Order Code 97-915 EPW
CRS Report for Congress
Received through the CRS Web
Tax Benefits for Education
in the Taxpayer Relief Act of 1997:
New Legislative Developments
Updated July 30, 2001
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress
Tax Benefits for Education
in the Taxpayer Relief Act of 1997:
New Legislative Developments
The Taxpayer Relief Act of 1997 (P.L. 105-34) substantially expanded tax
benefits for education. Four widely publicized provisions — two new tax credits, a
new tax-exempt education savings account (education IRAs), and a new deduction
for interest payments on education loans — can help families pay for college and
other postsecondary education expenses.
Other provisions in the legislation extended the tax exclusion for employer
education assistance, exempted individual retirement account (IRA) withdrawals used
for higher education from early withdrawal penalties, expanded the tax exclusion for
student loans that are forgiven, expanded the definition of qualified expenses for state
tuition plans, and authorized a temporary enhanced deduction for corporate
contributions of computer technology and equipment to elementary and secondary
schools. The legislation also created new qualified zone academy bonds for public
school renovation and program improvement.
The Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105206) made a number of minor and technical amendments in the 1997 legislation.
Two provisions were extended by the 106th Congress. The Ticket to Work and
Work Incentives Improvement Act of 1999 (P.L. 106-170) extended the exclusion for
employer education assistance through December 31, 2001. The Community
Renewal Tax Relief Act of 2000 (P.L. 106-554) extended the authorization for the
enhanced deduction for corporate donations of computer technology and equipment
through December 31, 2003; it also expanded the deduction in several ways.
In the 107th Congress, the Economic Growth and Tax Relief Reconciliation Act
of 2001 (P.L. 107-16) that President Bush signed on June 7, 2001, expanded a
number of the tax benefits discussed above. Among other things, it increased
contribution limits for education IRAs and allowed accounts to be used for elementary
and secondary education expenses; exempted distributions from qualified tuition plans
from taxes and allowed private institutions to establish prepaid tuition plans;
permanently extended the exclusion for employer education assistance and expanded
it to include graduate-level courses; removed a 60-month limit on the deduction for
interest on education loans; created a new tax deduction in lieu of the Hope
Scholarship and Lifetime Learning credits; and provided further assistance for school
construction. Generally, these provisions become effective after 2001. Subsequent
legislation (P.L. 107-22) changed the name of education IRAs to Coverdell education
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Education IRAs (Coverdell Education Savings Accounts) . . . . . . . . . . . . . 4
Interest Deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Employer Education Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
State Tuition Savings Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
IRA Early Withdrawal Penalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Forgiven Student Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Computer Donations by Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Tax Credit Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Arbitrage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Private Activity Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Tax Benefits for Education
in the Taxpayer Relief Act of 1997:
New Legislative Developments
The Taxpayer Relief Act of 1997 (P.L. 105-34) that President Clinton signed on
August 5, 1997, contained new higher education tax benefits for students and their
families. Most notable were two tax credits (the HOPE Scholarship and Lifetime
Learning credits), tax-exempt education savings accounts called education IRAs, and
a deduction for interest payments on education loans. The Act also made other
changes regarding state tuition savings programs, IRA withdrawal penalties, employer
education assistance, and student loan forgiveness. In addition, it authorized new
bonds for public school renovation and program improvement and an enhanced
deduction for corporations that donate computers to elementary and secondary
schools. While the Internal Revenue Code previously had provisions favoring
education, the new legislation marked a significant expansion in the use of tax policy
to encourage enrollment and to help families and communities pay for schools. The
numerous special tax benefits for education and other purposes distinguish this
legislation from the Tax Reform Act of 1986 (P.L. 99-514), which generally reduced
The Taxpayer Relief Act of 1997 offered families multiple ways to get tax
subsidies for higher education. They can benefit in years when they save for college,
when they pay tuition costs, and when they repay loans. The legislation thus
supported different approaches toward financing postsecondary education and gives
families flexibility to adapt their plans as circumstances change.
At the same time, the new options make financial planning for college more
complicated. The added complexity raises concerns that families in similar economic
circumstances will receive different levels of benefits. The extent to which the tax
benefits will supplement or supplant assistance provided by state or other federal
sources remains unclear.
