Republican vice presidential nominee Mike Pence’s recently released tax returns attracted attention for how little tax he paid: just $6,956 in federal income tax on $115,526 in total income, a rate of 6 percent. Pence’s tax bill would have been 72 percent higher had it not been for $5,000 in higher education tax credits enacted under Presidents Clinton and Obama, which have been increasingly demonstrated to be ineffective and regressive.
Tax credits that help offset the tuition paid by college students and their families have been in place since 1997, and were significantly expanded in 2009. These credits are available to married-couple families with incomes up to $180,000 ($90,000 for single-parent families), with varying formulas and eligibility rules for each of the credits. They totaled $17.5 billion in 2013, more than half the size of the Pell grant program for low-income students.
The availability of these tax credits to families with relatively high incomes combined with the fact that children from higher-income families are more likely to go to college means that the credits disproportionately benefit higher-income households. An analysis of the 2009 tax returns of households with 19- and 20-year-olds by George Bulman and Caroline Hoxby showed that the top third of families in terms of income (those making more than $70,000) reaped 62 percent of the benefits of these credits. Families in the middle third got 31 percent. The bottom third of families—those making less than $30,000 per year—got a paltry 7 percent.
The regressive distribution of education tax credits among families with traditional-age college students is offset to some degree by the use of credits by older college students, who tend to come from lower-income families. And the distribution of benefits might be tolerable if the credits at least accomplished their goal of getting more people to enroll in and graduate from college. But Bulman and Hoxby also find that the tax credits have zero or very small effects on college enrollment and the type of college attended.
The ineffectiveness and regressive nature of federal education tax credits appears unlikely to change. A new study found that providing families with better information on the tax credits had no impact on their likelihood of applying to or enrolling in college. In other words, the ineffectiveness of the tax credits at promoting educational attainment does not appear to be due to a lack of understanding about their existence or how they work.
Higher education tax credits are politically popular, likely due to the fact that they are distributed to a wide range of families in terms of income. That may be why neither of the 2016 presidential candidates has released a plan to reform or eliminate them. Such a change may only be possible as part of a broader bipartisan effort at tax reform led by liberals who desire a more progressive distribution of education benefits and by conservatives focused on reducing government waste of taxpayer dollars.