There are over a dozen provisions in the federal tax code concerning higher education. Most are aimed at making college more affordable for American students and encouraging them to pursue higher learning. However, there is little evidence about how well these taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. provisions work and whether they result in higher levels of education.
Earlier this month, Caroline Hoxby and George Bulman, two economists, released a new paper, “The Effects of the Tax Deduction for Postsecondary Tuition: Implications for Structuring Tax-Based Aid.” The paper sheds a pessimistic light on federal tax provisions aimed at encouraging higher education.
Hoxby and Bulman examine one specific provision of the tax code, the tuition and fees deduction, which allows households to deduct up to $4,000 in higher education expenses. The tuition and fees deduction was enacted as part of the 2001 Bush tax cuts, although it has been claimed less often over the past few years due to the expansion of the American Opportunity Tax Credit, another education incentive.
Using several sophisticated statistical techniques, Hoxby and Bulman investigate if the tuition and fees deduction has shaped students’ choices about education: whether they pursued higher education at all, whether they attended a two-year or four-year college, and how expensive a college they chose. The authors summarize their findings:
Although many eligible households take nearly the maximum deduction allowed, we find no evidence that it affects attending college (at all), attending full- versus part-time, attending four- versus two-year college, the resources experienced in college, the amount paid for college, or student loans.
In short, allowing students to deduct their college tuition did not affect their educational choices in any significant way.
Bulman and Hoxby propose several explanations for why the tuition and fees deduction is so ineffective at promoting higher education. They suggest that households simply may not be sensitive to the price of college: students that do not wish to go to college might never do so, no matter how generous the tax incentives. Or perhaps, they suggest, when choosing whether to go to college, students are simply unaware that the tuition and fees deduction exists – a reasonable explanation, given the overwhelming complexity of the income tax code.
Last year, Bulman and Hoxby published a similar study of three federal education credits, which concluded that all three have a “negligible” effect on college attendance. This finding was in stark contrast to the Obama administration’s claim that the expansion of the American Opportunity Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. made it possible for 12 million more students to earn a college degree.
It should not be concluded from these studies that American households do not respond to all changes in the tax code. In fact, there are other studies that show unusually large responses to changes in taxes, such as one recent paper on carbon taxes. Rather, Bulman and Hoxby’s study of the tuition and fees deduction shows the importance of examining each provision of the tax code separately, to determine how taxpayers respond to it.
The tuition and fees deduction expired on January 1st, 2015, along with fifty other tax provisions, known as tax extenders. As Congress considers renewing the tax extenders for another two years, it is worth considering which of these provisions achieve their intended effects.
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