Scientific Societies and Higher Education Associations Alarmed at Proposed Tax Changes

As Republicans rush to enact the first major overhaul of federal tax law in three decades, research organizations are warning that the legislation could harm the U.S. research enterprise and graduate education in particular.

The House passed its version of the legislation on a mostly party-line vote on Nov. 16, two weeks after revealing its full proposal. The Senate is proceeding at a similarly rapid pace, with the Finance Committee approving its version on a party-line vote the same day.

Many scientific societies and higher education associations have urged the House to reconsider its proposal to eliminate certain education incentives, such as the tax-exempt treatment of tuition waivers. The higher education associations have also objected to several other provisions in both the House and Senate bills.

Scientific societies ‘extremely concerned’ with House bill

Over 40 scientific and engineering societies sent a letter to Congress on Nov. 15 saying they are “extremely concerned” with provisions in the House bill that would alter a number of education-specific tax policies. They urge Congress to preserve the status quo, arguing the changes would make graduate education less affordable and discourage individuals from pursuing higher education. They also note the changes would have an “outsized impact” on the scientific enterprise since the majority of graduate students are in STEM fields. Several AIP Member Societies are signatories of the letter.

The House bill would repeal a tax code provision, 117(d) , that makes certain tuition waivers exempt from taxation, a change that could greatly increase the tax burden for many graduate students who benefit from them. Currently, graduate students who serve as teaching or research assistants can receive tax-exempt tuition reductions and are only taxed on the stipends they receive for their work. According to the American Council on Education, a higher education association, around 145,000 graduate students who were enrolled during the 2011–2012 academic year received tuition reductions, with 57 percent going to students in STEM fields.

Elimination of the exemption would not affect students at every institution. For example, in response to inquiries about the bill from concerned graduate students, Cornell University indicated that it “does not rely on 117(d) for favorable tuition-related tax treatment of funded graduate students, who are considered students, not employees” and instead students receive qualified scholarships, as defined in sections 117(a – c). However, Cornell also noted, “Other universities, particularly public universities, may be required by state law to treat certain graduate students as employees under state law, and therefore may be reliant on 117(d) for favorable tax treatment for their graduate students.”

The societies also urge the House to reconsider its proposed repeal of a number of other education-specific tax benefits, including the student loan interest deduction, the Hope Scholarship Credit, and the Lifetime Learning Credit. They also object to its elimination of section 127 , which permits companies to offer employees up to $5,250 each year tax free for education expenses.

Overall, Congress’s Joint Committee on Taxation (JCT) estimates that the changes to education incentives in the House bill would increase federal tax revenues by $65 billion over the next 10 years.

Education groups also worry bills could destabilize college finances

Meanwhile, over 40 higher education associations have sent letters to the House and Senate outlining a host of additional concerns.

In the Senate letter, the organizations say that although they are “pleased” the chamber’s bill does not include the House’s proposed changes to education incentives, they are deeply concerned by other provisions included in both bills that they argue would “make college more expensive and erode the financial stability of public and private, two-year and four-year colleges and universities.”

For example, both bills propose a new 1.4 percent excise tax on investment income generated from certain private college or university endowments that have a value of at least $250,000 per student. Endowment funds are used by academic institutions to generate revenue for expenditures such as student financial aid, construction and operation of research infrastructure, and public outreach activities.

Currently, some private foundations are already subject to a 1-to-2 percent excise tax on their net investment income, which is intended to encourage them to distribute their investment earnings. However, the law exempts academic institutions from paying a tax on their endowments because of their educational mission. Both letters strongly object to the new tax, which they assert would take away funds that would otherwise be used for “providing scholarships to our students and supporting research and education.”

The letters also express concern over budgetary implications of tax changes not specific to education, such as repealing the state and local tax (SALT) deduction. According to the Tax Policy Center , the SALT deduction is one of the largest federal tax benefits, with an estimated revenue cost of $96 billion in 2017. The letters argue that eliminating the deduction will “almost certainly make it harder for states and localities — many of which already face serious budget strains — to raise sufficient revenues in the coming years to fund higher education and other priorities.”

A side-by-side comparison of these and other provisions produced by the American Council on Education is posted here .

Bills preserve R&D tax credit, change R&D amortization requirements

Both bills include other provisions bearing on the U.S. research enterprise. Among them, the Republican tax reform framework released in September made a point of noting that they planned to preserve current business R&D tax credits because they have “proven to be effective in promoting policy goals important in the American economy.”

After a long period of temporary extensions, these incentives were made permanent in the omnibus appropriations bill for fiscal year 2016. Rep. Kevin Brady (R-TX), who chairs the House Ways and Means Committee, was one of the main proponents for permanently extending the credits, having introduced legislation to do so several times.

While both bills keep the tax credits intact as promised, they would require businesses to capitalize and amortize domestic R&D expenditures over a five-year period. For R&D conducted outside the U.S., the period would be set at 15 years. The JCT estimates that the Senate’s provision would increase federal tax revenues by $62 billion over 10 years, while the House’s provision would increase it by $109 billion over the same period.

The House bill also includes a provision that would alter the tax treatment of organizations that are “operated primarily for purposes of carrying on fundamental research the results of which are freely available to the general public.” Currently, income derived from research performed by such organizations, including nonpublic research, is exempt from unrelated business income tax (UBIT). (Separate sections of the tax code provide UBIT exemptions for research conducted for the government or by universities.)

The House bill would make this exemption only apply to income from research that is made freely available to the general public. The JCT estimates this change would increase federal tax revenues by $700 million over 10 years. The Senate bill does not include an analogous provision.

Differences between the chambers will have to be reconciled before the bill can advance to the president. The full Senate is expected to take up its version of the legislation shortly after Congress returns following the Thanksgiving recess.