It is also unclear whether the new tax benefits, estimated by the Joint Committee
on Taxation to cost $30 billion over FY2000 through FY2004, are resulting in
additional enrollment or other investment in education. The benefits may encourage
some students to continue their studies, particularly after obtaining their initial degree,
and some to consider a wider range of schools. However, it is likely that most of the
benefits are accruing to families whose students would have enrolled anyway. Some
of the benefits may be captured by the schools through higher tuition.1
This report summarizes highlights of the education provisions of the Taxpayer
Relief Act of 1997. It provides general information and does not cover all provisions
that individual taxpayers may consider important. For more details, readers might
consult either the Act itself or the conference committee report, both of which are
printed in part II of the Congressional Record for July 30, 1997. In addition, they
may want to refer to Internal Revenue Service publication 970, Tax Benefits for
The report also summarizes subsequent legislation that amended the 1997
provisions, including the Economic Growth and Tax Relief Reconciliation Act of
2001 (P.L. 107-16) that President Bush signed on June 7, 2001. Among other things,
this Act increased contribution limits for education IRAs and allowed accounts to be
used for elementary and secondary education expenses; exempted distributions from
qualified tuition plans from taxes and allowed private institutions to establish prepaid
tuition plans; permanently extended the exclusion for employer education assistance
and expanded it to include graduate-level courses; removed a 60-month limit on the
deduction for interest on education loans; created a new tax deduction in lieu of the
Hope Scholarship and Lifetime Learning credits; and provided further assistance for
school construction. Generally, these provisions become effective after 2001.
The report will track further legislation once it has been reported by committee
or considered on the House or Senate floor. Generally, it does not identify other bills
that have been introduced.2
The Taxpayer Relief Act of 1997 is perhaps best known for the two new
education tax credits it authorized. The HOPE Scholarship credit equals 100% of
the first $1,000 of qualified tuition and fees and 50% of the next $1,000 that taxpayers
pay for themselves, their spouse, or their dependents. The credit may be claimed for
two taxable years with respect to each student, provided the student has not
completed the first two years of postsecondary education before the beginning of the
year for which the credit is claimed. An eligible student must be enrolled (or accepted
for enrollment) in a degree, certificate, or other program leading to a recognized
For a discussion of these issues, see CRS Report 97-581, Tax Subsidies for Higher
Education: An Analysis of the Administration’s Proposals, by Jane Gravelle and Dennis
Congressional offices can construct comprehensive lists of bills on particular proposals by
using the Legislative Information System (LIS) available through the CRS home page. Under
the Legislation heading, click on the LIS and then on Bill Text: Adv. In the Word/Phrase box,
type either a term like “HOPE Scholarship” or a combination of words and connectors like
“deduction adj/5 education” and then click on Search. Search results may yield some
irrelevant bills without identifying all relevant ones; thus, the lists should be reviewed
carefully. For technical assistance with searches, offices might call the La Follette
Congressional Reading Room at 7-7100.
educational credential and must carry at least one-half the normal full-time work load.
The HOPE credit is not allowed for a student who has been convicted of a felony
The Lifetime Learning credit equals 20% of the first $5,000 of qualified tuition
and fees (the first $10,000 after 2002) that taxpayers pay for themselves, their spouse,
or their dependents. The credit may be claimed any number of years for any level of
postsecondary education; it can also apply to students who are enrolled in a single
course to acquire or improve job skills. For a particular student, either the HOPE
credit, the Lifetime Learning credit, or the exclusion of distributions from an
education IRA may be claimed in one year. However, all three tax benefits might be
claimed the same year, even by one taxpayer, with respect to three different students.
The HOPE and Lifetime Learning credits are allowed for payment of qualified
tuition and fees at institutions eligible to participate in student aid programs
authorized by title IV of the Higher Education Act (HEA); this includes nearly all
colleges and universities as well as many proprietary (for-profit) trade schools.
Payments attributable to scholarships, veterans’ educational assistance, or other
sources that are excludable from gross income for tax purposes (such as employer
tuition reimbursements) generally cannot be taken into account. However, tuition and
fee payments made from gifts and inheritances may be considered for the credits, as
may payments made from loans.
To give a simple example, consider an independent student who attends a school
with tuition and fees charges of $5,000. If the student receives a $1,000 Pell Grant,
a $1,000 scholarship from the school, and a $1,500 loan, qualified tuition and fees
would equal $3,000 (that is, $5,000 minus the grant and the scholarship). Subject to
limitations in the following paragraphs, the HOPE credit would be $1,500 (that is,
100% of the first $1,000 paid and 50% of the next $1,000). The Lifetime Learning
credit would be $600 (20% of the $3,000 paid).
