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To maximize the impact of higher education investments and achieve desired policy goals, policymakers should have knowledge of the full range of assistance provided to institutions and students. This means having an understanding of the billions of dollars made available through spending programs and the tax code. However, too frequently these two types of support are not considered in tandem, and most states lack the cost estimates they would need to determine how tax provisions for higher education compare in size to other postsecondary investments.
The federal government and the states each invested more than $70 billion in higher education-related spending programs, excluding loans, in academic year 2014, the latest year for which data are available. But that figure, as substantial as it is, does not paint a full picture of federal and state investments in higher education. It excludes the billions of dollars that the federal government and the 41 states plus the District of Columbia that levy personal income taxes provide to students and their families through tax expenditures—such as credits for tuition and college savings incentives—to help offset postsecondary costs.
These tax provisions—special deductions, credits, exclusions, and exemptions—allow people to reduce their income tax liability and result in lower federal and state government revenue. They are called tax expenditures because they are similar to direct spending both in their budgetary impacts and in the way they can benefit recipients. The tax code contains many such provisions that support specific policy priorities, of which higher education is just one.
Tax expenditures targeted toward higher education can have substantial costs for governments, but those costs are frequently excluded from federal or state debates about the scale and nature of higher education spending for three main reasons. First, tax expenditures are generally not subject to the same recurring budget procedures as are most spending programs for higher education, which are debated regularly during the appropriations process. Instead, they typically are permanent provisions that are rarely revisited once enacted.1 Second, spending programs and tax expenditures fall under the jurisdiction of different committees at the federal level—and sometimes in state legislatures as well. As a result, the evaluation and oversight of—and legislative debates about—these programs are generally not coordinated. Third, states rarely compile comprehensive information about the cost of their higher education tax expenditures, making it even less likely that provisions at the state level will be part of budget and policy debates about higher education spending programs.
Tax expenditures targeted toward higher education can have substantial costs for governments, but those costs are frequently excluded from federal or state debates about the scale and nature of higher education spending.
To help integrate these tax expenditures into broader discussions of higher education finances and policy, The Pew Charitable Trusts catalogued federal and state higher education income tax provisions and examined their extensive linkages across the levels of government. Other tax expenditures benefit higher education institutions, but this study is limited to tax expenditures that are intended to help students and families. The analysis, which is part of a larger series exploring the full range of federal and state support for higher education, found that:
This report explores these findings in greater depth to provide the fullest picture to date of the characteristics and costs of federal and state higher education personal income tax expenditures for students and families. It examines the size of these tax expenditures and their prevalence at the state level, outlines their features, and explains the linkages between state and federal tax codes that generate most of the state-level provisions.