TUITION TAX CREDITS
ISSUE BRIEF NUMBER IB81075
L y k e , R o b e r t F.
Education and Public Welfare Division
T H E L I B R A R Y OF C O N G R E S S
CONGRESSIONAL RESEARCH SERVICE
MAJOR I S S U E S S Y S T E M
D A T E O R I G I N A T E D 05/05/81
DATE UPDATED 07/19/82
F O R A D D I T I O N A L I N F O R M A T I O N C A L L 287-5700
Should taxpayers be permitted to claim a tax credit for education tuition
payments? Such credits would represent a significant change i n the Federal
Government's role in education. Currently most Federal aid for elementary
and secondary education is provided for specific purposes, such a s vocational
education, through categorical grants to States and local school districts.
Tuition tax credit aid would instead be provided
for general educational
purposes i n the form of tax reductions to students'
such money would assist families of students attending private
While most Federal aid for postsecondary
education already is provided
directly to students and their families, it generally is based on their
relative financial need.
Tuition tax credits would not be closely related to
These proposed changes are controversial, particularly with
their cost, whether there should be additional public
Support of private
education, and whether such support would be constitutional.
issues involve the effect tuition tax credits would have on equal educatonal
opportunity and the desirability of using tax expenditure financing.
The President submitted the Administration's bill
Congress on June 22, 1982.
Hearings have been held o n it and
BACKGROUND AND POLICY ANALYSIS
This section is divided into 1 0 parts:
Summary and Major Pros and Cons
Current Law and Legislative Options
Support for Private Elementary and Secondary
Postsecondary Student Financial Assistance
Equal Educational Opportunity
Tax Expenditure Financing
Federal Role i n Education
Legislative History Prior to the 97th Congress
SUMMARY AND MAJOR PROS AND CONS
Tuition tax credits are one possible kind of tax allowance for educational
expenses, several other types of which are presently
particular form of a tuition tax credit can vary considerably, depending on
such matters a s what portion of tuition payments may be taken into
consideration, whether the credit i s refundable to those whose tax liability
i s less than the credit, and what kinds of schools are covered.
In 1978 both
the House and the Senate passed tuition tax credit bills but differences
between them were not resolved by the time Congress adjourned.
Administration," according to Secretary of Education Terrel Bell, "heartily
endorses tuition tax credits...."
Administration officials have testified in
support of a tuition tax credit like that contained i n S.
bill, summarized below), although they
questions about how much it might cost, how it can be coordinated with other
Federal expenditures for education, and when it should be implemented.
President Reagan announced the outlines of the Administration's own proposal
on Apr. 1 5 , 1982, and submitted legislation to implement it on June 22, 1982
(for details, see the entry under the former date in the Chronology
below, as well a s the summary of S. 2673 in the Legislation
tuition tax credits might make the following arguments:
1. Private elementary and secondary schools
serve important functions that merit public
support. They enable parents to select the
education that is most suitable for their children.
Some private schools need public money to maintain
their quality and enrollments.
2. Tuition tax credits are needed to provide tax
relief to families and students trying to meet
postsecondary education expenses.
would not be need based, tax credits,
unlike a tax deduction, would not give more money
to families with higher income.
3. Federal tuition tax credit legislation can be
drafted in such a way that it avoids the constitutional
problems frequently found in State legislation.
In any case, the Congress should not prejudge the
issue of constitutionality, but should leave that
to the courts.
4. Tuition tax credits would give lower income families
many of the same options for schools that higher
income families now have.
They would encourage
voluntary integration in private schools.
5. Tuition tax credits should be seen not a s increasing
the Federal budget deficit as much as specifying a
particular tax revision. They might be
enacted as a tax reform measure.
6. Considering the numerous tax expenditures already
authorized, to say that there can be no more for
education would discriminate against an important
Education benefits society as
much as the other activities subsidized by tax
allowances. The cost of education tax expenditures
can be weighed against other Federal spending in
the annual budget process.
7. Tuition tax credits would be simple to administer.
In contrast to current categorical grant programs,
they would have neither the specified purposes nor
the associated requirements that result in Federal
control of education.
Among the organizations supporting tuition tax credits are the Council for
American Private Education, the Lutheran Church-Missouri Synod, the National
Association of Independent Schools, the National Society for Hebrew Day
Schools, and the United States Catholic Conference.
Opponents of tuition tax credits might make the following arguments:
1. Public money should be used to support
only public schools, many of which need additional
financial support. Public schools play a critical
role i n American society, promoting equality of
educational opportunity and harmony among different
ethnic and economic groups.
2. Postsecondary education tuition tax credit money
would go to families and students with relatively
There would be no needs test for
tuition tax credits, as there is for most Federal
postsecondary student financial assistance programs.
3. Since tuition tax credits would for the most part
benefit families of students who attend sectarian
schools, the Supreme Court is likely to find them
4. Most elementary and secondary tuition tax credit
money would go to families with relatively high
incomes, thereby impeding equality of educational
Tax credit money would also benefit
schools With few if any low income or minority
students, and even schools enrolling students
trying to avoid desegregated public schools.
5. Tuition tax credits would be costly. Given current
economic problems, no legislation should be enacted
that would increase the Federal budget deficit.
6. As a tax expenditure, tuition tax credits would
not be subject to legislative review by the
committees that deal with other education programs.
Numerous tax expenditures complicate the tax code.
7. There would be no restrictions on the use of
tuition tax credit money to ensure it i s spent
efficiently and for public purposes.
opponents believe, contrary to this argument, that
tuition tax credits would eventually lead to
government control of private education.)
are national education problems which the Federal
Government ought specifically to address with the
limited educational funds it has available.
Among the organizations opposing tuition tax credits are the American
Federation of Teachers, the League of Women Voters of the United States, the
National Urban League, the National Education A-ssociation, and the National
CURRENT LAW AND LEGISLATIVE OPTIONS
Tuition tax credit legislation would amend the Internal Revenue Code to
permit a taxpayer to claim a credit for educational tuition payments made for
himself, his spouse, or his dependents.
