STATEMENT OF THOMAS J. REESE, LEGISLATIVE DIRECTOR OF TAXATION WITH REPRESENTATION

Mr. Chairman and members of the Committee, my name is Thomas J. Reese Legislative Director of Taxation with Representation, a public interest taxpayers' lobby. I am testifying in opposition to the college tuition tax credit proposals which are being considered by Congress and your committee.

The proposals of tax allowances for college education expenses seem to be moti. vated by a desire to alleviate the financial burden on middle-income families who must bear the high costs of putting their children through college, without either the resources of the rich or the aid program available to the poor. In fact, however, the credit is nothing but a placebo. It will not help the middle class for which it is designed. This is so for a number of reasons.

Tuition costs have not risen dramatically.—A presupposition in all of the arguments in favor of the college tuition tax credit is that educational expenses have risen dramatically. This is simply not true when compared with the relative increase in median family income. Between 1967 and 1976, college charges for tuition, fees, room and board, rose about 75 percent. But at the same time, median income has increased almost 89 percent. As a result, the relative financial burden for putting a student through college is actually less than it was 10 years ago. This does not mean that some families might not need help, but it does show that a general tax subsidy to everyone is no more necessary today than it was 10 years ago.

Aid to middle income families.—Another fallacy supporting the credit is the argument that middle-income families are not helped by the current programs. Again, this is not true. In fiscal 1977, the federal government provided $8.5 billion in student aid in the form of direct outlays and tax expenditures. Students from families with incomes between $10,000 and $20,000, who account for 33 percent of all students, received 36 percent of this total, although they received a smaller share (21 percent) of the $2.3 billion provided under programs based on need. Middle-income families are, therefore, already getting their fair share of federal educational aid.

Credit helps wealthy.-From the statements of the proponents of the tax credit for college expenses, one would think that the credit will only help middle-income families. But, in fact, 54 percent of the benefits of a $250 nonrefundable credit will go to taxpayers with incomes in excess of $20,000, who make up the richest third of the population. Middle-income families, those with incomes between $10,000 and $20,000, receive only 34 percent of the benefits from the credit. If the college tuition tax credit is aimed at middle income families, it misses its target. Credit means higher tax rates.-Some supporters of the college tuition tax credit favor any tax credit or deduction which lower taxes for the middle class because they feel that those taxes are too high. This approach is simplistic. The tax system will raise as much money as Congress determines is necessary no matter how many credits, deductions and exclusions are available. What these gimmicks mean is that tax rates must be higher than necessary. If Congress adopts a college tuition tax credit costing approximately $2 billion in revenue each year, that will be $2 billion that will be unavailable for general tax cuts for all taxpayers. Thus, this credit means higher taxes for the elderly, for people who have already put their children through college, for childless couples, for single persons, for people in vocational schools, for everyone who does not qual ify for the credit.

Credit means higher tuition?-One of the major uncertainties of the credit is its effect on tuition costs. Some people argue that the credit will allow colleges to raise their tuitions at a faster rate than they would have otherwise. To the extent that tuition costs are increased, the credit's benefits for taxpayers are reduced as the colleges capture some or all of the benefits through higher charges. If this happens, the tax credit will be an aid to colleges and not to taxpayers.

On the other hand, if one argues that the colleges will not be able to raise their tuitions, then one must also recognize that they will receive no benefits from the credit. Both the colleges and the students cannot enjoy the same benefits. To the extent that one gets the benefits, the other does not.

Credit hurts private institutions.-Many people believe that the college tuition credit is especially helpful to private institutions. This is not the case. In fact, a flat credit will hurt private institutions. Although the credit will reduce the absolute cost of attending a private or public institution by an equal amount, the relative price of attending a private institution will be increased.

For example, if it costs $2,000 to attend a private college and $1,000 to attend a public institution, the absolute cost difference is $1,000, and in relative terms, the private school costs twice as much. A $500 tax credit would reduce the net price of attending these schools to $1,500 and $500 respectively. While the subsidy would not change the absolute cost difference, it would raise the relative price of attending the private institution to three times the price of attending the public institution. This increase in the relative price of education at private institutions will induce some students to attend the public institution whose relative price has fallen. This is why the Coalition of Independent College and University Students (COPUS) has called the tuition tax credit the Trojan Horse of independent higher education.

If the goal of the tax credit supporters is to aid the independent colleges and universities, the credit does not do it. AS HEW Secretary Joseph A. Califano Jr. pointed out in analyzing the tax credit proposal, "only 30 percent of the benefits would go to families sending their children to private colleges, although they have almost 50 percent of the financial need ***." Why should a millionaire sending his or her child to a low tuition institution get the same credit as a worker whose child attends an expensive independent college?

Tax credits add complexity.—Tax credits for college educational expenses will complicate the lives of students and their families. It will provide new regulations, new forms, new requirements that they will have to be familiar with in order to benefit from the program. In addition, they will have to figure out how the credit relates to other educational aid programs. Will it reduce their scholarships? Will it reduce their eligibility for loans?

