Higher Ed Subsidies - The Need for Brighter Light (transparency) on Tax Expenditures

I have seen a few stories about funding problems and possible reductions in funding of Pell grants that provide funds for low-income college students. For example, the Chronicle of Higher Education has a story for 3/20/11 - "Pell Grants Face Cuts, Possible Overhaul" by Kelly Field. Per this article:

"As Congress grapples with a $10.7-billion shortfall in the Pell Grant program, some lawmakers are beginning to ask whether the program, which has been the cornerstone of the federal system of student financial aid for almost 40 years, has become unsustainable."

(For more on the issue, see Representative DeLauro's post on The Hill blog of 3/15/11.)

Also this week, the Joint Committee on Taxation released a report (JCX-19-11) on the cost estimates of President Obama's FY2012 budget. That budget calls for the American Opportunity Tax Credit (AOTC) to become a permanent provision of the law, replacing the Hope Scholarship Credit. The estimated average annual cost of the AOTC is $11 billion.

The AOTC provides a tax credit of up to $2,500 per year for each of the first four years of college. And there is no need to complete a FAFSA (needs) form because as long as a married couples income is below $180,000, they will qualify (the AOTC phases out between $160,000 and $180,000 of income).

I find this shocking because at that level of income, one would not qualify for needs-based financial aid. My searching for income levels for Pell grants turned up that most go to students of families with $30,000 or less of income and perhaps up to $60,000 of income.

Of course, the AOTC figure is just an expectation because the AOTC will expire at the end of 2012. But it already got a 2-year extension with the 2010 Tax Relief Act at a cost of about $9 billion per year (JCX-54-10). I think if greater attention is not brought to operation of the AOTC and its cost, along with a discussion of where in the budget subsidies for scholarships and grants should be and who should get the subsidies, we are likely to see AOTC become a permanent tax provision.

A unified development budget that shows all government spending in one document would help shed light on this oddity in the budget. The oddity is that Congress wonders where it will find money for Pell grants to help low-income individuals go to college while a tax provision helps send high income students to college. A unified budget would have a category for spending on higher education and both the Pell grant direct spending and the AOTC spending would be shown. Then when Congress says it needs more money to help low-income college students, it would be obvious that the funding for AOTC be shifted to Pell grants. And it might even push the question of why any spending for higher education is in the tax code rather than in the Department of Education budget or in the form of a lower tax rate for everyone. This will greatly improve transparency and accountability.

For more on -

• The AOTC and how it compares to the Hope Scholarship Credit and the realities of what college even costs today, please see my short article - "Hope versus Opportunity," AICPA Tax Insider, 7/15/10.
• Unified Development Budgets - see New Rules Project information - here.

What do you think?