Kristin Tyndall, Senior Editor
The House and Senate voted mostly along party lines across Dec 19-20, 2017 except then it needed to go back to the House.
President Trump signed the tax overhaul into law on Friday, Dec 22, 2017. He quickly organized an impromptu ceremony after reporters questioned him about his promise to sign the legislation before Christmas.
When the Senate released its version of the tax bill, the EAB Daily Briefing rounded up higher education's top four concerns about the bill. Below, we explain how each of those issues fared in the final tax law.
Concern 1: Potential funding cuts
Result: Little change to cost estimates
Prior to the bill's passage, the Joint Committee on Taxation projected the Senate bill would add more than $1 trillion to the deficit and the House bill would add $1.4 trillion to the deficit. At the time, higher education leaders expressed concerns that future efforts by the federal government to offset that cost, along with other provisions in the bill, could end up leading to funding cuts for colleges and universities.
The final version of the law includes no significant changes on this issue. Official estimates place the total cost of the legislation at around $1.46 trillion, similar to previous estimates.
One reason the law could lead to cuts is that many states peg their tax rates to the federal rate, which means they would also need to lower taxes next year. But this could create significant shortfalls in state budgets—and states showed during the recession that, in such situations, they're willing to make drastic cuts to higher education appropriations.
Concern 2: Reduced incentives for philanthropy
Result: Increase to standard deduction preserved
Both the House and Senate versions of the tax bill increased the standard deduction for taxpayers, which philanthropy leaders argued removed a major incentive for middle-class families to donate to nonprofits, including colleges and universities.
The final version of the law preserves the increase to the standard deduction. However, it's only temporary. The standard deduction increase is scheduled to end in 2025, along with all other individual tax cuts in the legislation.
In an interview with NPR, United Way Worldwide President and CEO Brian Gallagher said it's hard to quantify the potential effect on donations, but roughly 82% of all charitable giving comes from people who itemize, and around 30 million people are likely to stop itemizing under the new law.
"Raising the standard deduction could have an outsized impact on charitable giving, with the Lilly School of Philanthropy estimating up to a $13 billion decrease in giving," said Jeff Martin, senior consultant and advancement researcher at EAB, commenting on an earlier version of the bill. "This comes at a moment when colleges and universities are depending more and more on philanthropy," he added.
Why mid-level donors matter
Concern 3: A slippery slope of endowment taxes
Final version: Tax on endowments above $500,000 per student preserved
Both House and Senate versions of the bill included a new tax on colleges with large endowments, though they set different thresholds for how large an endowment had to be to incur the tax. While few institutions met the criteria, higher education leaders expressed concerns that it sets a troubling precedent and could lead to taxing a greater number of school endowments in the future.
The final version of the law places a 1.4% tax on investment earnings at institutions with endowments greater than $500,000 per student, which was the Senate's version of the bill.
This point has attracted a good deal of attention over the past few weeks because of one school that got caught in its net: Berea College in Kentucky. Berea uses its $1 billion endowment to cover tuition for all students, more than four-fifths of whom are Pell-eligible. At one point, Republicans added language that would have exempted Berea—and any other college that does not charge tuition—from the tax. But the language was removed after the Senate parliamentarian determined it violated Congressional rules.
Concern 4: Taxes for graduate students
Final version: Eliminated
The House version of the bill included a provision that would have taxed tuition waivers for employees, including graduate students, as income. The House version also eliminated several tax deductions and credits related to student loans and other financial aid. Students and faculty protested these provisions on campuses nationwide after the House bill was released.
The final version of the law does not include these provisions, and there will be no changes to current tuition waivers or tax deductions and credits related to student loans.
(Sullivan/Tackett, New York Times, 12/22/17; Long, Washington Post, 12/15/17; Kelderman/Harris, Chronicle of Higher Education, 12/15/17; Douglas-Gabriel, Washington Post, 12/20/17; Harris, Chronicle of Higher Education, 12/19/17; Stratford, Politico, 12/19/17)
Also see: How to generate flexible dollars with auxiliary unit revenue
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