Tax Expenditures in the Education Sector
Tax expenditures are government revenue losses resulting from provisions in the tax code that allow an individual or business to reduce their tax liabilities by taking certain deductions, exemptions, exclusions, preferential rates, deferrals, or credits. Tax expenditures reduce the amount of revenue that would otherwise have been collected by the government, and thus have a similar effect on the federal budget as a spending program. They also can benefit recipients in much the same way as direct spending. Subsidyscope illuminates the budgetary costs of these programs; however, any use of these data for policy evaluation must weigh those costs against the benefits they provide. The costs of tax expenditures are estimated by two government entities: the US Department of the Treasury (Treasury), in the executive branch, and the nonpartisan staff of the Joint Committee on Taxation (JCT), a congressional committee. Each uses different methods and formats for calculating and presenting its estimates (see this Methodology page for more detail). Subsidyscope presents Treasury estimates below that are published by the Office of Management and Budget (OMB).
Table 1: Education Related Tax Expenditures for Individuals and Corporations, Fiscal Years 2009 and 2010 ($ millions)
| Tax Expenditure | FY 2009 | FY 2010 |
|---|---|---|
| American Opportunity Tax Credit | $2,460 | $15,110 |
| Deductibility of charitable contributions (education) | $4,170 | $3,930 |
| Lifetime Learning tax credit | $3,860 | $3,490 |
| Parental personal exemption for students age 19 or over | $4,440 | $2,960 |
| Exclusion of scholarship and fellowship income (normal tax method) | $2,080 | $2,760 |
| Exclusion of interest on bonds for private nonprofit educational facilities | $1,780 | $2,340 |
| Deductibility of student-loan interest | $1,250 | $1,480 |
| State prepaid tuition plans | $1,200 | $1,390 |
| Deduction for higher education expenses | $1,790 | $760 |
| Exclusion of employer-provided educational assistance | $660 | $680 |
| Exclusion of interest on student-loan bonds | $440 | $550 |
| Credit for holders of zone academy bonds | $190 | $190 |
| Special deduction for teacher expenses | $180 | $160 |
| Qualified school construction bonds | $20 | $80 |
| Education Individual Retirement Accounts | $40 | $60 |
| Discharge of student loan indebtedness | $20 | $20 |
| Exclusion of interest on savings bonds redeemed to finance educational expenses | $20 | $20 |
| HOPE tax credit | $2,920 | $0 |
| Total1 | $27,520 | $35,980 |
Source: Subsidyscope analysis of data from OMB. Budget of the U.S. Government. Fiscal year 2009 figures are from Analytical Perspectives, FY2011, p. 211; fiscal year 2010 figures are from Analytical Perspectives, FY2012, p. 243.
As seen in Table 1, the estimated amount of revenue lost due to education tax expenditures rose by 31 percent between fiscal year 2009 and fiscal year 2010, from around $27.5 billion to $36 billion. An expansion of the American Opportunity Tax Credit (AOTC)—a provision in the tax code introduced under the American Recovery and Reinvestment Act (ARRA)—was the primary driver behind this increase. From fiscal year 2009 to fiscal year 2010, the AOTC subsumed and expanded the HOPE tax credit by increasing eligibility, adding course materials as a deductible expense, and raising the number of years of applicable post-secondary education from two to four.2
The Largest Education Tax Expenditures, Fiscal Year 2010
Source: Subsidyscope analysis of data from OMB. Budget of the U.S. Government. Fiscal year 2010 figures are from Analytical Perspectives, FY2012, p. 243.
Notes: "Other" includes nine education exclusions, deductions, and credits, each of them is estimated to have a revenue loss of less than $1 billion.
Numbers may not add up to 100 percent due to rounding.
- Summing tax expenditures often provides a reasonably good estimate for the total cost of groups of tax expenditures, though it does not capture potential interactions among tax expenditures or behavioral responses if any single one is changed or repealed. For more on summing tax expenditures and their interaction effects, see Burman, Leonard, Eric Toder and Christopher Geissler. "How Big Are Total Individual Income Tax Expenditures, and Who Benefits from Them?" The Urban Institute. Washington, DC. December 2008. For more on why tax expenditure estimates are not exact estimates of the amount of federal revenue that would be raised if they were eliminated, see the Methodology page of Pew’s Tax Expenditure Database.
- Internal Revenue Service (IRS). "American Opportunity Tax Credit." November 9, 2011.