Tuition tax credits are one form of
a number of possible tax allowances that an individual might be permitted for
At the present time Only three such allowances are
explicitly authorized in the Code:
1. Taxpayers may deduct expenses for education that
the law or an employer requires for keeping one's
salary, status, or employment; or for education
that maintains or improves skills that are
needed for one's present employment, trade, or
2. Taxpayers may claim a dependent's exemption if
they contribute more than half the Support of a
student dependent, even if such would otherwise
not be allowed on the basis of the student's income
3. Taxpayers need not report a s taxable income amounts
they received a s scholarships or fellowship grants.
In addition to these allowances, other provisions of the Internal Revenue
Code provide indirect reimbursement for education expenses
credits for certain child care expenses, or deductions for interest paid
educational loans) or provide economic benefits to schools
FOP many people, whether tuition tax credits should be made a n allowance
as well depends on the particular form of credit being proposedOne key
question is whether there in fact would be a credit or whether there might be
a deduction. In general, a tax credit would result in taxpayers who made
equal payments for allowable tuition charges receiving tax benefits that are
equal, while a tax deduction would result in their receiving benefits that
are proportional to their taxable income.
Setting aside the issue of
for all taxpayers who made the same
allowable tuition payments (say, $1,000), a credit would reduce their taxes
by the same dollar amount (perhaps by '35% of what was paid, or $350) while a
deduction, being calculated on the marginal tax rates, would reduce the taxes
of those with high taxable income more (perhaps $490) than those with
taxable income (perhaps $210).
Another possible allowance variation would be to have a tax deferral
rather than a credit or a deduction.
Under a deferral, taxes for allowable
tuition payments could be postponed until a later tax year, such as after the
student ceases to attend school. The taxes owed would then have to be paid,
perhaps along with interest charges, over a certain time period.
also be possible to have a deferral for money that is saved in anticipation
of future tuition payments.
A second important question is whether the tuition
tax credit would be
It is possible for the amount of a tax credit to exceed the
amount of taxes that people with relatively low taxable income have to pay,
If the credit were refundable, such people would be eligible to receive a
payment equal to that portion of the credit which could not be used to offset
their tax liability.
If the credit were not refundable, they could not
receive this payment; in effect, the credit they might
receive would be
Third, a tuition tax credit might be made available without any income
limitation, or it might be restricted to taxpayers with
incomes below a
certain level, such as $30,000. The amount of the credit that could be
claimed might be proportionally reduced as taxable incomes increase.
A fourth question is what proportion of educational expenses might be
counted for purposes of the tuition tax credit.
Allowable expenses might
include just tuition payments per se, or they might include other required
expenses (such as laboratory fees) or even other costs
(such as fees for
books or field trips). Either all of the allowable expenses might be counted,
A maximum dollar limit
or just a proportion (such a s one-third or one-half).
(such as $250 or $500) might be applied for each student.
Fifth, tuition tax credits can vary with respect to the schools that could
in defining allowable tuition payments.
distinction is between institutions of postsecondary education on the one
hand and elementary and secondary schools on the other.
institutions, the program might be limited to only colleges and universities,
with or without graduate or professional schools, or technical or vocational
schools might be included as well.
Both elementary and secondary schools
might be included, or only one or the other.
Also important is the question
of whether to include tuition payments made to public schools
limited to those cases where children attend schools outside their district)
and to proprietary schools (that is, schools that are operated for profit).
Sixth, the tuition tax credit might cover allowable tuition payments made
for any person enrolled in school, or they might be restricted just to those
who are studying full-time. Another
distinction that might be drawn is
between those who are enrolled to obtain a degree and those who are simply
Seventh, the tuition tax credit might become effective upon enactment of
the legislation, or its effective date might be delayed, perhaps
certain categories of schools or students.
Finally, tuition tax credit legislation might include sections specifying
what the purpose of the tax credit is.
There might also be provisions
schools must meet
dealing with a number of other matters, such as whether
certain nondiscrimination standards or whether postsecondary
student assistance programs may take into account the amount of a credit a
SUPPORT FOR PRIVATE ELEMENTARY AND SECONDARY EDUCATION
Private education in the United States undoubtedly
financially from a tuition tax credit for elementary and secondary education
tuition payments (see section 4, below for a discussion of a postsecondary
education tuition tax credit).
Exactly how much it would. gain depends on how
many additional families elect to enroll their children i n private
and on what portion of the tax money credited to parents i s shifted to the
schools themselves, perhaps in the form of higher tuition payments.
extent to which
either of these things would occur is
Nonetheless, it is reasonable to presume that an elementary and secondary
tuition tax credit would contribute to an increase in the 5 million
school students there currently are in the country (a number that represents
about 11% of all elementary and secondary school students) and that some tax
credit funds would indirectly benefit many of the Nation's
schools (which represent about 18% of all of the elementary and secondary
schools in the country).
(For additional information on private schools in
the United States, see CRS IB81049, Nonpublic ~ i e m e n t a r y and Secondary
Education: Providing Federal Aid, by Jim Stedman.)
Private elementary and secondary education in the United
primarily financed with private funds, but many private
schools and their
students receive public financial assistance of one sort or another.
example, some States provide private schools standardized tests and scoring
services, and some loan their
students textbooks and give them free
transportation to and from school. The Federal Government provides private
school students with compensatory instruction and other services under the
Education Consolidation and Improvement Act, the Education of the Handicapped
Act, and other Federal education legislation; it also reimburses many private
schools for part of the cost of student lunches they
many States and the Federal Government have tax expenditures that benefit
private schools and their students.
Reliable data on the total amount of
public financial assistance to private education are not available.
Proponents of elementary and secondary tuition tax credits generally
believe that there should be more public Support for private education in the
One argument they make is that private schools serve
important functions that merit public aid.
