[Senate Report 107-12]
[From the U.S. Government Publishing Office]
Calendar No. 34
107th Congress Report
SENATE
1st Session 107-12
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S. 763--AFFORDABLE EDUCATION ACT OF 2001
_______
April 24, 2001.--Ordered to be printed
_______
Mr. Grassley, from the Committee on Finance, submitted the following
R E P O R T
[To accompany S. 763]
[Including cost estimate of the Congressional Budget Office]
The Committee on Finance reported an original bill (S. 763)
to amend the Internal Revenue Code of 1986 to allow tax-free
expenditures from education individual retirement accounts for
elementary and secondary school expenses, to increase the
maximum annual amount of contributions to such accounts, and
for other purposes, having considered the same, reports
favorably thereon and recommends that the bill do pass.
CONTENTS
Page
I. Legislative Background and Summary................................2
A. Legislative Background................................ 2
B. Summary............................................... 2
II. Explanation of the Bill...........................................3
A. Education Savings Incentives (Title I)................ 3
1. Modifications to education IRAs (sec. 101)........ 3
2. Private prepaid tuition programs; exclusion from
gross income of education distributions from
qualified tuition programs (sec. 102)............ 8
B. Educational Assistance (Title II)..................... 11
1. Exclusion for employer-provided educational
assistance (sec. 201)............................ 11
2. Modifications to student loan interest deduction
(sec. 202)....................................... 13
3. Eliminate tax on awards under National Health
Service Corps Scholarship Program and F. Edward
Herbert Armed Forces Health Professions
Scholarship and Financial Assistance Program
(sec. 203)....................................... 14
C. Tax Benefits for Certain Types of Bonds for
Educational Facilities and Activities (Title III).... 15
III.Budget Effects of the Bill.......................................19
A. Committee Estimates................................... 19
B. Budget Authority and Tax Expenditures................. 21
C. Consultation With the Congressional Budget Office..... 21
IV. Votes of the Committee...........................................23
V. Regulatory Impact and Other Matters..............................23
A. Regulatory Impact..................................... 23
B. Unfunded Mandates Statement........................... 24
C. Tax Complexity Analysis............................... 24
VI. Changes in Existing Law Made by the Bill, as Reported............25
I. LEGISLATIVE BACKGROUND AND SUMMARY
A. Legislative Background
The Senate Committee on Finance marked up an original bill
(the ``Affordable Education Act of 2001'') on March 13, 2001,
and ordered the bill favorably reported by a roll call vote of
20 yeas and no nays.
B. Summary
Education tax incentives (Title I)
The bill increases the annual contribution limit for
education IRAs from $500 to $2,000, expands the definition of
qualified education to include qualified elementary and
secondary education expenses, allows education IRA
contributions for special needs beneficiaries above age 18,
allows corporations and other entities to contribute to
education IRAs, provides an exclusion from income for certain
contributions to education IRAs, allows a taxpayer to exclude
education IRA distributions from gross income and claim the
HOPE or Lifetime Learning credits as long as they are not used
for the same expenses, allows contributions to education IRAs
and qualified tuition programs in the same year for the same
beneficiary, eliminates the marriage penalty in the income
phase-out ranges for education IRAs, and redesignates education
IRAs as Coverdell Education Savings Accounts. The provisions
modifying education IRAs generally are effective for taxable
years beginning after December 31, 2001.
The bill permits private educational institutions to offer
prepaid tuition plans, effective for taxable years beginning
after December 31, 2001. In addition, the bill allows a
taxpayer to exclude certain distributions from qualified
tuition programs from gross income and to claim the HOE or
Lifetime Learning credit as long as they are not used for the
same expenses. The bill also increases the amount of room and
board expenses that can be paid from qualified tuition plans.
The provision is generally effective for distributions made in
taxable years beginning from December 31, 2001. The exclusion
from gross income is extended to private prepaid tuition plans,
effective for taxable years beginning from December 31, 2003.
Educational assistance (Title II)
The bill makes permanent the exclusion from gross income
for employer-provided educational assistance. In addition, the
bill expands the exclusion to apply to graduate courses. The
provision is effective for courses beginning after December 31,
2001.
The bill eliminates the 60-month limit relating to the
deduction for interest paid on qualified student loans and
increases the income limits on the student loan interest
deduction. The provision is effective for interest paid after
December 31, 2001.
The bill provides an exclusion from gross income for awards
under the National Health Service Corps Scholarship program and
the F. Edward Herbert Armed Forces Health Professions
Scholarship and Financial Assistance program, effective for
taxable years beginning after December 31, 2001.
Tax benefits for certain types of bonds for educational facilities and
activities (Title III)
The bill increases the arbitrage rebate exception for
governmental bonds used to finance qualified school
construction from $10 million to $15 million, effective for
bonds issued after December 31, 2001.
The bill permits the issuance of tax-exempt private
activity bonds for qualified education facilities with an
annual volume cap of the greater of $10 per resident or $5
million, effective for bonds issued after December 31, 2001.
II. EXPLANATION OF THE BILL
A. Education Savings Incentives (Title I of the Bill)
1. Modifications to education IRAs (sec. 101 of the bill and sec. 530
of the Code)
present law
In general
Section 530 of the Internal Revenue Code (the ``Code'')
provides tax-exempt status to education individual retirement
accounts (``education IRAs''), meaning certain trusts or
custodial accounts which are created or organized in the United
States exclusively for the purpose of paying the qualified
higher education expenses of a designated beneficiary.
