The University Record, June 25, 1997

Proposals contain elements of concern to higher ed

By Jane R. Elgass

The House and Senate are each expected to vote this week on their respective tax plans as part of their efforts to carry the agreement to balance the budget by 2002.

The agreement called for approximately $35 billion for higher education, including a tax credit, called the Hope Scholarship, and a $10,000 tuition deduction. In addition, the Clinton administration called for about $5 billion in other tax breaks for students.

Both the House and Senate bills fall short of meeting those dollar goals, says Thomas A. Butts, associate vice president for university relations in the U-M's Washington, D.C., office. However each contains substantial new educational benefits and is part of a larger reconciliation bill that affects Medicare and student loans as well.

Unexpectedly, Butts notes, the House bill contains three provisions that if enacted would cause serious problems for university employees.

First, it would make taxable the tuition the university pays graduate teaching and research assistants. In 1995-96, some 3,115 teaching and research assistants at the U-M received $29.3 million in tuition payments.

They would be expected to pay income tax on that, with the federal portion estimated at 15 percent, roughly $4.4 million. Additional state income tax would result as well.

Second, the House version of the bill would repeal the tax-exempt status of the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) pension operations.

The loss of tax-exempt status would mean a reduction in investment income received by TIAA-CREF's 1.8 million participants nationwide. TIAA-CREF CEO John H. Biggs estimates the tax would cost the company $250 million-$400 million per year, an amount that would be passed on to participants in a cut of 2 percent to 3 percent in the investment income they receive.

In a June 10 statement, TIAA-CREF noted that retirement savings are now tax-exempt for all U.S. workers, and to impose indiscriminate tax only on the retirement plan for teachers is unfair.

Finally, tax relief for employer-provided education assistance would be terminated at the end of this year. Internal Revenue Code Section 127 currently excludes from taxable income tuition paid employees by their employers. This year, only students taking undergraduate courses are eligible. In the past, individuals taking undergraduate or graduate courses were protected.

Some 1,200 U-M employees would be affected by this provision, as well as students employed at companies that provide similar benefits.

The Senate bill does not tax TIAA-CREF or teaching and research assistant tuition. It provides for a permanent extension of Section 127, including graduate students, as well as a deduction for student loan interest payments.

The House proposal also calls for a reduction in spending for indirect medical education through Medicare, which has been characterized by American Association of Universities (AAU) President, Cornelius Pings, as "disproportionately large reductions in indirect medical education payments compared with the overall level of Medicare cuts."

The House version would cut payments from a current level of 7.7 percent to 6.6 percent in 1998 and 5.5 percent in 1999 and thereafter.

The Senate version calls for a more moderate reduction---to 7 percent in 1998, 6.5 percent in 1999, 6 percent in 2000 and 5.5 percent in 2001 and thereafter.

In a letter sent to AAU member institutions June 13, Pings noted that the composition of the proposed tax cuts differs significantly from recommendations developed by the higher education community and those proposed by the Clinton administration.

He called on higher education officials to contact members of their Congressional delegations and encourage the members to drop the provisions related to employer-provided tuition assistance, tuition waivers for graduate teaching and research assistants and the TIAA-CREF provision.

Butts notes that the U-M as well as other colleges and universities "are doing everything possible to make things right. There is new money for higher education in both the House and Senate bills. It's just not entirely where we want it to be."

The House and the Senate hope to vote on their packages before the July 4 recess. The conference to work out differences between the House, Senate and administration could continue well into the fall.