In their view, private
maintain cultural and educational diversity in a country where public
programs have grown increasingly similar. They enable parents to select the
schooling that is the most suitable for their children, particularly with
respect to their moral development.
It is also said that they provide
educational opportunities for students who for one reason or another cannot
succeed in public schools. Tuition tax credit proponents also argue that
schools need public aid to maintain
Constant.ly rising costs have forced a number sf schools to c u t
their programs or to set their fees higher than many parents can afford,
Unless extra funds become available, such schools may decline i n quality or
Opponents of elementary and secondary- tuition tax credits generally
believe that private education should not receive additional public
or even any public support a t all. The principal argument they make is that
public funds should be used only to support public schools.
should not be diverted to private schools, it is claimed, even i f they do
have financial problems, when public
schools need additional help.
argue that this is particularly true at the present time, when Federal funds
for many education programs are being cut and States like California,
Michigan, and Massachusetts are facing severe fiscal problems.
tuition tax credits also argue that public schools play a critical role in
American society. They stress the widely held view that the public schools,
than any other institution, have been responsible not Only for
instilling democratic values but also for forming what common culture there
is in the United States.
POSTSECONDARY STUDENT FINANCIAL ASSISTANCE
A tax credit for postsecondary
education tuition payments undoubtedly
would benefit most students enrolled in postsecondary education. As with an
elementary and secondary tuition tax credit, some postsecondary tuition tax
credit money might be shifted to the schools themselves, perhaps in the form
of higher tuition charges. However, in contrast to elementary and secondary
education, where for the most part only families of students attending
private schools could claim the credit, a postsecondary education tuition tax
credit would benefit nearly all students since public as well a s private
postsecondary institutions typically charge tuition.
(According to the
College Board, the average annual tuition charges at public 4-year colleges
is $819; a t private 4-year colleges it is $3,709).
At the present time there
are approximately 3,100 institutions of higher education in the United States
(about 1,450 of them public and 1,650 private);
approximately 11,250,000 students
(about 8,750,000 of them in
institutions and 2,500,000 in private institutions).
Reliable data are not
available on how many other postsecondary educational institutions there are
(such a s proprietary and vocational schools), nor o n how many
At present, the Federal Government provides more than $12 billion
postsecondary education in the United States. Most of these funds are made
available through three large student assistance programs:
Pel1 Grants (FY82
Guaranteed Student Loans
authority for Federal obligations:
billion, with legislation for a
supplemental $1.3 billion under consideration; FY8l new loan volume based on
funds generated from non-Federal sources: $7.7 billion), and Social Security
student benefits (FY81 outlays for postsecondary students: approximately $1.6
In addition, there are various smaller student assistance programs
like Supplemental Educational Opportunity Grants, National Direct Student
Loans, and the College Work-Study Program.
Funds for postsecondary education
are also made available through grants from such agencies as the National
Science Foundation and the Public Health Service.
(For current information
o n funding for postsecondary education student assistance, see CRS IB82018,
Student Financial Assistance: FY83 Budget, by David Osman.)
Opponents of tuition tax credits argue
postsecondary student financial assistance should be channeled into existing
programs, not new ones.
They claim that this is particularly the case a t the
present time since Congress is reducing the overall funding for some of the
existing programs and the assistance eligibility
Opponents also point out that with the exception of Social Security student
benefits, existing Federal postsecondary
programs are need based, that is, they typically limit the amount of money a
student is eligible to receive to his unmet costs of attending school
(legislation has been enacted to phase out Social Secuirty student benefits
for postsecondary students).
Tuition tax credits would not be need based:
students or their families would be reimbursed for part of their tuition
payments regardless of whether the money is needed to pay for schooling
perhaps regardless of family income).
Opponents might cite Congressional
Budget Office figures showing that with a hypothetical $250 refundable credit
covering 50% of postsecondary tuition cost, nearly 6 0 % of the funds would go
to families with incomes greater than $30,000, nearly 30% would go to
families with incomes between $15,000 and $30,000 and only a little more than
10% would go to families with incomes less than $15,000 (see section 6 ,
below, for estimates on what proportion of elementary and secondary tuition
tax credit money would go to these family groupings).
Proponents of tuition tax credits argue that the credits should not be
compared directly with existing Federal
is tax relief
for families overburdened
educational expenses; they do not modify
principles underlying existing
programs so much as supplement them. According to proponents, families paying
postsecondary education tuition charges are making an investment in education
which the tax laws ought to encourage; the fact that the credit would benefit
some kinds of families (in general, those that pay more taxes) more
others does not negate the need for giving them tax relief.
It is sometimes
pointed out that there are other provisions of the tax code that benefit high
income families more than low income families, such as the exclusion of
limited amounts of dividend
income or deductons for mortgage interest
payments. Finally, proponents of tuition tax credits stress that the amount
of the tax credit (at least of a refundable tax credit) does not increase
with income, a s the amount would With a tax deduction.
As a result, the
credit would represent a higher percentage of income for a low income family
than it would for a high income family.
Tuition tax credits would benefit many families with students enrolled
Since 80% of private elementary and secondary schools are'
Sectarian, as are almost 50% of the private institutions of higher education,
the question arises whether the credits would be constitutional,
is whether a Federal tax credit for tuition payments made to a sectarian
school would violate the first amendment's prohibition that "Congress shall
make no law respecting an establishment of religion or prohibiting the free
In considering recent cases involving public aid to sectarian schools, the
United States Supreme Court has developed three guidelines for assessing
has a secular
One test is whether the aid program
purpose, that i s , whether the aim of the program, explicitly stated or not,
is something other than the advancement of religion. A second is whether the
aid program would bring about excessive entanglement of government and
religion, that i s , whether the program
would involve government in how
sectarian schools are administered, or perhaps would result in political
divisions along religious lines.
