Update on “Higher Education and Skills Obtainment Act”

Last month, I released a paper analyzing a bill introduced by Senator Marco Rubio (R-FL) and Representative Aaron Schock (R-IL) that would reform the current tax provisions for high education expenses.

The bill, the “High Education and Skills Obtainment Act,” would repeal all current education benefits, the three tax credits and one deduction, and replace them with one, non-refundable, tax credit. In addition, it would extend the credit to workforce training programs and attempt to cut back on improper payments through stronger enforcement.

I argued that this is a positive reform. It simplifies the tax code, attempts to cut back on improper payments, and limits the credit to those who probably need it the most, saving taxpayers’ money. All good things.

At the time, Rubio and Schock’s offices estimated that it would save approximately $10 to $15 billion over a ten year period.

Now the JCT has officially “scored” the bill, finding that the savings are about twice as much as what Rubio and Schock had earlier estimated.

As the chart from the JCT indicates, the total savings will equal $26.56 billion over a ten year period. All of the savings will occur in the first five fiscal years. After 2018, the act begins costing more each year compared to current law.

I assume that the larger-than-expected savings is due to an assumption that the JCT is making that college enrollment may keep increasing. This makes current law more expensive than Rubio and Schock originally thought.

You may also be wondering why this new bill will cost more in the out years. This has to do with the coming expiration of the refundable American Opportunity credit.

This credit was passed in 2009 as a temporary replacement for the non-refundable Hope Scholarship Credit. Currently, the American opportunity credit is the most costly of the three credits. According to IRS data from 2009 and 2010, the refundable portion alone made up 33 percent of the total cost of all education credits for those two years. It is also more costly than Rubio and Schock’s non-refundable credit.

Under current law, this credit is set to expire in 2017. After which, the less-generous Hope Credit will retake its place and the total cost of education tax credits will naturally decrease.

However, Rubio and Schock’s bill will replace current law with a tax credit that is more generous than the Hope Credit, yet less generous than the American Opportunity Credit. During the years in which it replaces the American Opportunity Credit, the government will save money, but during the years in which it replaces the Hope Credit, the government loses money.

That being said: this current law estimate from JCT showing increased costs in the latter half of the budget window shouldn’t be taken too seriously. Barring comprehensive tax reform, I am not confident that lawmakers will allow the American Opportunity tax credit to expire. They have extended it twice already: once in 2010 and once in 2012.