The HOPE Scholarship and Lifetime Learning credits are phased out for
taxpayers with modified adjusted gross incomes between $40,000 and $50,000
($80,000 to $100,000 in the case of a joint return). Thus, for single filers with
modified adjusted gross incomes of $42,500 the maximum HOPE credit would be
limited to $1,125.3
The two credits are not refundable: the sum of them and other nonrefundable
credits generally is limited to the taxpayer’s regular income tax liability.4 Thus, for
taxpayers with combined nonrefundable credits of $1,000 and a regular tax liability
of $800, the allowable credits can be no more than $800. Under a provision in the
The maximum credit of $1,500 x [($50,000 - $42,400)/$10,000] = $1,125. Modified
adjusted gross income is adjusted gross income (a prominent line on tax returns) increased by
the foreign earned income and housing exclusion and amounts excluded for income within
Puerto Rico and certain territories.
Regular income tax liability is the product of taxable income (gross income minus deductions
and personal and dependency exemptions) times the taxpayer’s tax rate. The regular tax
liability does not reflect any reductions due to tax credits.
Ticket to Work and Work Incentives Improvement Act of 1999, personal
nonrefundable credits are not limited by the taxpayer’s tentative minimum tax in tax
years 2000 and 2001.
Taxpayers are not eligible for either the HOPE or Lifetime Learning credit if they
are claimed as dependents by other taxpayers (for example, students who are claimed
as dependents by their parents). However, in this case the taxpayers who claim the
dependent are eligible for the credits (assuming they meet the other eligibility
requirements) and they may take into account tuition payments made by the
dependent. Under proposed rules issued in January 1999, taxpayers who are eligible
to claim students as dependents may elect not to do so (normally, no election is
allowed aside from cases of divorce or separation); the students then may claim the
credits for whatever tuition expenses they paid. Parents might make this election if
their income exceeds the ceilings described above.5
The IRS Restructuring and Reform Act of 1998 modified the reporting
requirements for educational institutions.
The Economic Growth and Tax Relief Reconciliation Act of 2001 did not change
the HOPE or Lifetime Learning credits; however, it did authorize a new deduction
(not limited to itemizers) for qualified tuition and fees in lieu of the credits. Taxpayers
will be able to choose one or the other with respect to a student in the same year. The
new deduction will be effective only for four tax years: in 2002 and 2003, it is limited
to $3,000 for taxpayers with modified adjusted gross incomes that do not exceed
$65,000 ($130,000 in the case of a joint return); for 2004 and 2005, it is limited to
$4,000 for taxpayers whose incomes do not exceed those amounts or $2,000 for
taxpayers with higher incomes that do not exceed $80,000 ($160,000 in the case of
a joint return).
Education IRAs (Coverdell Education Savings Accounts)
The Taxpayer Relief Act of 1997 authorized new investment accounts that
families can use to save for higher education. The accounts are called education
individual retirement accounts (education IRAs) although they have nothing to do
with retirement. Like other IRAs, however, these accounts are designated trusts that
are held by banks and other financial entities. Contributions to education IRAs can be
made until beneficiaries are age 18; the annual limit for all contributors combined is
$500, though this amount is reduced and then eliminated for contributors with
modified adjusted gross incomes between $95,000 and $110,000 ($150,000 and
$160,000 for joint returns).
Education IRA contributions are not deductible, but accounts are exempt from
taxation and distributions are excluded from beneficiaries’ gross income if used for
qualified higher education expenses: tuition, fees, books, supplies, equipment
required for enrollment or attendance, and certain room and board expenses.
Qualifying expenses must be incurred at Title IV HEA institutions. Distributions for
other purposes generally are taxable (that is, the part representing earnings is taxable)
26 Federal Register 794 (January 6, 1999), example 2 under proposed rule 1-25A-1.
and a 10% penalty applies. The exclusion cannot be claimed the same year either the
HOPE or the Lifetime Learning credit is claimed for the student. Remaining balances
must be distributed when beneficiaries reach age 30.
