A great deal of ink has been spilled on how the Republican tax bill working through Congress would impact higher education for the worse. The highest profile item is the plan in the House bill to tax graduate student tuition waivers as income, effectively making the young people who are helping the nation move forward with critical research pay taxes on “incomes” that are tens of thousands of dollars higher than they actually get paid. However, higher education takes multiple hits in the House bill such as taxing endowment earnings that go towards school advancement, reducing incentives for charitable giving, and eliminating student loan interest deductions that benefited 12 million borrowers in 2014. For a bill that the G.O.P. is trying to market as a “boon” to the middle class, the House bill does not just tax graduate student tuition waivers, but also it takes aim at tuition benefits for higher education employees and their children. The New York Times portrayed a 64 year old night custodian at Boston College who managed to send all five of his children to college using such a benefit and who would never have been able to do so under the House bill. Assurances from House leaders that their bill would grant most Americans so much tax relief that they would not need those benefits ring hollow as analyses show that various provisions in the bills could result in $1.6 trillion dollars of tax INCREASES on middle class earners over the next decade.
So while the House and Senate bills are not friendly to higher education (the Senate bill somewhat less so), there has been little talk about the potential impact on K-12 education if the Senate bill passes, is reconciled with the House bill, and sent to the Oval Office for splashy signing ceremony. There are several provisions in both pieces of legislation that would take serious aim at K-12 education at the state and local funding levels. Reporters and editorials have stressed that eliminating the deductions for state and local taxes (SALT) including property taxes, as in the Senate bill, will heavily impact Democratic leaning states with higher tax burdens, but the Governmental Finance Officers Association (GFOA) reports that eliminating SALT deductions from the tax code will have a broadly negative impact on tax payers in all states. According to the GFOA findings:
- 30% of tax units use the SALT deduction.
- 60% of deductions for earners under $50,000 a year come from property taxes and the loss of the deduction would negatively impact home ownership and price stability.
- 30% of earners between $50,000 and $75,000 a year use the SALT deduction. 53% of earners between $75,000 and $100,000 a year use it.
- Income earners at all levels would see their taxes go up if the SALT deduction is eliminated.
More importantly from a public school perspective: the loss of the SALT deduction would apply significant pressure on states and municipalities to reduce taxes in order to offset the increases in federal taxes paid by their constituents. Using the 8th Congressional District in Texas north of Houston as a model, the GFOA estimates that the district would see an increase in federal taxes of $306 million dollars. Offsetting that with state and local tax decreases could impact $125 million in school funding. Simply put: education funding is an enormous local and state expenditure, and it would have to be cut in order to provide any relief to tax payers who lost SALT.
There is something incredibly perverse about putting pressure on states and municipalities to cut taxes in order to make up for a federal tax bill that overwhelmingly favors the rich and corporations. It is even more perverse to label that as “middle class tax relief” when the outcome will be potentially disastrous for local schools. The vast majority of K-12 school funding in this country still comes from state and local revenues which would no longer be deductible from federal tax burdens.
It is true that upper income communities benefit significantly from SALT, but it is also true that states with even vaguely progressive school funding systems depend upon those communities being able to foot their own school bills so that state aid can get to needier communities. It was that principle that made New Jersey Governor Chris Christie’s proposal to “flatten” state aid so that all schools got exactly the same amount of aid per pupil so outrageous and – eventually – a non-starter with legislators. The elimination of the SALT deduction would create enormous pressure for additional tax relief from wealthier communities and shrink the revenue available for their own schools via property taxes and for less wealthy communities via state aid packages.
The pain for school budgets would not end with the loss of SALT. The Congressional Budget Office recently scored the tax plan and estimates that it will expand on budget deficits by $1.4 trillion dollars over the next decade. In the short term, current “pay as you go” requirements might cause immediate cuts to Medicare, but as deficits pile up over the next decade, Congress would have to slash as much as $150 billion a year. Federal education spending could look very appealing to future Congresses trying to offset lost revenue unless the trickle down theory suddenly works for the first time ever. Analysts have already identified $2 billion in student loan administration that might go as well as $62 billion in “all other programs.” While the federal contribution to the $634 billion spent in the U.S. on public K-12 schools is only about 8%, that will be a tempting target for future deficit hawks and legislators boxed in by spending rules.
Federal spending K-12, while limited, has a long reach: $14.9 billion in local Title I grants, $11.9 billion in special education grants, $9.1 billion in Head Start for pre-K children. Most of this money is targeted to help states meet the needs of the most vulnerable children in the country – whose communities cannot raise enough revenue through property values. Under this tax bill, states could easily be strangled on both sides of their education budgets with calls to lower state tax rates in response to the loss of SALT deductions and with fewer federal dollars coming in to help the needy.
The tax bill could further hurt education spending by reducing property values, restricting local and state revenue even further. In addition to eliminating (or capping) SALT, the bill reduces the mortgage interest deduction from $1 million to $500,000. Although this more heavily impacts very expensive housing markets, combined with the loss of the SALT deduction, the tax bill would make home ownership significantly more expensive in numerous housing markets, creating a disincentive for buyers across a large range of prices, and potentially depressing housing prices. Although experts differ about the full impact of these factors on the market, the National Association of Realtors warns that home prices could fall as much as 10%. That translates into more lost local revenue in an environment where state school funding still has not recovered fully from the impacts of the Great Recession – when we learned that municipalities were not well positioned to make up for lost state funds. The Center on Budget and Policy Priorities’ analysis found that since the end of the recession, local revenue growth has only averaged 1.5% above inflation, not remotely enough to make up for lost state funds and increasing student populations. If local revenues take another hit through the new tax bill, even that incredibly modest growth is at risk.
The Republican tax bill is a looming threat to K-12 education spending on numerous fronts:
- Blowing a hole in the Federal budget will force Congress to look for savings in future budgets’ discretionary spending, putting money sent to help our neediest students at risk.
- Capping or eliminating the SALT deduction will put intense pressure on state and local governments to cut their own taxes in the face of constituents with higher federal tax bills.
- If those taxes are cut, municipalities won’t be able to generate more money for school budgets, and states won’t be able to generate more money for state aid funding – even as federal sources shrink.
- Disincentives for home ownership in the form of increased costs will put downward pressure on home prices which will further impact local school budgets.
Put together, the threat to public education is evident. This bill threatens federal aid for needy students by exploding the budget deficit, puts pressure on municipalities via decreased home values and loss of property tax deductions, and puts pressure on states via loss of income tax deductions. School budgets HAVE to rise just to keep up with growing student populations and other fixed costs even if there is no concerted effort at school improvement. Flat or decreased funding for any significant length of time threatens numerous factors that impact school quality such as class sizes, the length of the school year, and capital improvements. We saw this play out across the country during the Great Recession and, more recently, with Kansas which plunged deep into a supply side experiment under Governor Brownback – and which precipitated a long term public education crisis.
If the Republicans in Congress pass this tax bill, there’s a good chance that we will all be Kansans next year.