By Michael Austin and Sam Brunson
“Before any great things are accomplished, a memorable change must be made in the system of education and knowledge must become so general as to raise the lower ranks of society nearer to the higher. The education of a nation instead of being confined to a few schools and universities for the instruction of the few, must become the national care and expense for the formation of the many.”—John Adams
There has been much ado recently (including on Surly) about the fact that the current version of tax reform before the House of Representatives repeals Section 117(d) of the Internal Revenue Code. As a general rule, you have to pay taxes on anything of value your employer gives you. Section 117(d) is an exception to this rule; among other things, it exempts graduate students from paying taxes on tuition waivers. With that subsection excised from the Code, graduate students would be taxed on tuition waivers that they receive (usually in addition to a very modest stipend) when they worked as teaching and research assistants as part of their program.
If this repeal were to become law, students without personal or family resources would have a very difficult time pursuing graduate education. But while the plight of graduate students has gotten huge amounts of attention, it is not the worst thing about the repeal of Section 117(d).
Section 117(d) also allows private institutions, such as the ones we are both currently employed by, to offer tuition waivers to its employees and to their dependents. This is a nice perk for overpaid administrators and law professors, but, while its repeal may increase the cost of sending our children to college, it is a cost we can afford to bear. But tuition waivers can be a life-changing opportunity for some of our lowest-paid employees.
But here’s the catch: the tax on these tuition benefits is calculated using the full sticker price of a school’s tuition. Most all private universities, however, discount the sticker price of tuition for nearly all of their students.
Very few private universities have a discount rate lower than 50% of the rack rate. And it can be much higher—60, 70, and even 80% in some places. For reasons that don’t always make much sense, but are nonetheless a very real part of the higher education landscape, most students at private schools pay only a fraction of the tuition listed on the school’s website.
Why does it matter? Think about an administrative assistant at a private college who earns $30,000 per year. The college she works for has an advertised tuition rate of $35,000. The administrative assistant uses the tuition waiver benefit to send two children to that college. Under the House plan, she would be taxed as if she earned $100,000 a year. And that would be the case even the school actually charges $10,000 per student.
What this means is that fewer college employees, and fewer of their children, are going to have the opportunity to attend college because the life-changing benefit of a tuition waiver will become too expensive for them to afford. Of course, just as it does with graduate students, this limitation applies only to those without personal or family resources. Those with such resources will be fine.
And this is why it matters: access to higher education remains the only thing standing between the current United States and a society of hereditary privilege and permanent class divisions. The proper term for such a society is an “aristocracy,” and it is precisely what our country was founded not to be.
Our Founders did not agree on very much. Thomas Jefferson, Alexander Hamilton, John Adams, and Benjamin Franklin fought with each other about almost everything that we fight about today: taxes, immigration, military spending, federal prerogatives, and whether or not the mainstream media is “fake news.”
But they all agreed that America should not be ruled by the British, and they all agreed that American society should not replicate the social structures of 18th century England. And, to a person, they all understood that education was the best way to prevent that from happening. The tax code is the most important tool that the federal government has to enact their vision. We get more of what we incentivize and less of what we discourage.
Changing the tax code to transfer wealth and income away from those with modest means is, at best, a morally questionable proposition. But when such wealth transfers end up preventing people from obtaining an education for themselves and their families, it becomes a fundamental betrayal of our national character.
Michael Austin is the Executive Vice President for Academic Affairs at the University of Evansville in Evansville, Indiana.
4 thoughts on “Tax Reform, Tuition Waivers, and Economic Mobility”
Why shouldn’t they fix the sticker price to reflect the standard price and go from there?
Then you could move towards exceptions based on income level to except those with total income under $60k from taxes on tuition waiver and graduate it up from there.
Would tuition remission offered by a private elementary/high school also be treated as taxable under this house bill? I work at a private school and my kids get free tuition as part of my employment.
On what basis is this valued using the sticker price? Why is fair market value not used?
Ditto to all three comments above!