The IRS Restructuring and Reform Act of 1998 included numerous technical
corrections and clarifications of education IRAs regarding the taxation of
distributions, rollover contributions, changes in beneficiaries, and rules for death and
The Economic Growth and Tax Relief Reconciliation Act of 2001 made a
number of changes to education IRAs, effective after 2001. Specifically, the Act:
! raises the annual contribution limit per beneficiary to $2,000;
! expands qualified distributions to include certain elementary and secondary
! raises the income phase-out range for married couples making contributions
to $190,000 to $220,000;
! allows contributions for special needs beneficiaries to continue beyond age 18
and does not require their accounts to be distributed by age 30;
! clarifies that corporations and other entities (such as tax-exempt organizations)
may make contributions without regard to income limits;
! allows contributions for a year to be made up until the normal due date for tax
returns (usually April 15th );
! allows beneficiaries to exclude distributions and claim the Hope Scholarship
or Lifetime Learning tax credit the same year (though not for the same
! allows contributions the same year that contributions are made to a qualified
tuition savings plan.
P.L. 107-22 (S. 1190) changed the name of education IRAs to Coverdell
education savings accounts, effective July 26, 2001.
The Taxpayer Relief Act of 1997 authorized a new deduction for interest
payments on qualified education loans. The deduction is taken in calculating adjusted
gross income (an “above-the-line” deduction) and so is not restricted to taxpayers
who itemize. The deduction is allowed only with respect to interest paid during the
For details about qualifying elementary and secondary education expenses, see CRS Report
RS20289, Education Savings Accounts for Elementary and Secondary Education, by Bob
Lyke and James B. Stedman.
first 60 months (whether or not consecutive) in which interest payments are required;
it was limited to $1,000 in 1998 and $1,500 in 1999, while the limit is $2,000 in 2000
and $2,500 in 2001 and thereafter. The maximum allowable deduction is phased out
for taxpayers with modified adjusted gross incomes between $40,000 and $55,000
($60,000 to $75,000 in the case of a joint return). Taxpayers are not eligible for the
deduction if they can be claimed as a dependent by another taxpayer.
Qualified education loans are any indebtedness incurred to pay qualified expenses
of taxpayers, their spouse, or their dependents at Title IV HEA institutions or at
institutions of higher education, hospitals, or health care facilities conducting
internship or residency programs leading to a certificate or degree. At the time the
debt is incurred, students must be enrolled (or accepted for enrollment) in a degree,
certificate, or other program leading to a recognized educational credential and must
carry at least one-half the normal full-time work load. Qualified expenses generally
equal the cost of attendance minus scholarships and other education payments
excluded from taxes. Qualified loans also include indebtedness to refinance qualified
The IRS Restructuring and Reform Act of 1998 included a technical amendment
regarding the interest deduction for education loans.
The Economic Growth and Tax Relief Reconciliation Act of 2001 eliminates the
60-month limit for this deduction. It also increases the income phase-out ranges to
$50,000 to $65,000 ($100,000 to $130,000 in the case of joint returns). Both
changes are effective after 2001.
Employer Education Assistance
The Taxpayer Relief Act of 1997 extended the exclusion for employer education
assistance through May 31, 2000. The exclusion, in Section 127 of the Internal
Revenue Code, allows tuition reimbursements and other forms of employer education
assistance to be exempt from taxes of the recipient even if the education does not
qualify as a deductible business expense (that is, even if it is not job-related).
Qualifying education is not restricted to Title IV HEA schools. The extension did not
apply to graduate-level courses, which had not been covered after June 30, 1996.7
The Ticket to Work and Work Incentives Improvement Act of 1999 extended
the exclusion (again without covering graduate-level courses) through December 31,
The Economic Growth and Tax Relief Reconciliation Act of 2001 makes the
exclusion for employer education assistance permanent and also extends it to
graduate-level courses beginning after December 31, 2001.
For additional information, see CRS Report 97-243, Employer Education Assistance:
Overview of Tax Status in 2001, by Bob Lyke.
State Tuition Savings Plans
The Small Business Job Protection Act of 1996 (P.L. 104-188) clarified the tax
treatment of qualified state tuition savings plans; it generally provided that account
earnings are to be included in designated beneficiaries’ gross income when they
receive distributions to attend school. Previously, it appeared that account earnings
might be subject to annual taxation. State tuition savings plans (often called section
529 plans) are either prepaid tuition contracts or college savings accounts established
by a state agency.