The third test is whether the primary
effect, or indeed any principal effect, of the program is to aid religion.
For this last test the Court has looked a t such things as whether the aid the
program provides is only incidential or substantial, whether it i s restricted
to secular uses, and whether the group it benefits is broad and diverse.
Even with these tests, the determination of whether a given program
or does not Constitute an establishment of religion in violation of the first
amendment is not unambiguous.
In its rulings in more than a dozen cases, the
Supreme Court has held some programs benefitting
sectarian schools to be
constitutional and others to be unconstitutional.
However, in general both
the excessive entanglement and primary
effect tests have proven
substantial barriers to the Court's sanctioning public aid for educational
functions a t sectarian schools, particularly at the elementary and secondary
levels. The Court has also ruled that the first amendment restrictions apply
not only to aid provided directly to sectarian schools but also to aid
provided to the students or the parents of students who attend such schools.
In one of the tax allowance cases it has considered, the Court held
unconstitutional a New York State law authorizing a tax deduction for tuition
payments to private schools (Committee for Public Education v.
Subsequently the Court has affirmed several lower Federal
U.S. 756 (1973)).
court decisions invalidating other tax allowances for such payments.
detailed analysis of the constitutional issues affecting tuition tax credits,
see the CRS paper, "Analysis of Constitutionality of S.
550 of the 97th
Congress. The Compatibility of Tax Credits for Tuition and Fees Incurred at
Elementary Secondary, Vocational, and Postsecondary Schools with the Religion
Clauses of the First Amendment," by David Ackerman).
Opponents of tuition tax credits argue that the Supreme Court is likely to
They argue that a tax
find a Federal tuition tax credit unconstitutional.
credit for elementary and secondary school tuition payments would benefit
only a small proportion of American schools (about 18%), most of which
sectarian, and an even smaller proportion of school children
most of whom attend sectarian schools.
In addition, they claim that the aid
provided by an elementary and secondary tax credit could not be described as
"incidentalw: with median tuition costs of about $500 for private elementary
schools and $1,200 for private secondary schools (Congressional Budget Office
a tax credit of several hundred dollars
insubstantial. Most important, pointing to the sectarian instruction in many
schools, opponents argue that tax credit money
could not be
restricted to secular uses, a t least not without close
Proponents of tuition tax credits generally argue that only the Supreme
Court can rule definitively on constitutionality and that the Congress should
not prejudge the issue. They also assert that carefully drawn
can avoid some of the pitfalls associated with State programs.
that benefits could be larger and more heterogeneous, particularly if
postsecondary education tuition expenses are included as well.
purpose of promoting
freedom of choice and fostering competition among
schools could be made clear.
How Federal funds strengthen basic instruction
in private schools, benefitting society as a whole, could be emphasized.
Proponents also argue that the Court's guidelines have not been applied with
consistency, that some constitutional historians criticize them, and that i t
is possible they may be modified or even abandoned in the future.
6. EQUAL EDUCATIONAL OPPORTUNITY
Whether tuition tax credits would further or impede efforts to provide
equality of educational opportunity is a matter of debate.
that tuition tax credits would give lower income families many of the same
educational options that higher income families now have.
they claim that lower income families now forced to enroll their children in
poor quality, and often dangerous, inner city public schools would be able to
send them to alternative schools.
It is sometimes added that allowing
parents to choose schools in this manner might stimulate a l l schools, public
as well as private, to do better.
Proponents deny that tuition tax credits
would foster more school segregation in the United States. They might
out that Catholic schools, which
constitute about three-quarters of all
private elementary and secondary schools, together have an enrollment in
which more than 8% of the students are black and more than 8% are Hispanic.
Proponents also claim that tuition tax credits would further voluntary
integration in schools, arguing that parents might not be
so reluctant to
have their children attend desegregated schools
schools, because they are private, will remain
if they believe
stable and maintain
Opponents of tuition tax credit argue that since most tuition tax credit
money would go to families with relatively high incomes, it would do little
to promote equal educational opportunity. According to Congressional Budget
Office estimates, with a hypothetical $250 refundable credit for elementary
and secondary education tuition payments covering 50% of tuition costs,
approximately 42% of the money would go to families with incomes greater than
$30,000, about 42% would go families with
$30,000, and only 16% would go to families with incomes less than $15,000. If
the credit were not refundable, families with relatively low incomes would
get even less of the money (see section 4 , above, for estimates on what
proportion of postsecondary education tuition tax credit money would go to
these family groupings). Opponents also argue that tuition tax credits would
benefit schools with few if any low income or minority students. They assert
that many of the private schools that would be aided attract students who are
trying to avoid desegregated
(In January, 1982, the
Administration announced that it would no longer deny tax exempt status
requirement for tuition tax credit eligibility under S. 550 and many
to schools that discriminate by race.
tax allowance bills
Administration subsequently sent legislation to the Congress that would
re-establish the prohibition for schools with racially discrimatory policies,
and although the Department of the Treasury presently is under a court order
prohibiting it from granting exemptions to such schools, the ultimate outcome
of the issue remains unclear. For additional information see the CWS paper
"Legal Analysis of Administration Bill Regarding the Tax Exempt Status of
Private Schools that Discriminate on the Basis of Race" by David Ackerman).
Since tuition tax Credits would reduce the revenue otherwise collected by
the'Interna1 Revenue Service, what they would cost has become an issue
section 8, below, for analysis of the issue of tax expenditure financing).
The extent to which Federal revenues would be reduced depends on the
particular form sf tax credit authorized.
According t o the Congressional
Budget Office, a hypothetical $250 nonrefundable
credit, covering 50% of
elementary and secondary tuition payments, would cost $1,324,000,000 (this
and subsequent figures refer to the estimated cost for 1 year, assuming
Current school enrollments).
The identical credit for postsecondary
payments is estimated to cost $945,000,000.
