Tax Foundation President Testifies on Education Incentives

July 25, 2012

Hodge Critiques Use of Federal Credits to Subsidize College Costs

Washington, D.C., July 25, 2012––This morning, Tax Foundation President Scott Hodge will testify before a Senate Finance Committee hearing on the use of tax credits as a means of reducing the costs of higher education. With the elimination of several credits currently scheduled for the end of the year, the Committee will be seeking suggestions on how best to get rising tuition costs under control and what role the federal tax code should play.

Hodge’s testimony will explain how the shift away from traditional loan and direct subsidy programs (such as Pell Grants) toward the use of various tax credits and deductions tends to benefit high-income taxpayers much more than low income families. Further, he will explain several other serious, unintended consequences of using tax policy to promote higher education, such as the relationship between tax credits and higher education costs.

“Subsidized student loans and education credits are helping to fuel rising college costs by disconnecting student-consumers from the true cost of higher education,” said Tax Foundation President Scott Hodge. “In turn, the benefits of these programs get capitalized into tuition costs because universities can boost tuitions without suffering the normal market backlash.”

The recent expansion of education credits is part of the larger trend of Congress attempting to enact social policy through tax provisions rather than directly through spending measures. The over-use of tax credits has turned the Internal Revenue Service into an extension of – or substitute for – any number of other government agencies. As a result of forcing the IRS to take on programs it is not equipped to manage, these credits tend to be abused and fraud rates are very high.

In addition, the ever-increasing number of tax credits offered by the federal government has dramatically raised the number of “nonpayers,” individuals who earn enough income to file a tax return, but who have no net tax liability for the year. Individuals who now benefit from government services but pay nothing to fund them – currently 58 million people, or 41 percent of filers – constitute a new class of Americans who are increasingly disconnected from the cost of government.

The rising cost of education is not something that can be efficiently or effectively fixed through a simple reform of tax credits. Rather, a reform of the tax code as a whole is needed.

The full text of Scott Hodge’s testimony before the U.S. Senate Committee on Finance on the use of tax credits as a means of lowering the cost of higher education is available online. More Tax Foundation research on education and taxes is available here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or

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