The Taxpayer Relief Act of 1997 expanded the definition of qualified higher
education expenses for state tuition savings plans to include reasonable costs for room
and board in the case of students attending at least half-time. As under prior law,
qualified expenses also include tuition, fees, books, supplies, and equipment required
for enrollment or attendance. The Act also expanded the definition of eligible
institution to include all Title IV HEA institutions.
The IRS Restructuring and Reform Act of 1998 clarified that qualified state
tuition plan distributions are taxed under the general annuity rules (unless excludable
as a scholarship, etc.); thus, part of each distribution is considered to be earnings and
part is considered a return of the contribution.
The Economic Growth and Tax Relief Reconciliation Act of 2001exempts
distributions of these savings plans from taxation if they are used for qualified
expenses. It also allows one or more educational institutions (including private
institutions) to establish prepaid tuition plans. These provisions become effective
after 2001, except for the exclusion of distributions from educational institution plans,
which is effective after 2003.
IRA Early Withdrawal Penalty
The Taxpayer Relief Act of 1997 exempted IRA distributions used for qualified
higher education expenses from the early withdrawal penalty. The penalty otherwise
applies to distributions before age 59½, with a number of exceptions; it equals 10%
of the amount of the distribution that is included in gross income. Qualified higher
education expenses include tuition, fees, books, supplies, and equipment required for
enrollment or attendance at Title IV HEA institutions, plus (in the case of students
attending at least half-time) reasonable costs for room and board. The education must
be for the taxpayer or the taxpayer’s spouse or child (including stepchildren), or for
a grandchild of the taxpayer or of the taxpayer’s spouse.
The Act also authorized Roth IRAs. The general rule for these IRAs is that
distributions are exempt from taxation and penalties if they have been held for 5 years
and the account owner has attained age 59½, is disabled or has died, or is using the
distribution to purchase a first home. However, no Roth IRA distribution is taxable,
regardless of when it is withdrawn or how it is used, until the total of all distributions
exceeds the amount of contributions. Thus, some amounts might be withdrawn
before age 59½ without taxation or penalty in any case.
Technical amendments regarding distributions from Roth IRAs that had rollover
contributions from other IRAs (conversions) were included in the IRS Restructuring
and Reform Act of 1998.
Forgiven Student Loans
The Taxpayer Relief Act of 1997 expanded the tax exclusion allowed student
loans that are forgiven (in whole or in part) to include loans made by tax-exempt
educational institutions (for example, private colleges) even if the funds originated
from a private, nongovernmental source. As under prior law, the exclusion applies
only if the borrower works for a certain period of time in certain professions for any
of a broad class of employers (for example, teaches in an inner-city school).8 There
is an additional requirement for loans made by tax-exempt educational institutions
from private nongovernmental sources: the loans must be issued pursuant to a
program designed to encourage students to work in an occupation or area with unmet
needs and provide services either for or under the direction of a tax-exempt charitable
organization of governmental entity.
Technical amendments regarding this provision were included in the IRS
Restructuring and Reform Act of 1998.
Computer Donations by Corporations
The Taxpayer Relief Act of 1997 authorized an enhanced deduction for
contributions of computer technology and equipment to elementary and secondary
schools or to tax-exempt charitable organizations supporting elementary and
secondary education. Contributions may be made through a private foundation. The
property must be donated within two years after it was acquired or constructed, and
it must be originally used by either the donor or the donee. The enhanced deduction,
like others allowed under prior law, is limited to corporations other than Scorporations;9 it is equal to the fair market value of the contributed property minus
50% of the ordinary income that would have been recognized had the property been
sold for its fair market value. (Without this exception, the deduction would equal the
corporation’s basis in the property, which usually is less.) However, the enhanced
deduction is limited to twice the basis of the property.
The IRS Restructuring and Reform Act of 1998 included several minor
amendments to this provision.
The Community Renewal Tax Relief Act of 2000, P.L. 106-554 (H.R. 5662,
incorporated into H.R. 4577) extended the authorization for the enhanced deduction
The provision also extends the exclusion to refinancing loans issued by tax-exempt entities,
provided the requirement about working in an area or occupation with unmet needs is met.
S-corporations generally are tax-reporting rather than tax-paying entities. Their charitable
contributions are divided among shareholders and reported on the latter’s separate tax returns.