If this same credit were
refundable (that i s , if the taxpayer were to be paid
the amount which
total credit exceeded his tax liability), the cost would be $1,431,000,000
for elementary and secondary education and $1,043,000,000 for postsecondary
A $500 nonrefundable credit for elementary and
education is estimated to cost $ 1 , 9 0 1 r 0 0 0 s 0 0 0 ; for postsecondary
the cost is estimated to be $1,475,0001008.
The Congressional Budget Office has also estimated the revenue loss for S.
550 (the Packwood/Moynihan bill, described below).
Its projections, made in
the spring of 1981, are shown in the following table:
Estimated revenue effect of S. 550, fiscal years 1982-1986
(Millions of dollars)
College and other
Total revenue effect
of the bill
The Office of Tax Analysis in the Department of the Treasury has estimated
the cost of S. 2673, President Reagan's elementary and secondary education
tuition tax credit proposal.
the OTA estimates given here are
revisions of estimates released earlier for the President's plan.
previous estimates, which may still be found in some analyses of the plan,.
were somewhat higher.)
Estimated revenue effect of S. 2673, fiscal years 1983-1987
(millions of dollars)
Opponents of tuition tax credits argue that these costs a r e unjustifiable.
Given concern over the Nation's economic problems, particularly about the way
the Federal budget deficit may. contribute to them, they argue that new
measures which in effect increase Federal expenditures are not warranted.
Some also argue that tuition tax credits should not be enacted a t a time when
Federal support for other educational programs is being cut.
Proponents of tuition tax credits argue that they should not be considered
for families that are overburdened because of the additional investment they
make in education.
Now is said to be an appropriate time to authorize
tuition tax credits since Congress is considering ways to reform taxes i n
Some proponents also question whether tax credits should be
considered a Federal expenditure a t all since they believe this would imply
that money which i s not paid in taxes belongs to the government.
a new expenditure; rather, they should be viewed a s a form o f
TAX EXPENDITURE FINANCING
Tuition tax credits would be classified as tax expenditures according
the Congressional Budget Act of 1974 (P.L.
since they would
"revenue losses attributable to provisions of the Federal tax laws which
allow a special exclusion, exemption, or deduction from gross income, or
which provide a special credit, a preferential rate of tax, or a deferral of
Some opponents of tuition tax credits argue that tax
expenditures are not an appropriate way for the Federal Government to finance
education. They point out that since tax credit legislation would not
normally be considered by
the committees that have jurisdiction over
legislation authorizing Federal education programs, or that oversee those
programs, there would be no committee that could compare all pieces of
educational legislation, assess their strengths and weaknesses, and shape
them according to a general policy perspective.
In particular, it is argued
that tuition tax credit legislation needs to be carefully studied in light of
existing Federal postsecondary
education student assistance programs and
Federal efforts to promote equality of educational opportunity (see sections
4 and 6 , above)
Tuition tax credits would not be subject to annual
appropriation reviews, making it difficult to weigh their cost to the
government against the revenue needs of other education programs included in
the Federal budget.
Some people also argue that tax expenditures in general
ought to be restricted:
in their view, tax expenditures unnecessarily
complicate the tax code, create problems of tax equity,
administrative burdens on the Internal Revenue Service.
Tuition tax credit proponents might argue that the tax code already is
widely used as a funding mechanism.
Numerous tax expenditures are currently
authorized, including such familiar provisions as deductions for interest
paid for consumer debt or home mortgage loans, exclusions of limited amounts
of dividend income, and residential energy credits (see section 2 on p. 5 for
Federal tax expenditures related to education).
Proponents could cite
estimates the Joint Committee on Taxation made prior to the passage of the
Tax Incentive Act of 1981 that the total of all tax expenditures for
individuals and corporations would exceed $260 billion in FY82 (while the Tax
Incentive Act authorized expanded tax expenditures, the dollar total may
decline since the Act also reduced many tax rates).
In their view, to say
that there could be no additional tax expenditures for education would be to
discriminate against an important social function.
Proponents might also
argue that there are numerous legislative issues for which one congressional
committee does not have comprehensive jurisdiction.
They could point out
that tax expenditures could be subject to comparative evaluations with other
programs through the annual budget process.
(For additional information
about Federal tax expenditures, including a listing of them by budget
function, see "Special Analysis G n in The Budget for Fiscal Year 1983.)
FEDERAL ROLE IN EDUCATION
Tuition tax credits would represent a significant change in the Federal
sole in education.
At present, nearly all Federal funds for elementary and
secondary education are provided through categorical programs for particular
purposes, such as compensatory education,
vocational education (though begining in July 1982, a number of the smaller
elementary and secondary programs have been consolidated
Many of these programs have requirements designed to further
equality of educational opportunity, such as a provision in the compensatory
education programs funded under Chapter 1 of the Education Consolidation and
Improvement Act that children in low income areas be served first.
tax credit money would not be restricted to a particular educational purpose
(though conceivably it might be limited to students at certain kinds of
schools), nor would
it be explicitly directed toward promoting equal
Most Federal postsecondary
programs currently are need based
in that students are not eligible to
receive more support than they require (considering their family income and
other resources) to attend school. Tuition tax credits would not be
Proponents of tuition tax credits argue that these changes are long
In their v i e w , the many Federal categorical programs must be
administered by a large bureaucracy that has gained too much
schools and colleges. The programs' numerous provisions and requirements are
said to generate confusion and paperwork; they are said to frustrate
educatorst efforts t o work on the very problems Federal programs were
designed to solve.
In contrast, it is claimed that aid provided
tuition tax credits would be simple to administer; it would not constrain
parents and educators who are trying to improve schools; and it would
give the Federal Government the .control it now has over American education.
Opponents of tuition tax credits argue that it is essential to
some conditions on recipients of Federal aid. They could claim that without
restrictions there would be no assurance that public
funds get used
efficiently or for public purposes.
