Diane Black (R-TN) introduced the Student and Family Tax Simplification Act. The legislation is designed to make it easier and simpler for families to afford the costs of higher education by consolidating four separate tax provisions into one, improved and more robust education tax benefit.

"Streamlining the number of education provisions and retooling those that are most effective allows us to simplify the code and reduce some of the confusion that exists in the tax code today," said Congressman Black. "As a result, students can spend less time figuring out how to finance the cost of a higher education and more time developing the skills they need to succeed in a knowledge-based economy. Our bipartisan bill makes commonsense reforms to make the tax code simpler and fairer when it comes to helping Americans afford the cost of a college education."

Davis stated, "Education is key to the economic well-being of our citizens and our democracy. This bipartisan bill simplifies our tax code and strengthens our investment in students and their families, expanding aid for the lowest-income students. The improvements within the bill will help increase college affordability, access, and completion."

The legislation consolidates four existing education provisions — the Hope Credit, the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit, and the tuition deduction — into a single, modernized and strengthened AOTC. The new AOTC, which would be permanent and partially refundable, would:

· Provide a 100-percent tax credit for the first $2,000 of eligible higher education expenses and a 25-percent tax credit for the next $2,000 of such expenses (for a maximum credit of $2,500).

· The first $1,500 of the credit would be refundable, meaning that families could receive the benefit regardless of whether they have Federal income tax liability.

· The credit could be used to offset expenses for tuition, fees and course materials.

· The credit would be available for up to four years of post-secondary education at qualifying four-year universities, community colleges, and trade and vocational schools.

· The credit would begin to phase out for families with incomes between $86,000 and $126,000 (half those amounts for single individuals), ensuring that the credit provides the greatest benefit and value to low- and middle-income families.

Black and Davis began working on the issue of simplifying tax incentives for higher education earlier this year. The two served as the Chair and Co-Chair of the Tax Reform Working Group on Education, one of 11 separate working groups established by Ways and Means Committee Chairman Dave Camp (R-MI) and Ranking Member Sandy Levin (D-MI). The working groups were tasked with reviewing current law in their designated issue areas and then identifying, researching and compiling feedback related to the topic of the working group.

After reporting back to the committee, Black and Davis continued working together, resulting in today's introduction of the Student and Family Tax Simplification Act.

EXTENSION OF REMARKS
CONGRESSMAN DANNY K. DAVIS
STATEMENT ON THE INTRODUCTION OF THE BIPARTISAN
STUDENT AND FAMILY TAX SIMPLIFICATION ACT
OCTOBER 30, 2013

Education is key to the economic well-being of our citizens and our democracy. Today, I am pleased to join my colleague, Diane Black from Tennessee, in introducing the Student and Family Tax Simplification Act. This bipartisan bill simplifies our tax code and dramatically strengthens our investment in students and their families, expanding aid for the lowest-income students.

Tax-based aid represents more than half of all non-loan federal aid, playing an important role in promoting college affordability, access, and completion. As partners in the Ways and Means Education and Family Benefits Tax Working Group, Congressman Black and I heard from dozens of experts about the need to improve education tax benefits. There was surprising agreement among politically-diverse stakeholders about the problems of and promising reforms to tax-based education benefits. The Student and Family Tax Simplification Act is a bipartisan effort to implement stakeholder recommendations for reform.

Education tax experts described current education tax benefits as complex and poorly targeted. The greatest agreement centered on creating one credit for current education costs to improve the simplicity, awareness, and use of tax benefits. Stakeholders highlighted that the complexity of multiple benefits makes it difficult for taxpayers to understand whether they qualify for a benefit and which benefit best meets their needs. Indeed, a study by the Government Accountability Office showed that 1.5 million tax filers who qualified for either the Tuition and Fees Deduction or the Lifetime Learning Credit in 2009 did not claim the credit or deduction; another 237,000 did not claim optimal benefits. To improve the effectiveness of the American Opportunity Tax Credit (AOTC), both conservative and progressive stakeholders urged policymakers to target benefits to low- and moderate-income taxpayers whose college enrollment and persistence decisions are more sensitive to cost.

The Student and Family Tax Simplification Act simplifies education benefits by consolidating the Hope Tax Credit, the Tuition and Fees Deduction, and the Lifetime Learning Credit into the AOTC, creating a single credit for current educational expenses. The bill also extends the AOTC permanently rather than allowing it to expire in 2017 and preserves the value of the credit over time by adjusting for inflation starting in 2018, an important provision given that college expense have risen much quicker than inflation for many years.

In addition, the bill creates an improved, more robust education tax benefit for low-income students in multiple ways. It adopts the upper phase-out limits for the Hope tax credit adjusted for inflation, which focuses aid on families whose incomes are in the bottom 80% of income distribution. The bill also doubles the current phase-out range for single and joint filers to create a more gradual phase-out of the benefit and to reduce the effective marginal tax rate associated with the phase-out. These changes phase-out the credit for single tax filers between $43,000 to $63,000 ($86,000 to $126,000 for joint tax filers).

The bill expands aid to low-income students by increasing the amount of credit available and removing obstacles to claiming the credit. This bill increases the maximum refundable credit from $1,000 to $1,500. It also changes the process of awarding the credit from covering a proportion of total eligible expenses to covering the first qualified expenses. Currently, a family would have to have $4,000 in expenses to claim the $1,000 refundable credit; under the new bill, low-income families could claim the full $1,500 refundable credit after only $1,500 in eligible expenses, greatly enhancing the effectiveness of the credit for low-income families.

The bill also allows students to combine Pell Grants and AOTC to address unmet financial need. Due to poor coordination between Pell grants and the tax code, an estimated 1 million college students with unmet financial need do not receive any benefit from the AOTC, with the vast majority of these students attending low-cost institutions such as community colleges. The bill improves coordination between the AOTC and Pell without double counting the same expenses as well as excludes Pell grants from taxation to simplify compliance.

In closing, the Student and Family Tax Simplification Act will help streamline education tax benefits, making it easier for students and families to understand and take advantage of education tax benefits. Further, it will substantially increase federal assistance for education for the lowest-income students and families, improving the affordability of higher education.