Federal Update: Senate Approves Tax Package while Partisan Fights Stoke Fears of December Shutdown

Sat, 12/02/2017

With the end of the year in sight, Capitol Hill is pushing forward in key areas. The list of legislative items in play with implications for the University are growing in urgency and in number, as tax reform efforts continue to advance, a major fiscal deadline looms, and lawmakers take the first steps on a long path toward reauthorization of the Higher Education Act. Republicans are increasingly frustrated and worried with their lack of tangible legislative victories, particularly with the approaching midterm elections. We have seen that dynamic with the tax bill, which has moved quickly and with little appetite for careful examination of the details. On funding, politics and partisan gamesmanship are overshadowing serious negotiations over the top-line spending levels that are an essential first step in finalizing FY18 funding. Following is a more detailed overview of these recent activities in Washington and the outlook for the next several weeks.

The Tax Cuts and Jobs Act of 2017

Nowhere is the pressure for legislative results more obvious than in the ongoing effort to adopt major tax reform legislation. In an effort to smooth and speed passage, Republican leaders are pushing the bill through the Congress as a reconciliation measure, which is protected from filibuster and can pass on a majority vote. This has guaranteed, to the extent the Republican caucus in each house stays united in support, the bill can pass with only Republican votes. It has also enabled an extraordinarily fast process.

Both the House and Senate have passed their own versions of the Tax Cuts and Jobs Act. The House passed (227-205) their version November 16 and the Senate, after a week of high drama, completed its version very early today on a vote of 51–49. At this point, signals point to a conference on the bill to reconcile the many differences; after the conference the bill would once again have to be approved by the House and Senate and then go to the President for his signature. There remains a small chance that leadership will choose to short-circuit this longer process and take the Senate bill directly to the House for its approval. All indications are that this legislation will be completed before the end of the year.

While the House and Senate versions share the same top line goals – lowering corporate, small business and individual tax rates, simplifying the tax code and supporting economic growth – the bills differ substantially in their details. Beyond high profile issues such as the elimination of state and local income tax deductions, the phasing out of individual and other tax cuts, the inclusion of the repeal of the ACA's individual mandate, and the deficit impacts of the bill, there are significant higher education issues in play. From President Faust and the University’s governing boards to donors and students, Harvard has been deeply engaged directly in many of these on the Hill as well as working with our national associations, peers, and others across higher education to impress upon policymakers the damaging impacts of these proposals on our core educational mission. The focus has been on several leading issues:

Endowments: Both the House and Senate bills impose a new 1.4% excise tax on investment earnings for private colleges and universities for institutions with 500 or more students and assets above a certain threshold. The House bill sets that at $250,000 per student and, in a late change, the Senate raised that to $500,000 per student. We remain strenuously opposed to this provision, which seems based on a fundamentally flawed view of endowments. Harvard’s endowment fuels excellence, strong student financial aid programs, innovation and enables the work of faculty, students and staff that has a positive impact in the world. The same is true of the other 35-75 institutions that would be affected by this misguided provision. We will continue to work in conference in the effort to have this provision struck in the final bill.
Graduate Education: The House bill, but not the Senate, includes the elimination of tax-free tuition waivers. While used at some institutions to support staff and dependents’ attendance, this provision is a vital support for graduate students across much of higher education and could result in significant tax liabilities for students. Since emerging in the House bill, there has been substantial criticism of this provision at Harvard and beyond from students, presidents, institutions, faculty and those concerned about innovation and competitiveness. With the Senate excluding this provision and indications from the House committee leadership that they are open to reconsidering it, we hope (and will be working so that) the Senate position will be maintained in conference.
Other Education Affordability Provisions: Numerous changes lessening support for students and families were included in the House bill only, including: the repeal of the student loan interest deduction and the consolidation of HOPE and Lifetime Learning Credits into the American Opportunity Tax Credit in a way that eliminates support for continuing and part-time studies. Significant criticism has been leveled at the House provision repealing the student-loan interest deduction and the Senate appears very intentional in its exclusion of that provision. The consolidation of the various credits has long been a bipartisan goal, although the House approach substantially reduces the assistance these provisions currently offer families and students is helping with the cost of post-secondary education.
Tax Exempt Bonds: The House bill repeals private activity bonds for all tax-exempt entities. Both the House and Senate bills repeal advance refunding bonds. While tax-exempt bonds impose certain limitations on a building’s use, they have been an important tool to assist in building and maintaining university infrastructure particularly when interest rates have been high. Harvard has also used advance refunding to lower borrowing costs.
Employer Provided Educational Assistance: The House bill repeals this staff benefit that has allowed employers to provide up to $5,250 annually tax-free to employees to pursue courses, training, and other education, like Harvard’s popular Tuition Assistance Program (TAP). The Senate bill does not address the issue.
Charitable Giving: While not directly targeted at charitable giving incentives in the tax code, both the House and Senate bills contain a broad expansion of the standard deduction, nearly doubling it. It is estimated this will reduce those that itemize from 30 percent to 5 percent of filers. Such a change would substantially reduce the number of taxpayers who will have a tax incentive for charitable donations. Congress’s Joint Committee on Tax has estimated this will reduce itemized charitable deductions 40 percent.
Executive Compensation: Both bills create a new 20 percent institutional excise tax on the compensation of the top-five highest-paid employees for income above $1 million.