For example, tuition tax credit money
might only result in higher prices for education (if schools simply
more for what they now provide), or it might only supplant current sources of
support (if parents spent the money - they now pay for tuition on other
(Contrary to this argument, some opponents believe that tuition tax
credits would entail conditions that eventually could result in government
control of private education.)
Opponents also argue that it is important for
the Federal Government to identify the purposes for which its money ought to
In their view, there are national education problems that require
national attention and resources.
such direction, Federal money
would be used only for general educational expenses, which traditionally has
been the responsibility of the States, local communities, and parents.
LEGISLATIVE HISTORY PRIOR TO THE 97th CONGRESS
Congress has considered tuition tax credit legislation a number o f times
in recent years.
The Senate passed tuition tax credit measures i n 1967,
1969, 1971, 1976, and 1977, but it was not until 1 9 7 8 , when both
and the Senate passed such measures, that tuition tax credit legislation came
close to obtaining final congressional approval.
(For details of this
legislative activity, including references to recorded votes, see the CRS
paper "Legislative Activity on Tuition Tax Credits Prior to the 97th
Congress," by Bob Lyke.)
In April 1978, the House Committee on Ways and Means reported H.R.
the Tuition Tax Credit Act of 1978, with amendments. As reported, the bill
provide a nonrefundable tax credit for
postsecondary education expenses, up to a limit of $100 in 1978, $150 in
1979, and $250 in 1980. When H.R. 12050 was passed by the House on June 1 ,
1978, it was amended to include graduate postsecondary education expenses, up
to the same limits, as well as elementary and secondary tuition expenses, up
to a limit of $50 in 1978 and $100 in each of 1979 and 1980.
In the Senate, the Committee on Finance reported H.R.
12050, which it
renamed the Tuition Tax Relief Act of 1978, with amendments i n early August
(In February the committee had previously
House-passed bill aealing with import duties on wool, striking its language
and substituting provisions for a refundable tax credit for 50% of tuition
expenses for elementary,
vocational schools, up to certain limits. This bill was never considered on
the Senate floor).
As reported, H.R. 12050 would provide a nonrefundable tax
credit for 50% of undergraduate tuition expenses, up to a limit of $250 prior
to Oct. 1 , 1980, and $500 thereafter; it also would provide such a credit for
elementary and secondary tuition expenses, though only after Sept. 3 0 , 1980,
up to a limit of $250. When H.R. 12050 was passed by the Senate on Aug.
1978, the undergraduate tuition expense provision was expanded to include
postsecondary education education in general, while the elementary and
secondary provision was deleted. Authorization for credits was limited to
the period before Jan. 1 , 1984.
On Oct. 3 , 1978, the Conference Committee on H.R. 12050 reported a version
of the bill that would provide a nonrefundable credit for
postsecondary education tuition expenses, up to a limit of $100 in 1978, $150
in 1979, and $250 in 1980 and 1981. No credit was authorized for elementary
or secondary school tuition payments.
The House rejected this proposal,
voting on Oct.
1 2 to recommit the Conference Report.
Committee submitted a second report on Oct. 1 3 , amending the version of the
bill it had reported earlier to include a nonrefundable credit for 35% of
secondary (but not elementary) school expenses, up to a limit of $5Q in 1978
and $100 in 1979, 1980, and 1981. On Oct. 1 5 , shortly before it adjourned
for the remainder of the session, the Senate rejected this second proposal.
During the final days of the session one other attempt was made to
authorize tuition tax credits.
On Oct. 6 , the Senate amended B,R. 13511, the
Revenue Act of 1 9 7 8 , to include a nonrefundable tax credit for 35% of
postsecondary education tuition expenses, up to a limit of $100 in 1978, $150
in 1979, and $250 in 198Q and 1981 (the same provisions reported in the first
report of the Conference Committee on H,R. 12050, described above.
1 5 , the Conference Committee o n H.R. 13511 reported a version of the bill
that excluded any tuition tax credit.
Both the House and the Senate
immediately approved the bill in this form.
Thus no tuition tax credit legislation was enacted during the 95th
Congress* One season for this was strong opposition from President Carter,
who tnreatened to veto any such measure.
Another was that shortly before
adjournment Congress instead enacted the Middle Income Student Assistance Act
Among other things, this Act reduced the assessment rate
applied to parental discretionary
Educational Opportunity Grants (now named Pel1 Grants) and eliminated the
family income limit for determining eligibility for interest subsidies for
Guaranteed Student Loans. Because of these provisions, some people argued
that tax credits for postsecondary education tuition payments were no longer
S. 550 (Packwood)
Tuition Tax Relief Act of 1981. Amends the Internal Revenue Code to allow
a n individual taxpayer to claim a credit for educational expenses paid for
himself, his spouse, or his dependents.
The credit for any one such
individual during a taxable year shall not exceed 50% sf the educational
expenses (defined a s tuition and required fees, but not including such
matters as books, supplies, equipment, transportation, or living expenses),
after these have been reduced by scholarships and other forms of financial
assistance, educational expenses taken into consideration shall not exceed
$500 for the period from Aug. 1 , 1982 through July 3 1 , 1 9 8 3 , or $1,000 for
each taxable year thereafter.
Credit cannot be claimed for expenses prior to
Aug. 1 , 1982. The credit is to be refundable.
Credit may be claimed for educational expenses at institutions of higher
education, area vocational schools, and private elementary and secondary
(including facilities, whether public or private, that
education for the handicapped as a substitute for regular elementary or
Elementary and secondary schools must be exempt from
taxation under section 501 of the Internal Revenue Code; in addition, they
must not exclude persons from admission or participation on account of race,
Color, or national or ethnic origin. Credit may be
claimed for graduate
students and part-time students (provided they are at least half-time)
after July 31, 1984.
No other credit or deduction shall be allowed for any educational expenses
taken into account
(after the above-mentioned limits are applied)
calculating the credit for educational expenses.