Corporations may elect S-corporation status if they meet a number of Internal Revenue Code
requirements; among other things, they cannot have more than 75 shareholders or more than
one class of stock.
for three years through December 31, 2003. The Act also expanded the deduction
to include donations to public libraries, to include property donated no later than three
years (instead of two years) after the date the taxpayer acquired or substantially
completed its construction, and to include property donated after reaquisition by the
computer manufacturer. The Secretary of the Treasury may develop standards to
assure that donations meet minimum standards for educational purposes.
Tax Credit Bonds. The Taxpayer Relief Act of 1997 authorized tax credits
for a new form of obligation called qualified zone academy bonds (QZABs).11
Qualified zone academies are public schools and programs that provide education and
training below the postsecondary level; they must be designed in cooperation with
business to enhance the academic curriculum, increase graduation and employment
rates, and better prepare students for college and the workforce. The academies must
either be located in empowerment zones or enterprise communities12 or have 35% or
more of their students eligible for free or reduced price lunches. At least 95% of bond
proceeds must be used for rehabilitating or repairing public school facilities, providing
equipment, developing course materials, or training teachers and other school
personnel. Private entities must contribute equipment, technical assistance, employee
services, educational opportunities, and other property worth at least 10% of bond
QZABs are not tax-exempt; however, bondholders are allowed a nonrefundable
tax credit based upon a credit rate that the Secretary of the Treasury determines
would allow bonds to be issued without discount or interest cost to the issuer. Thus,
unlike tax-exempt bonds, the federal government will pay all the interest costs.
Qualified zone academy bondholders are limited to banks, insurance companies, and
corporations actively engaged in the business of lending money.
Under the 1997 Act, state and local governments could issue QZABs only in
1998 and 1999, subject to a national limitation of $400 million each year that is
allocated proportionally to their share of the population in poverty.
In addition to authorizing tax credit bonds and expanding the small issuer exception for
rebating arbitrage profits, the Taxpayer Relief Act of 1997 also repealed the $150 million
ceiling on the total amount of tax-exempt bonds that may be issued by 501(c)(3) nonprofit
organizations, including private universities.
For additional information, see two CRS reports by Steven Maguire: CRS Report RS20606,
Qualified Zone Academy Bonds: A Description of Tax Credit Bonds, and CRS Report
RS20699, Funding School Renovation: Qualified Zone Academy Bonds versus Traditional
Empowerment zones and enterprise communities are economically distressed areas that
qualify for special tax incentives and other federal assistance under P.L. 103-66. See CRS
Report RS20381, Empowerment Zones/Enterprise Communities Program: Information on
Rounds II and III, by Bruce Mulock.
The Ticket to Work and Work Incentives Improvement Act of 1999 authorized
up to $400 million of QZABs to be issued in each of 2000 and 2001. Unused
authority may be carried over for several years.
Some have proposed using tax credit bonds to finance school construction.
President Clinton’s last budgets would have expanded QZABs for this purpose; they
also would have created new school modernization bonds with much higher
authorizations.13 Similar proposals have been made for the 107th Congress.
Arbitrage. The Taxpayer Relief Act of 1997 also expanded the arbitrage rebate
exception that applies to small issuers of governmental bonds. The previous rule had
been that governmental units that do not issue more than $5 million annually in
governmental bonds need not refund arbitrage profits to the federal government. The
1997 Act provided that up to $5 million annually in school construction bonds issued
after 1997 need not be counted towards this $5 million ceiling.
Arbitrage profits occur when issuers invest bond proceeds in other investments
that pay a higher rate of interest. For example, a governmental entity might issue taxexempt bonds at 5% and invest the proceeds in taxable bonds paying 7%. Entities
need not rebate arbitrage profits if they meet a schedule for spending proceeds for
construction, e.g., 10% in the first 6 months after issuance, 45% in the first 12
The Economic Growth and Tax Relief Reconciliation Act of 2001 increases the
small issuer exception from $5 million to $10 million (i.e., up to $10 million need not
be counted toward the ceiling).
Private Activity Bonds. The Economic Growth and Tax Relief
Reconciliation Act also expands the list of private activities for which tax-exempt
bonds may be issued to include elementary and secondary school facilities owned by
private, for-profit corporations pursuant to partnership agreements with state or local
For additional information, see CRS Report RS20713, School Modernization Bonds: An
Explanation of Selected Legislation of the 106th Congress, by Steven Maguire.
For analysis of a proposal to expand this exception, see CRS Report 98-803, Bonds for
Public Schools: Relaxation of Arbitrage Restrictions in the Taxpayer Relief Act of 1998, by