FY18 Funding and Appropriations

FY18 began October 1, the government is currently funded under a Continuing Resolution (CR) that expires December 8. The process is far behind as thus far there has been a failure to reach agreement on the overall government-wide spending caps, which fall back to the low levels established in the 2011 Budget Control Act. There is significant pressure from Republicans to increase the Defense caps and Democrats are insistent that there be parity for non-Defense programs. In addition, recognizing that funding measures give them added leverage (since some Republicans on principle rarely support appropriations bills), Democrats have pushed for the next funding measure to serve as a vehicle for legislation addressing Dreamers and the Administration’s termination of the DACA program. Beyond these substantive challenges, politics and the focus on tax reform have delayed and distracted members, making next week’s deadline particularly fraught.

Earlier this week, there was hope that bipartisan negotiations were moving forward in earnest; but a sharp tweet from the President led Democrats to pull out of a scheduled meeting and seems to have sent the parties back to their corners. With one week remaining before the current continuing resolution expires, Congress will once again clearly need to extend current funding temporarily, but has yet to agree on how long such a CR would run, or what additional legislation – e.g. disaster aid, children’s health insurance, a Dreamer bill – if any, would be tacked on. Finger pointing has already begun over what party would be to blame in the event of a government shutdown and some elements seem to be advocating a shutdown. Even so, there is still time for the two sides (particularly among Hill leadership, without the President) to come together and hash out a deal. Leaders are reportedly considering a pair of CRs that would begin with a short two-week extension to December 22, to allow time for enactment of a budget deal, followed by another CR into the New Year with the goal of passing an omnibus appropriations package in January. This weekend and early next week will be critical for negotiations.

Higher Education Act Reauthorization

On top of these massive fiscal issues before Congress, House Education and Workforce Committee Chairwoman, Virginia Foxx (R-NC), released today her version of a comprehensive rewrite of the Higher Education Act (HEA). The House committee may markup its bill next week. Foxx’s bill, known as the PROSPER Act, consolidates and caps student-aid programs, repeals regulations on traditional and for-profit schools, authorizes more funding for apprenticeships, and makes additional changes especially aimed at non-traditional schools and programs. With its release today, we are reviewing all the details and will work with financial aid and other offices across the University to better understand its impacts.

Last reauthorized in 2008, the HEA is overdue for a reauthorization. While Foxx’s bill is the first to emerge this year, Senate HELP Committee Chair Lamar Alexander (R-TN) has long promoted his FAST Act that calls for consolidation and simplification but mainly without many of the cuts included in the Foxx measure. In addition, Senator Alexander has a cordial and strong working relationship with his Democratic Ranking member, Patty Murray (D-WA), and together they have a history of producing bipartisan education bills. Just this week, the HELP committee held a hearing on FAFSA simplification and members from both parties expressed a commitment to a reauthorization and to working together on it. So while the House may move fast, we anticipate this process will take months, if not more than a year, to navigate.

Harvard’s Advocacy

As these issues and other continue to unfold, we will continue to engage closely with Congressional leadership, alumni, and key policymakers in support of institutional priorities, and we will keep you informed with the latest significant developments and results. As always, please feel free to reach out to Suzanne Day (suzanne_day@harvard.edu) and Jon Groteboer (jon_groteboer@harvard.edu) with any questions or concerns.