The House Committee on Ways and Means convened this afternoon in a “markup” session to begin consideration of H.R. 1, the Tax Cuts and Jobs Act (TCJA), a tax reform package that would slash corporate income tax rate and some individual income tax rates and raise the standard deduction, offsetting the cost by eliminating some cherished itemized deductions. The legislation is the first draft of a bill for tax reform and is expected to be under consideration by the Committee throughout this week with many possible amendments likely to be taken up. (A markup session is the name given to when a Congressional committee or subcommittee meets to debate, amend or rewrite a bill. The committee has the option of either accepting or rejecting the final version of the bill that comes out of the markup session.)
Several of bill’s provisions would likely impact school districts in a negative way. These include:
Educational Savings Accounts – H.R. 1 proposes to phase out so-called Coverdell accounts, in which money set aside for future education costs accumulates tax-free, and guide savers into so-called “529” college savings plans. Further, H.R. 1 would change 529 plans so they would allow savings to be used to pay for either college expenses or for the costs of elementary and secondary education.
Coverdell plans are similar to 529 plans, in that both offer tax-free withdrawals when the funds are used on qualified education expenses. Currently, however, only Coverdell plans can be used to save for K-12 education costs and only up to $2,500. Under H.R. 1, up to $10,000 from a 529 plan could be used for K-12 expenses, including tuition for private K-12 schools.
The WASB opposes this provision. Delegates to the January 2017 WASB Delegate Assembly specifically adopted Resolution 2.09, Education Savings Accounts, which states:
2.09 Education Savings Accounts The WASB opposes the creation of Education Savings Accounts for preK-12 educational expenses. (2017-16)
Critics of this provision argue it would primarily benefit wealthy families and would drain potential resources from public school districts and the innovate efforts they are making to boost student achievement of all students.
State and Local Tax Deductibility – H.R. 1 would limit full deductibility of state and local taxes—e.g., state income taxes and local property taxes. Under H.R. 1, taxpayers would be unable to deduct any state income taxes, the main source of Wisconsin’s state aid to schools. In somewhat of a compromise, Congressional Republicans have agreed to keep the deduction for local property taxes on the books, but limit the amount of property taxes taxpayers would be able to deduct to $10,000. However, without the ability to deduct state income taxes, many taxpayers may not be able to qualify to itemize their deductions due to the increase in the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly.
Critics say that together, these changes could significantly pinch Wisconsin’s ability to fund K-12 spending at the district and state level, as it is likely that without the federal deduction for those taxes, states like Wisconsin would feel significant pressure to cut their own taxes, which would in turn strip out a lot of revenue for public schools.
School Bond Programs and Advance Refunding – H.R. 1 proposes to eliminate municipal bond programs that benefit school construction projects and other capital improvements for school districts, along with advance refunding of bonds. Advance refunding allows a bond issuer to refinance the bond on a one- time basis to reflect a lower interest rate, which is a cost-savings to taxpayers.
Critics of this change urge Congress to retain the programs that H.R. 1 proposes to eliminate in Sections 3601, 3602 and 3603. They argue these provisions promote important investments in maintaining public school infrastructure and help foster safe, healthy and innovative learning environments.
Teacher Tax Credit – H.R. 1 would repeal the $250 above-the-line tax deduction currently available to teachers who use their personal funds to purchase instructional materials and classroom supplies for students such as books, writing materials, art supplies, and rewards for students.
Critics of eliminating this deduction note that a survey conducted during the 2015-16 school year found that the typical teacher spends an average of at least $600 of his or her own money on those supplies and materials every year. They argue these teachers use their own resources to augment resources helpful to student achievement and should receive a break for what essentially amounts to a charitable contribution to their students’ academic welfare.
“Cadillac Tax” on Healthcare Plans for School District Employees – Although H.R. 1 does not currently address the “Cadillac Tax,” some argue that this is an opportunity to urge that Congress address the issue, which they say would impose a fiscal burden on many school districts that do not have the resources to pay an excise tax on the health care plans they offer teachers and other educators as a way to attract and retain quality teachers and combat teacher shortages.
Under the Affordable Care Act, this tax is scheduled to be collected in the year 2020 and would require employers to pay a 40 percent penalty on health insurance expenditures over $10,200 for individual coverage and $27,500 for family coverage.
Advocates for change argue that while H.R. 1 does not currently include provisions that address the “Cadillac Tax,” the bill could be used as a vehicle to modify conditions under which penalties may be imposed on school districts as employers for health insurance coverage that exceeds the price benchmark established by the Affordable Care Act (ACA). They note there is bipartisan support to address this fiscal burden.
The House of Representatives has set an ambitious goal to vote on the bill before Thanksgiving, with the aim of passing it through both the House and Senate by the end of the year.
Many political observers put the odds Congress will achieve this goal at less than 50/50 as passage is less certain in the U.S. Senate than in the House. Those same observers also doubt whether the changes will be passed in time to apply to calendar year 2017 federal taxes; however, they note tax reform is a high priority for majority Republicans as they move into the 2018 election cycle.
It is noteworthy that Congress has until December 8 to pass a federal fiscal year 2018 budget bill, as that is the date when the current temporary resolution funding the federal government will expire. Whether Congress can accomplish both these feats within the next month or so remains to be seen.