Reauctions in taxes or refunds due to credits for educational expenses
shall not be taken into account as income for purposes of determining
eligibility or amount of assistance under any Federal educational assistance
program (or under any such State or local program
financed with Federal
Nothing in this Act shall be construed as granting additional authority to
examine the account books or activities of any church-related school.
If any provisions, or their applications, of this Act (or of the Internal
Revenue Code relating to this Act) are held invalid, . the remainder of the
provisions, and their applications, shall not be affected.
Congress declares it to be the policy
of the United States to foster
educational opportunity, diversity, and choice for all Americans.
legislation should recognize the right of parents to direct the education and
upbringing of their children; it should also provide relief for the financial
burden families must bear to obtain the education that best serves their
needs and aspirations.
Introauced Feb. 24, 1981: referred to Committee on Finance.
by Subcommittee on Taxation and Debt Management on June 3-4, 1981.
S. 2673 (Dole)/H.R.
Educational Opportunity and Equity Act of 1982.
(This bill is President
Reagan's tuition tax credit proposal.)
Amends the Internal Revenue Code to
allow an individual taxpayer to claim a credit for 50% of the tuition for
full-time elementary or secondary school enrollment
course fees) paid by the taxpayer during the tax year for certain dependents
who have not attained the age of 20 by the end of that year.
credit .with respect to each such dependent to $100 in 1983, $300 in 1984, and
$500 in 1985 and after.
Reduces those limits by
respectively, of the adjusted gross income each year i n excess of $50,000 (or
of $25,000, i n the case of a married individual filing a separate return).
Provides that tuition expenses for Which credit is allowed may not include
amounts attributable to scholarships, veteranst educational benefits, or
other tax exempt financial assistance for education
(other than gifts and
States that no other Federal tax credit or deduction
shall be permitted f o r any tuition expenses taken into account in determining
the amount of the credit.
Includes provision that schools which eligible dependents attend must be
private, nonprofit institutions exempt from taxation under sec. 501 of the
Internal ~ e v e n u eCode.
They must provide full-time programs of elementary or
In addition, the schools must not follow a tvracially
(The term "raceN is to include color and national
origin,) Failure to pursue or achieve a n y " racial quota, proportion, or
representation in the student body shall not be deemed such a policy.
Measure states that a person who alleges he has been discriminated against
under a racially discriminatory policy may within 180 days file a petition
with the Attorney General, who shall promptly notify the school i n writing of
the allegations. Within one year after receiving the petition, and upon
finding of good cause, the Attorney General is authorized to bring an action
in Federal district court in which
the school is located, seeking a
declaratory judgment that the school has followed a racially discriminatory
policy and discriminated against the person filing the petition.
bringing such an action, the Attorney General shall give the school a fair
opportunity to comment on the allegations and to show that the racially
discriminatory policy does not exist or has been abandoned.
discriminatory policies lies with the Attorney General.
Provides that no credit shall be allowed unless at the end of
year the school. files w'ith the Secretary of the Treasury a statement, subject
to the penalties for perjury, that the school has not followed a racially
discriminatory policy that year and indicating whether the Attorney General
has brought an action for declaratory judgment during that or either of the
two preceding years.
A copy of this statement shall be furnished to all
persons who paid tuition that year and must be attached to'their tax return
in order for them to claim the credit.
Also provides that no credit shall be allowed for tuition paid to schools
for which a declaratory judgment sought by the Attorney General has become
final (that is, when all parties have exhausted all appellate review),
beginning with the calendar year in which the action was brought.
judgment becomes final.
credit shall not be disallowed until a declaratory
If a previously claimed credit is disallowed, any tax deficiency
expire until 3 years from the final judgment.
States that tax credits do not constitute Federal financial assistance
recipients or to educational institutions.
Measure states that Congress finds that it is the policy of the United
States to foster educational opportunity, diversityp and choice.
legislation should recognize that pluralism is one of the great strengths of
American society and that nonpublic shcools play an indispensable
providing diversity; that public
competition; that Americans should have equal opportunities to choose between
public and private education; that increasing numbers of families are unable
to afford nonpublic school tuition in addition to State and local taxes for
public schools; that tax credits would result in small revenue loss compared
to the cost to State and local taxpayers of providing public school
education; and that equality of educational opportunity is the policy of the
United States and that tax credits should not be used to promote
S. 2673 introduced June 23, 1982 and referred
hearings held by the committee o n July 1 6 , 1982.
2 4 , and referred to Committee on Ways and Means.
to Committee on Finance;
H.R. 6 7 0 1 introduced June
Committee on the Budget.
force on tax expenditures, government organization and
Hearings, 95th Congress, 1st session.
College tuition tax credits. Apr. 2 8 and May 1 2 ,
1977. Washington, U.S. Govt. Print. Off., 1977. 1 1 4 p.
House, Committee on Education and Labor.
Subcommittee on Elementary, Secondary, and Vocational
Oversight on private schools. Hearings,
97th Congress, 1st session. May 13-14 and Sept. 1 6 and 22-23,
1981. Washington, U.S. Govt. Print. Off., 1981.
Committee on Ways and Means. Tax treatment
of tuition expenses.
Hearings, 95th Congress,
Feb. 14-17 and 21, 1978.
Washington, U.S. Govt. Print. Off., 1978.' 627 p.
"Serial no. 95-56"
Committee on Finance.
Taxation and Debt Management Generally. Federal tax
proposals to help defray middle income families'
Parts 1-2 plus supplementary material.
Hearings, 95th Congress, 2d session.
1978. Washington, U.S. Govt. Print. Off., 1978.
7 2 4 p.
Tuition Tax Credits.
Hearings, 97th Congress,
1st session. June 13-14, 1981. Washington, U.S. Govt. Print.
REPORTS AND CONGRESSIONAL DOCUMENTS
Revenue Act of 1978, H.R. 13511.
(Debate and vote in the
Senate). Congressional record, [daily ed.] v. 124, Oct. 5-6,
S17193-S17200 and S17332-517334.
