Tax breaks — including those that have helped boost the value of Washington's prepaid college-tuition plan — cost the federal Treasury hundreds of billions of dollars a year. Both President Obama and House Speaker John Boehner have proposed limiting such benefits as a way to raise more revenue.
WASHINGTON — Washington’s prepaid college-tuition program has been such a bonanza for early buyers that someone who locked in five years’ worth for $17,500 in 1998 can redeem the units today for $58,910.
The lucky parents who bought into the Guaranteed Education Tuition (GET) program have enjoyed even sweeter returns, courtesy of federal taxpayers. Thanks to the first of two George W. Bush-era tax cuts, gains in the value of GET and 529 college-savings accounts have been tax-free since 2002.
The favored treatment of 529 plans is part of the tax code, so it’s not at risk in the negotiations over the mandatory spending cuts and automatic tax increases due to go into effect next month without congressional action.
But the savings plans are part of a slew of so-called tax expenditures that cost the U.S. Treasury hundreds of billions of dollars a year — and that both President Obama and House Speaker John Boehner have publicly vowed to curb.
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As it stands, several tax credits and deductions that help offset college expenses are scheduled to go away at the end of this month. Among them are the American Opportunity tax credit worth $10,000 over four years for each college student, elimination of taxes on certain scholarships and more generous deductions for interest paid on student loans.
The fate of these and dozens of other expiring tax provisions could hinge on what happens in the negotiations between Obama and Boehner. The parties last week still stood $600 billion apart on new revenue, with Republicans offering $800 billion over 10 years and Obama seeking nearly twice that.
Some of the gap presumably could be bridged by eliminating or limiting tax breaks. Obama has proposed capping total deductions on higher-income families earning more than $250,000. Boehner has said he would do away with unspecified deductions to simplify the tax code.
Critics of tax expenditures say they are complicated and regressive, more often benefiting taxpayers who itemize their returns and favoring specific groups such as homeowners or parents. For 529 plans and similar programs, only people able to prepay for college can take advantage of the tax benefits.
Chris Edwards, director of tax-policy studies at the libertarian Cato Institute in Washington, D.C., noted Congress has passed a spate of tax breaks for higher education in the past 15 years, even though half of Americans don’t attend college.
He argues such “government subsidies” contribute to the rise in tuition rates by inflating the demand for college education.
“It’s a vicious cycle,” Edwards said.
For instance, the American Opportunity tax credit, passed as part of the 2009 stimulus bill to help offset the cost of college enrollment, is worth $13.9 billion over 10 years, according to the congressional Joint Committee on Taxation.
Edwards said it would be better to allow taxpayers to claim a set amount of deductions covering all items, such as mortgage interests and health- or child-care spending.
That’s similar to the idea floated two years ago by the National Commission on Fiscal Responsibility and Reform. The bipartisan panel, better known as Simpson-Bowles, proposed scrapping popular deductions like charitable contributions in lieu of refundable 15 percent tax credits. That would benefit even taxpayers who don’t itemize and would lower the value of deductions for wealthier households.
But few Democrats or Republicans seem eager to parse through tax breaks enjoyed by millions of Americans.
U.S. Rep. Jim McDermott of Seattle, a top Democrat on the tax-writing House Ways and Means Committee, believes Congress should renew all tax breaks for one more year and reserve debate over tax expenditures for later.
McDermott said some tax provisions slated to lapse Jan. 1, such as higher contribution limits for Coverdell education savings accounts, keep more money in people’s pockets and help the economy. So do other tax breaks that have expired and are awaiting renewal, such as sales-tax deductions for residents of Washington and other states without state income taxes.
“People are counting on them,” he said.