Educators Are Taking Stock of Tax Proposal's Effects

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With the yearlong battle over federal tax revision apparently nearing its end, education officials are busy assessing what they stand to lose--and what they will save--in the final settlement.

For some, it appears, the price will be heavy. On a number of issues, lobbyists said, the compromise bill approved last month by House and Senate negotiators will reduce or eliminate many provisions favorable to the education community.

The bill would end the existing deduction for state and local sales taxes, while retaining it for income and property taxes. It would tighten the rules on tax-exempt bonds, and impose new limits on their use by public schools and colleges and universities.

Under the measure, retiring I teachers would no longer receive an l extended tax holiday on their pension income as a result of the reveal of the so-called three-year recovery rule. And many school districts would have to examine their pension plans to see if they discriminate against low-paid employees.

If the bill passes, millions of taxpayers who do not itemize on their return could no longer deduct for their charitable contributions, and scholarship students would find that a part of their awards are now taxable. Also, students would no longer be able to deduct the interest they pay on their student loans, a provision which would be phased in over the next five years.

Until Congressional staff members finish writing the detailed language of the conference report which will flesh out the general outline approved by the conferees much will remain uncertain, experts say. The House and Senate are expected to vote on that report either this week or next.

The bill, approved on a 16-to-5 vote, is virtually certain to win approval in the full House and Senate, education lobbyists and other Washington observers say. President Reagan has said he will sign the bill, even though it bears little resemblance to the plan he submitted to the Congress last year.

In a round of highly· secret meetings that ended Aug. 16, the conference committee co-chairmen, Representative Daniel Rostenkowski, Democrat of Illinois, and Senator Robert Packwood, Republican of Oregon, crafted a bill that would reduce individual taxes by $121.7 billion over the next six years, according to the Congressional Joint Committee on Taxation. The measure would raise payments from corporations and other businesses by $120.4 billion.

Central to the chairmen's agreement are the low marginal rates of 15 percent and 28 percent that would apply to most taxpayers. But to pay for those low rates, the bill cuts deeply into a variety of deductions and loopholes that benefit schools and educators.

Sales-Tax Defeat

Perhaps the biggest defeat for education lobbyists-considering their proclaimed priorities-came when Representative Rostenkowski accepted a last-minute proposal from Senator Packwood to repeal the state and local sales-tax deductions.

Both of the major teachers' unions, as well as a host of other public employee groups, had made it their top priority to protect full deductibility for all state and local taxes.

Until near the last days of the conference, it appeared full deduction would prevail. But last-minute revenue projections indicated the compromise bill would add to the federal deficit, violating a basic ground rule that the bill must be "revenue neutral." Faced with a looming deadline, Representative Rostenkowski agreed to the sales-tax proposal.

State governments will also suffer from the bill's lower marginal rates, which make all deductions less valuable to taxpayers, said Stephen Gold, a fiscal analyst for the National Conference of State Legislatures.

The federal tax system, he said, has tended to shield taxpayers from the variation between high- and low-tax states, Mr. Gold explained-an especially attractive feature for those in high tax brackets.

Without that shield, Gold predicted, states will increase their efforts to outdo each other in attracting and retaining businesses and job " making their tax systems less progressive, and new revenues for education harder to raise.

With final votes on the tax package drawing near, most supporters of the sales-tax deduction have rejected a campaign to stop the entire measure, which cannot be amended on the House and Senate floors.

Another loss identified by education groups came when lawmakers agreed to repeal the recovery rule. Some retiring teachers could find that much of their financial planning is I obsolete as a result of the action.

Because many public employees make significant after-tax contributions to their pension plans, current law grants a tax holiday upon retirement, allowing them to withdraw all of their contributions first, for up to a maximum of three years.

Both the Senate and the House voted to repeal the rule, which would require retirees to take a portion of their tax-free contributions each year, based on their expected lifespan.

The Senate had proposed phasing the new rule in over two years. In a surprise move, however, the two chairmen agreed on the House version, which sets a retroactive date of July 1, 1986. The bill also bans nonprofit organizations, including state and local governments, from starting "401(k)" tax-deferred plans, common in the private sector.