Tuition Tax Credit Act of 1 9 7 8 , H.R. 12050.
vote in the House).
Congressional record, [daily ed.] v. 124,
June 1 and Oct. 12, 1978:
H4727-H4799 and H12612.
Tuition Tax Credit Act of 1 9 7 8 , H.R. 12050.
vote in the Senate).
Congressional Record, [daily ed.] v. 1 2 4 ,
Oct. 1 5 , 1978:
(CR date of Oct. 1 4 , 1978).
Tuition Tax Relief Act of 1 9 7 8 , H.R. 12050.
vote in the Senate).
Congressional record, [daily ed.] v. 124,
Aug. 10-11 and 14-15, 1978:
S13070-S13072, S13106-S13136, S13146S13161, S13191S13231, S13236-S13256, and S13310-S13387.
Congress. Joint Committee on Taxation.
Summary of testimony on tuition tax credits and other proposals
relating to educational financial assistance. Apr.
7 , 1978.
(95th Congress, 2d session.)
"Serial no. 16-78."
CHRONOLOGY OF EVENTS
The Senate Committee on Finance held a day of
hearings on S. 2673, the Administration's tuition
tax credit bill.
President Reagan submitted to Congress legislation for
implementing the tuition tax credit proposal he announced on
Apr. 1 5 , 1982. The bill was introduced by Senator Dole as
S. 2673 (for a summary of the bill, see the Legislation
The Eighth Circuit Court of Appeals upheld the
constitutionality of Minnesota's tuition tax deduction
law, which authorizes taxpayers to deduct from the
calculation of their gross income certain tuition,
textbook, and transportation expenses incurred on
behalf of dependents attending public or private
elementary and secondary schools.
President Reagan announced the Administration's
draft prOpQSal for tuition tax credits. Under this
proposal, parents of children attending private,
nonprofit elementary or secondary schools would be
able to claim an income tax credit for 50% of the
tuition paia for each Child, up to a per child
maximum credit of $ 1 0 0 in 1983, $300 in 1984, and
$500 in 1985. The full credit would be available
Only to families with adjusted gross income up to
$50,000; above that sum the credit would be reduced,
being phased out entirely for families with adjusted
gross incomes of more than $75,000. The credit would
not be available with respect to schools that
discriminate on the basis of race, color, or national
origin. According to the White House, a draft bill will
b e transmitted to Congress later this spring after
The President's FY83 budget stated that "Later in the
year, the Administration will transmit to Congress
a plan to implement a program of tax credits for
families of tuition paying students."
President Reagan submitted to Congress legislation
that would deny tax exempt status to schools with
racially discriminatory policies.
The Treasury Department announced that it would no longer
deny tax exempt status to private schools that
discriminate on the basis of race.
The House Subcommittee on Elementary, Secondary, and
Vocational Education held one day of hearings o n
proposals for tuition tax cre.dits.
President Reagan signed H.R. 4242, the Tax
Incentive Act of 1981 (P.L. 97-34).
The Act does
not contain a provision for tuition tax credits.
Such a provision was not formally considered in the
House, either during deliberations of the Committee
on Ways and Means or during floor debate.
Senate, a tuition tax credit provision was formally
Considered during deliberations of the Committee on
Finance (see the entry below for June 24, 1981),
but not during floor debate.
The Senate Committee on Finance rejected by
a vote of 10-3 a proposal to provide a tax
credit of up to $500 per student for tuition
payments t o private elementary and secondary
The Subcommittee on Taxation and Debt Management
of the Senate Committee o n Finance started 2 days
of hearings on tuition tax credits.
The Subcommittee on Savings, Pensions, and Investment
Policy of the Senate Committee on Finance held one day
of hearings o n S. 2 4 and S. 243, bills which among
other things would authorize tax deductions for higher
education savings accounts.
President Reagan stated i n his economic address
to the Congress that he would join with others
to seek various changes i n Federal tax l a w s ,
including enactment of tuition tax credits, "at
the earliest date possible,** after his program
for economic recovery (which would include tax
cuts) had been acted upon.
ADDITIONAL REFERENCE SOURCES
Epstein, Noel and Marshall Smith, Violating the Reagan
creed, Apr. 1 2 , 1981, Washington post, Dl, D5.
Government neutrality and separation of church and State:
tuition tax credits.
Harvard law review, v. 9 2 ,
Hollings, Ernest F.
The case against tuition tax credits.
Phi delta kappan, v. 6 0 , Dec. 1978:
Hunter, Howard 0. The continuing debate over tuition tax
credits. Hastings constitutional law quarterly, v. 7 ,
Jacobs, Martha J.
An update; who would benefit from tuition
679Phi delta kappan, v. 6 1 , June 1980:
Freedom of choice for inner-city parents.
National review, v. 32, July 25, 1980:
Tax policy an tuition credit legislation:
McNulty, John K.
Federal income tax allowances for personal costs of
California law review, v , 6 1 ,
Moynihan, Daniel Patrick. The case for tuition tax credits.
Phi delta kappan, v. 6 0 , Dec. 1978:
What do you do when the Supreme Court is wrong?
public interest, no. 57, fall 1979:
consequences of tuition tax credits.
Yale law journal,
v. 8 9 , Nsv. 1979: 168193.
The public school lobby fends off tuition tax
a t least for now.
National journal, v. 1 3 ,
June 13, 1981:
Congress. Congressional Budget Office.
to postsecondary students: tax allowances and alternative
subsidies. Washington, Jan. 1978: i-xx; 1-68.
Tuition tax credit proposals:
West, E . G .
analysis of the 1978 ~ a c k w o o d / M o y n i h a n bill.
review, no. 3 , winter 1978: 61-75.
Glen A ,
Income tax cleductions and credits for
nsnpublic education: toward a fair definition 0 % net
income. Harvard journal on legislation, v. 16, Dec.