Many people claim that the red tape involved in tax gimmicks is less than that involved in direct expenditure programs. This is only true if the requirements for qualifying for the credit are simpler than for the spending program. In addition, the administrative cost of the program for the government is less only because the Internal Revenue Service audits less than 3 percent of tax returns. If HEW only checked on less than 3 percent of the students who applied for educational aid, its administrative costs would also be low.

Loans help more than credits.-The college tuition tax credit is supposed to help families who are burdened by college expenses. They will be more than happy to receive a $250 credit, but it will not help very much those who are really burdened by the cost of education. A credit of $250 provides little real relief to students or their families, who now face average tuition costs of $3,300.

College expenses cause a short-term cash flow problem to students and their families which will be followed with higher earnings by the students or with lower expenses for the family. The best way to deal with a short-term cash flow problem is with a loan. Loans provide a subsidy larger than could be provided through a tax credit at the same cost to the government. Some of the cost of these loans can be borne by students when they are earning more after their education is completed; or the cost can be borne by parents whose expenses are reduced when the student is out of school and independent.

Before 1976, eligibility for federal interest subsidies on Guaranteed Student Loans (GSLP) was lost when family income reached $15,000. The 1976 Amendments lifted this ceiling to $25,000 (equal to about $31,000 of adjusted gross income) and thus expanded the eligibility to about 85 percent of all students. The 1976 Amendments also raised from $10,000 to $15,000 the total amount that a student can borrow for undergraduate and graduate training. The 7 percent interest on the GSLP loans is not payable until a year after the student finishes his education. In addition, there is a National Direct Student Loan (NDSL) program for which the interest rate is only 3 percent payable beginning nine months after the student finishes school. An expansion of these programs would make much more sense than a new college tuition tax credit program.

Conclusion.-TWR urges the Congress not to adopt a college tuition tax credit. Such a program would benefit the rich more than the middle class or the poor. It will require that tax rates be kept artificially high in order to raise the $2 billion needed to fund the program. It is questionable if the credit will even benefit families with college students, since colleges may be able to raise tuition charges and thus wipe out any savings to taxpayers. In addition, it is likely that the credit will upset the current balance between private and public higher education in favor of public education. Finally, the credit will add new complexity to an already complex area of educational aid when more help could be given through a fuller funding of already existing programs.

Senator PACKWOOD. Has Professor Davidson arrived yet? All right, then, we will take a panel of concerned students. Then we will take the panel of concerned students, Mr. Barry, Mr. Brady, and Mr. Zaglaniczny.

PANEL OF CONCERNED UNIVERSITY STUDENTS: GAINES CLEVELAND, COLLEGE REPUBLICAN NATIONAL COMMITTEE, ON BEHALF OF JOHN BRADY; LAWRENCE S. ZAGLANICZNY, NATIONAL DIRECTOR, COALITION OF INDEPENDENT COLLEGE AND UNIVERSITY STUDENTS; KENT L. BARRY, PRESIDENT, ASSOCIATED STUDENTS OF MICHIGAN STATE UNIVERSITY, ACCOMPANIED BY COREY BINGER, VICE PRESIDENT OF ASSOCIATED STUDENTS OF MICHIGAN STATE UNIVERSITY, AND MICHAEL MCCANDLESS, LEGISLATIVE REPRESENTATIVE OF ASSOCIATED STUDENTS OF MICHIGAN STATE UNIVERSITY

Senator PACKWOOD. I want you gentlemen to decide who speaks first and what order you want to go in. Would you go from one to the other, identify yourselves for the reporter, so that they know who will be talking, starting over here.

Mr. CLEVEAND. Yes; I am Gaines Cleveland of College Republican National Committee. I am speaking in behalf of John Brady, chairman of the committee, who was unable to attend.

Mr. ZAGLANICZNY. I am Lawrence Zaglaniczny, national director, Coalition of Independent College and University Students.

Mr. BARRY. I am Kent Barry. I am president of the Associated Students of Michigan State University.

Mr. BINGER. I am Corey Binger. I am vice president of Associated Students of Michigan State University.

Mr. MCCANDLESS. I am Mike McCandless. I am legislative representative of Associated Students of Michigan State University. Senator PACKWOOD. Gentlemen, go ahead.

STATEMENT OF LAWRENCE S. ZAGLANICZNY, NATIONAL DIRECTOR, COALITION OF INDEPENDENT COLLEGE AND UNIVERSITY STUDENTS

Mr. ZAGLANICZNY. Mr. Chairman and members of the committee. We thank you for the opportunity to testify on the utilization of the tax system for relief of the high cost of tuition and related college expenses. I have prepared a statement which I would like entered in the record at this time.

Senator PACKWOOD. It will be entered in full.

Mr. ZAGLANICZNY. I have to apologize for not getting here on time. Our Xerox broke down and when your Xerox breaks that is it. As I say, we seek Federal student assistance programs that will allow needy and middle-income students to select a college based on their ability to achieve and not based on their ability to pay.

