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Education Groups Praise House Bill On Tax Reform

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Washington--Precollegiate education groups were all but claiming victory here last week after the House Ways and Means Committee approved a compromise reform of the nation's tax code that treats them more favorably than a plan developed earlier this year by the Reagan Administration.

Lobbyists cautioned, however, that last-minute additions to the bill could limit pension benefits for school employees and make it more difficult for colleges and universities to raise funds. In general, higher-education officials were much less enthusiastic about the bill than groups affiliated with the public schools.

The compromise bill, hammered out by committee chairman Dan Rostenkowski, retains the deductibility of state and local taxes for individuals who itemize their federal tax returns and makes permanent the charitable deduction for non-itemizers who contribute more than $100 per year.

It also retains the tax-exempt status of most government bonds and of employer-provided fringe benefits.

Each of these measures--except for the $100 contributions floor--was applauded by educators. "It's a substantial victory for the future financial integrity of school districts," said Michael Resnick, the associate executive director of the National School Boards Association.

The Reagan plan, known as Treasury II, would have eliminated the deductions and taxed both the fringe benefits and the interest earned on some of the bonds, with the added tax revenue going to offset reductions in tax rates. The committee bill reduces rates but not by as much as the Administration had planned.

The committee bill is expected to reach the House floor before the Congress recesses in mid-December, but passage is uncertain. Some observers predict a floor fight, with the outcome dependent on the mood of the White House. The President has yet to make a statement on the bill, but is known to oppose some of its features.

House Republicans, meanwhile, are reportedly preparing an alternative tax plan that would limit the deductibility of state and local taxes.

Once the House passes a bill, the Senate Finance Committee will begin marking up a Senate version in mid-February, a committee aide said, but the full Senate will probably not act until July.

The White House may pressure the Republican-controlled Senate to write a different bill than the one the House committee has approved, but the Finance Committee is not likely to alter the provisions on state and local taxes or charitable contributions, the committee aide said.

Focus on Deductibility

Ever since the Treasury Department proposed a sweeping overhaul of the federal tax system in 1984, educators have supported tax reform in principle but have opposed many of the specifics. (See Education Week, March 20, 1985.) Along with many state and local officials, education groups have been particularly concerned that tax revisions would limit their ability to raise funds, at a time when the Congress seems likely to reduce federal aid to cut the budget deficit.

For public schools and public colleges and universities, retention of the deductibility of state and local taxes has been a top legislative priority. A coalition of some 30 groups, including the National Education Association and the American Federation of Teachers, has been fighting the proposed elimination of deductibility, and has spent more than a million dollars on advertising, said Gregory A. Humphrey, the legislative director for the aft

"Obviously, the number one issue for us is deductibility," Mr. Humphrey said. "We've put a lot of money and time into it."

Educators argue that elimination of state and local tax deductibility would prompt taxpayers to demand cuts in state and local taxes, to offset their increased federal taxes. At best, educators say, it would make it difficult for schools to raise new funds. At worst, they claim, it could cost the schools as much as $16.5 billion.

"The supporters of public education across America will be able to sleep a little better tonight knowing that the pro-school state and local tax deduction will remain intact," said Albert Shanker, the aft president, in commenting on the Ways and Means committee bill.

Howard Carroll, a spokesman for the nea, said of the bill: "We thought it came out quite well, especially on the deductibility of state and local taxes and the taxing of fringe benefits, which were our main concerns."

Both unions stopped short of endorsing the committee bill, however, saying they had yet to determine how it would affect their members. "It's a broad bill and it affects virtually every aspect of tax policy,'' Mr. Humphrey noted.

Major Provisions

The committee bill reduces the number of personal-income tax brackets from 14 to 4, and sets a top personal-tax rate of 38 percent. Currently, the top tax rate is 50 percent. The Administration had wanted to limit the number of brackets to three and the top rate to 35 percent.

The rate reductions were made possible by the elimination of many deductions and exemptions, especially for businesses. According to a committee aide, Ways and Means added the fourth tax rate in part to offset the loss in revenue resulting from the retention of state and local tax deductibility, which now costs the federal treasury an estimated $34 billion annually.

Copies of the tax bill were not available last week, but according to interviews with education lobbyists, other major provisions of the committee bill include:

Non-Pension Benefits: The committee bill leaves untaxed fringe benefits that employers provide, such as health insurance. The Administration plan would have taxed such benefits.

The committee also left workers' disability compensation untaxed, but went along with the Administration and extended taxation of unemployment compensation to individuals earning less than $12,000.