The conference bill sets an annual $7,000 cap on contributions to 401(k) plans, compared with the current $30,000, or 20 percent of income, whichever is smaller. The limit on "403(b)" tax-deferred plans, offered by many schools, would be slightly higher-$9,000 a year.

The bill also limits the advantages of Individual Retirement Accounts.

Wealthy individuals, and many others who are covered by company pension plans, could no longer deduct their I.R.A. contributions.

In one victory for the education community, the conferees agreed to exempt the giant Teachers Insurance and Annuity Association and College Equities Retirement Fund from a provision that would have taxed the income on their pension funds.

Representatives of both public and private education groups said they are worried about highly complicated changes in the "non-discrimination" rules for company pension systems and tax-deferred plans.

Generally, the bill would reduce the amount of "tilt" that such plans could show toward higher-paid employees- a move of great concern to schools that have traditionally offered more generous benefits to faculty and some administrators than to support staff.

School-Bond Jitters

as those anticipating major capital expenditures-the conference bill's provisions on tax-exempt bonds are another setback, according to education lobbyists.

Education groups are especially apprehensive about the details of a I proposal that limits the private use of facilities paid for with tax-exempt I bonds. Under the new rule, no more than 10 percent of the money raised by the bond could be used by private groups or businesses.

The uncertainty lies in the definition of "private use" and the fact that schools built with bond money often provide space for such commercial services as cafeterias and day-care centers, as well as for community and non-profit groups.

Bruce Hunter of the American Association of School Administrators predicted the issue would end up in court, no matter what definition the tax writers eventually arrive at. "We are resigned to that, " he said.

Education officials are also upset by the more restrictive limits on arbitrage and advance refunding-practices that involve the use of bond proceeds to make short-term, high-interest investments. In addition, the bill sets a limit-2 percent of the bond value--on the amount of money that districts can spend on issuing costs.

Under the bill's revised minimum tax, wealthy individuals would find their interest income from state and local bonds taxed at a rate of 21 percent. Financial institutions, such as insurance companies and banks, would also lose some tax advantages.

The revisions would tend to make state and local bonds a less attractive investment for these buyers, bond analysts say.

Under the new rules, 41 percent of all tax-exempt bonds sold in 1984 could not be issued this year, according to the Public Securities Association. The N.G.A. has predicted that the market for such bonds will be cut in half by 1987.

An initial House proposal would have sharply limited "private-use" bonds, also known as Industrial Development Bonds, which many higher education institutions issue to finance new buildings and equipment.

The final bill exempts most nonprofit organizations from that cap, but sets another $150 million limit on the amount of bonds any college or university may have outstanding. As a result, about 20 to 30 large institutions-including Harvard University-will be unable to float additional bonds for some time.

Higher Education

In general, representatives of the nation's higher-education community said the bill struck a serious blow by drastically reducing the incentives for taxpayers to donate to colleges, universities, and other private schools.

Higher Education

In general, representatives of the nation's higher-education community said the bill struck a serious blow by drastically reducing the incentives for taxpayers to donate to colleges, universities, and other private schools.

The conference committee rejected an attempt to save the charitable deduction for non-itemizers, due to expire at the end of 1986, and made the deduction for the appreciated value of certain gifts-such as stocks, real estate, and works of art-subject to the minimum tax.

Christine T. Milliken, general counsel to the National Association of Independent Colleges and Universities, said preliminary estimates indicate the conference report will reduce total giving to charitable causes by about $11 billion, with education institutions losing $1.58 billion.

Educators also blasted the conference committee's decision to limit the tax exclusion for academic scholarships and fellowships. The bill only exempts that portion of an award that is spent on tuition, books, and supplies.

Private-school teachers who receive free, on-campus housing would also pay higher taxes; the bill treats such benefits as annual income equal to 5 percent of the lodging's value.

Vol. 06, Issue 01, Pages 17-18

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