Consequently, we welcome these hearings and an opportunity to comment on the various proposals under consideration to institute a system of tax relief for parents and students. I think it is most im

portant to bring out, Senators, and especially Mr. Moynihan, Mr. Packwood, and Mr. Roth, that you have done the Nation a real service.

I should mention Mr. Mikva and Mr. Corcoran in the House by raising the whole problem of needing to aid middle-income students and their parents and that is a whole broader question of financing education, especially in our case, financing education which has been selected since campus cooldowns, since the riots of the late sixties and seventies.

I have to commend you Senators upon bringing this whole question to the forefront and it is a real service. Our organization has traditionally been opposed to tuition tax credits, but we are willing to, if our suggested amendments are adopted, reconsider our position, perhaps, and support the whole idea of tuition tax credits.

We testified on the Budget Committee last year and I will provide you with that testimony. That goes into our objections since we do not have too much time today.

Let me say that in that statement, we pointed out that public and independent high education in their friendly competition for students' tuition tax credits will upset that balance, it is our belief.

The issue of tuition tax credits has created a national debate on the financing of higher education. And it is timely that the Executive, the Congress, and the American people consider the state of educational finance, since higher education has been neglected in the past few years after the campus disruptions of the late sixties and early seventies subsided.

Frankly, inflation, the high cost of energy, mandated social programs and years of underfunded Federal student assistance programs have made it more difficult to pay for a college education because these factors have driven tuition costs higher and higher. Especially for the coalition's constituency, higher tuition bills and related expenses have forced some students to drop out or transfer from their private schools.

And many prospective students do not even consider going to a college in the independent sector because of their high costs. It is for these reasons that we commend the sponsors of this type of legislation in their recognition of the financing problems of higher education and for beginning a national dialog seeking answers.

Our testimony is in two parts. First, we again state our opposition to the utilization of the tax system as a means of financing individual's costs of attending college. However, we do support reform of the current system of student aid and increased funding of the programs so that more students are eligible for assistance and we call for an increase of at least $1 billion in the current programs so that they better serve needy and middle-income students. Such a targeted increase in appropriations will better meet the goals of the proponents of tuition tax credits, at a substantially reduced cost and with less constitutional controversy.

Second, while the coalition opposes tuition tax credits. we do realize there is great support for the concept in the Congress. Therefore, we will suggest changes in the already introduced tax credit proposals, which if adopted, would allow the organization to reconsider the tax credit idea and perhaps come to support it.

Since I have very little time to testify, I recommend the committee examine our testimony before the House Budget Committee on May 12, 1977, with copies of which we will be happy to provide you. In that statement, we pointed out that tuition tax credits will upset the already tenuous balance between public and independent higher education in their friendly competition for students.

For example, if a tax credit and refund policy were adopted, we believe the Federal Government would be establishing a free tuition policy for many institutions and if there were a half-cost provision, then many public colleges would in effect have their tuition charges reduced by 50 percent to the detriment of the independent sector.

We have done some research on it surveying colleges, using Federal data. In the year in which the data was taken, there were 947 public and 22 private institutions that charged less than $500 in tuition and required fees. The number of students enrolled in colleges for the public, 4,987,461 students, and the independents enroll 15,675 students. We cannot see how some people can claim tuition tax credit, aid public higher education and it is just going to upset the balance between the two sectors. If we look at tuition under between $901 and $1,000, we find similar figures, 3.6 million, in the public sector, and only 81,000 in the independent sector.

The effect of the credit if we consider tuition under $1,000 will be that 1,046 public schools and 1,300 private schools will have either free tuition or have tuition charges halved. Those students enrolling for the public are 8.6 million students and for independents 97,000 students.

Finally, these figures mean that approximately 97 percent of the public college and university students will by instituting a tax credit of all or one-half of their tuitions paid by the U.S. Government as compared to only 4 percent of those students enrolled at institutions of higher learning.

We have done some research to focus our arguments. Table I at the end of this statement indicates the undergraduate tuition and fees charged in academic year 1976-77. These figures are broken down in $500 tuition and fee ranges by the number and control of institutions in each dollar range and by the number of students enrolled broken down in the same fashion.

It is claimed by some advocates of tuition tax credits and in the press that a system of tuition tax credits will aid private higher education. This is not true and, in fact, private higher education and their students will not receive benefits proportionately equal to those received by students attending public schools.

In our survey of the Nation's colleges and universities, we found that there were 1,450 public schools and 1,391 independent colleges for a total sample of 2,841. The publics enrolled 8,883,353 students and the independents enrolled 2,281,933 students.

In the year for which the data is given, 947 public and 22 private institutions charged $500 or less in tuition and required fees. The public schools enrolled 4,987,461 students and the independents enrolled 15,676 students. A tax credit and refund would mean that the Government will give a free tuition education to 56 percent of all students enrolled in public higher education institutions.