Pensions: The committee bill limits elective pretaxed employee contributions to 403-(b) annuity plans to $7,000 per year. Many teachers participate in such plans.

Also, under the committee bill, every dollar contributed to an annuity plan would be subtracted from the amount an individual could contribute to an Individual Retirement Account. "You lose your ira as soon as you hit $2,000," said Kathy Curry, the associate director of governmental relations for the National Association of Independent Colleges and Universities.

The bill would also affect the benefits paid out of many contributory retirement systems, including those run by states and localities for teachers and other school employees. Current law exempts such retirement payments from taxation for up to three years if they do not exceed employee contributions.

But under the committee bill, retirees would begin paying taxes on their pension payments immediately, although a certain amount would be exempt each year, depending on the individual's life expectancy.

The bill also sets a 15 percent early-withdrawal penalty for individuals age 59 or under.

Charitable Deductions: The committee bill provides that non-itemizers may deduct contributions only if they have donated more than $100. The first $100 in gifts is not deductible. The bill also makes the charitable deduction permanent. The deduction, now set at 50 percent, is scheduled to increase to 100 percent next year.

The Administration had proposed eliminating the charitable deduction for non-itemizers, setting off a storm of protest in the higher-education community and among private schools.

Independent Sector, a group that monitors philanthropy, had estimated that some $6 billion in charitable contributions would have been lost if non-itemizers could not deduct their charitable donations.

Higher-education groups were not happy about the $100 floor, but they were extremely pleased that the committee made the charitable deduction permanent.

Independent Sector estimates that the $100 floor would cost non-profit organizations some $22 million, according to David Tobin, the group's assistant director for governmental relations.

"We don't like it," said Jean Rosenblatt, the assistant director of public affairs for the American Council on Education, "but it doesn't throw us into total despair."

Mr. Tobin noted, however, that "floors have a tendency to rise," and he said any increase would act as a disproportionately large disincentive for contributors.

Unrealized Appreciation: The committee essentially went along with the Administration and made the appreciated value of charitable contributions a "tax preference," which means that they can be subject to a minimum tax. Current tax law allows contributors to deduct the appreciated value of all gifts.

Higher-education groups oppose taxation of so-called "unrealized appreciation," noting that more than half of all gifts of more than $5,000 to colleges and universities are in the form of real estate, securities, or other properties that appreciate in value. Private-school officials also oppose such limitations on major donations.

According to Nan F. Nixon, a governmental-relations official for Harvard University, donors who have no other preference items, such as capital gains, would still receive the full deduction on contributions of appreciated gifts. But for individuals with other preference items, such contributions would be taxed, she said.

"We're still trying to find out how it works and what its implications will be," she said.

Bonds: The committee bill retains the tax-exempt status of state and local government obligations. The Administration plan would have taxed such bonds if projects financed by the bonds were used more than 1 percent of the time for other than general public purposes. Current law sets that limit at 10 percent, according to Katherine Herber, the director of legislation for the nsba

The nsba had made opposition to this part of the Administration's plan one of its top legislative priorities, arguing that it would limit the use of bonds for school construction.

The committee bill also limits the use of tax-exempt bonds for colleges and universities. It places a $175 per-capita cap on all nongovernmental bonds issued by states, according to Ms. Curry of naicu. At least $25 of the $175 per capita would have to be used for colleges and hospitals, "pitting colleges against hospitals," said Ms. Rosenblatt of ace

"You can compete for the remaining $150 per capita, but it's going to be hard to get any of that," Ms. Curry added. "In essence, colleges are subject to a a $25 per-capita cap."

Ms. Curry noted that 35 states now exceed the $25 per-capita cap.

The bill also limits colleges and universities to a maximum of $150- million in outstanding tax-exempt bonds. "If you have more than $150- million outstanding, you're out of the market," Ms. Curry said.

Ms. Rosenblatt said that some 20 universities now have more than $150 million in outstanding bonds.

The bill also limits the use of arbitrage on tax-exempt bond proceeds and the advance refunding of bonds, both common practices for school districts.

Student Aid: The committee bill taxes scholarship and fellowship funds that exceed tuition and equipment costs.

Ms. Curry said she did not think the committee intended to tax federal student aid, but she said it "could be interpreted to mean that Pell grants and federal loans are taxable."

Child-Care Deduction: The committee bill retains the tax credit for child-care expenses. It also raises the personal exemption to $2,000, which favors large families.

Employer-Paid Assistance: The bill includes a two-year extension of the deduction for employer-paid legal and educational assistance, up to $5,000 per person. The Administration plan would have made this deduction permanent.

Many districts use this deduction for the retraining of teachers and support personnel.

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