Economic Recovery and Deductions for Worker Training

August 13, 2020

Yesterday, Scott Pulsipher and Michael B. Horn wrote on RealClearPolicy.com, “An obstacle to employers investing more in their employees’ education is that Section 127 of the tax code has been frozen in time since 1986.” Section 127 allows employers to provide up to $5,250 annually for worker education costs that can be tax-deductible and excludable from employee wages. Education costs above this amount are not deductible under current law.

The authors argue that reskilling is a practical response to the acceleration of technological disruption brought on by the COVID-19 pandemic and that increasing the $5,250 limit on the employer deduction for education would help facilitate this investment in worker training.

While increasing the limit to better cover education expenses makes sense given the deduction has been fixed for more than 30 years, the underlying tax treatment of investment in worker training and education remains biased and presents an opportunity for wider reform.

As we have written previously:

Currently, employers can deduct certain qualified education and training expenses for tax purposes, and certain qualified educational benefits are excludable from the taxable portion of employees’ wages. Generally, at the firm level, only education expenses which improve worker skills for their current positions are deductible. If the education would qualify workers for a new type of work, the expenses are not deductible. At the individual level, the tax treatment of educational expenses varies by income level and type of education.

These differences are important because tax treatment is relevant to human capital investment decisions, and human capital accumulation is a key driver of economic growth. Differing tax treatment can distort costs of investments and decision-making by firms and individuals.

Expanding the dollar amount of training that employers are eligible to deduct would help cover more of the costs of education, but reforms should also include further expansion to allow all types of training to be deductible. Discussions should acknowledge that while elements of education spending may actually be consumption, there may be positive spillover effects from education spending too. Additionally, reforms to consolidate the myriad of overlapping education provisions available to individuals would improve simplicity and administrability and help individuals make optimal choices about which tax provision to claim.

Investments in worker training and education can increase productivity and economic output as growth in human capital accumulates, though the time horizon for these effects is longer than that of physical capital accumulation. But the bottom line is that tax treatment can affect investment decisions and extending expensing treatment (full and immediate deductions) to all forms of capital investment, human and physical, would move the tax code in a more positive direction and facilitate sustainable long-run economic growth.

Was this page helpful to you?

No

Thank You!

The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work?

Contribute to the Tax Foundation

Related Articles