The fiscal cliff legislation that has cleared Congress has a number of key tax provisions that are longstanding AACC priorities. Although these items received little attention in the headlines over the final deal, they are extremely important to community college students. Alternatively, the 2-month delay of the across-the-board sequester cuts leaves open the possibility of further spending reductions later this year. The following is a summary of provisions of the American Taxpayers Relief Act (H.R. 8) that are of major interest to community colleges.
Five-Year Extension of the American Opportunity Tax Credit
The legislation extends for 5 years the American Opportunity Tax Credit (AOTC). Largely at the behest of President Obama, the AOTC replaced the Hope Scholarship Tax Credit in 2009 with a more generous credit that better serves community college students. The AOTC is larger than Hope ($2,500 vs. $1,800) and is calculated using a formula that helps students attending low-tuition institutions—for example, it covers books and course materials as well as tuition. The AOTC also is partially refundable, so low-income students with little or no tax liability can benefit from the credit. The credit is reaching millions of community college students each year and nearly 10 million colleges students and their families overall.
As the fiscal cliff neared, the political prognosis for extension of the AOTC was not especially bright because of its cost. The 5-year extension of the AOTC had a $67-billion price tag, a huge sum—roughly twice the annual expenditures on Pell Grants—that is not offset by other spending reductions or tax increases, thereby adding to the deficit. We thank the many of you who responded to our requests for input to members of Congress on this issue. It clearly made a difference and will help community college students finance their education.
Permanent Extension of Section 127 of the IRS Code
As part of the permanent extension of most of the provisions in the 2001 tax cut legislation, Section 127 of the IRS Code has been made permanent. Section 127 allows employees to receive up to $5,250 tax-free in employer-provided educational assistance, and these benefits are often used at community colleges. As such, it has long been a top AACC priority in the tax arena. The provision has been extended on a temporary basis since 1978. The 10-year cost of making this permanent was $11.5 billion.
Student Loan Interest Deduction
The deduction for student loan interest has been expanded and made permanent—good news for the many community college students who are forced to rely on loans to help finance their education. The new legislation permanently extends the enhanced student loan interest deduction, which eliminated a previous cap of 60 months on the duration of deductions and increased the income phase-outs, which start at $60,000 and go up to $75,000 for single filers, and double that for joint filers. The cost of this change was $9.7 billion over 10 years.
As has been widely reported, H.R. 8 postpones for 2 months implementation of the across-the-board sequestration spending reductions for FY 2013. These were estimated to be 8.2% for all nonexempted domestic discretionary programs and therefore would have affected most of the programs of interest to community colleges, although the Pell Grant program was exempted for the upcoming year.
There is every likelihood that a possible elimination or further delay of the implementation of the sequester will take place in conjunction with negotiations over the increase of the national debt limit. At that time, a renewed attempt to enact a comprehensive deficit reduction measure will no doubt occur. Many outcomes are possible, but AACC will remain focused on protecting the general category of nondefense discretionary spending.
The AACC Government Relations and Policy Analysis Team:
- Senior Vice President: David Baime, ext. 224
- Associate Vice President: Jim Hermes, ext. 216
- Legislative Associate: Laurie Quarles, ext. 249
- Program Director, Policy Analysis: Christopher M. Mullin, ext. 258
- Director, Health Professions Policy: Roxanne Fulcher, ext. 274