Contributions to education IRAs may be made only in cash.\1\
Annual contributions to education IRAs may not exceed $500 per
beneficiary (except in cases involving certain tax-free
rollovers, as described below) and may not be made after the
designated beneficiary reaches age 18.
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\1\ Special estate and gift tax rules apply to contributions made
to and distributions made from education IRAs.
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Phase out of contribution limit
The $500 annual contribution limit for education IRAs is
generally phased out ratably for contributors with modified
adjusted gross income (``AGI'') between $95,000 and $110,000.
The phase-out range for married taxpayers filing a joint return
is $150,000 to $160,000 of modified AGI. Individuals with
modified AGI above the phase-out range are not allowed to make
contributions to an education IRA established on behalf of any
individual.
Treatment of distributions
Earnings on contributions to an education IRA generally are
subject to tax when withdrawn. However, distributions from an
education IRA are excludable from the gross income of the
beneficiary to the extent that the total distribution does not
exceed the ``qualified higher education expenses'' incurred by
the beneficiary during the year the distribution is made.
If the qualified higher education expenses of the
beneficiary for the year are less than the total amount of the
distribution (i.e., contributions and earnings combined) from
an education IRA, then the qualified higher education expenses
are deemed to be paid from a pro-rata share of both the
principal and earnings components of the distribution. Thus, in
such a case, only a portion of the earnings are excludable
(i.e., the portion of the earnings based on the ratio that the
qualified higher education expenses bear to the total amount of
the distribution) and the remaining portion of the earnings is
includable in the beneficiary's gross income.
The earnings portion of a distribution from an education
IRA that is includable in income is also subject to an
additional 10-percent tax. The 10-percent additional tax does
not apply if a distribution is made on account of the death or
disability of the designated beneficiary, or on account of a
scholarship received by the designated beneficiary.
The additional 10-percent tax also does not apply to the
distribution of any contribution to an education IRA made
during the taxable year if such distribution is made on or
before the date that a return is required to be filed
(including extensions of time) by the beneficiary for the
taxable year during which the contribution was made (or, if the
beneficiary is not required to file such a return, April 15th
of the year following the taxable year during which the
contribution was made).
Present law allows tax-free transfers or rollovers of
account balances from one education IRA benefiting one
beneficiary to another education IRA benefiting another
beneficiary (as well as redesignations of the named
beneficiary), provided that the new beneficiary is a member of
the family of the old beneficiary and is under age 30.
Any balance remaining in an education IRA is deemed to be
distributed within 30 days after the date that the beneficiary
reaches age 30 (or, if earlier, within 30 days of the date that
the beneficiary dies).
Qualified higher education expenses
The term ``qualified higher education expenses'' includes
tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of the designated beneficiary at an
eligible education institution, regardless of whether the
beneficiary is enrolled at an eligible educational institution
on a full-time, half-time, or less than half-time basis.
Qualified higher education expenses include expenses with
respect to undergraduate or graduate-level courses. In
addition, qualified higher education expenses include amounts
paid or incurred to purchase tuition credits (or to make
contributions to an account) under a qualified State tuition
program, as defined in section 529, for the benefit of the
beneficiary of the education IRA.
Moreover, qualified higher education expenses include,
within limits, room and board expenses for any academic period
during which the beneficiary is at least a half-time student.
Room and board expenses that may be treated as qualified higher
education expenses are limited to the minimum room and board
allowance applicable to the student in calculating costs of
attendance for Federal financial aid programs under section 472
of the Higher Education Act of 1965, as in effect on the date
of enactment of the Small Business Job Protection Act of 1996
(August 20, 1996). Thus, room and board expenses cannot exceed
the following amounts: (1) for a student living at home with
parents or guardians, $1,500 per academic year; (2) for a
student living in housing owned or operated by the eligible
education institution, the institution's ``normal'' room and
board charge; and (3) for all other students, $2,500 per
academic year.
Qualified higher education expenses generally include only
out-of-pocket expenses. Such qualified higher education
expenses do not include expenses covered by educational
assistance for the benefit of the beneficiary that is
excludable from gross income. Thus, total qualified higher
education expenses are reduced by scholarship or fellowship
grants excludable from gross income under present-law section
117, as well as any other tax-free educational benefits, such
as employer-provided educational assistance that is excludable
from the employee's gross income under section 127.
Present law also provides that if any qualified higher
education expenses are taken into account in determining the
amount of the exclusion for a distribution from an education
IRA, then no deduction (e.g., for trade or business expenses),
exclusion (e.g., for interest on education savings bond) or
credit is allowed with respect to such expenses.
Eligible educational institutions are defined by reference
to section 481 of the Higher Education Act of 1965. Such
institutions generally are accredited post-secondary
educational institutions offering credit toward a bachelor's
degree, an associate's degree, a graduate-level or professional
degree, or another recognized post-secondary credential.
Certain proprietary institutions and post-secondary vocational
institutions also are eligible institutions. The institution
must be eligible to participate in Department of Education
student aid programs.
Time for making contributions
Contributions to an education IRA for a taxable year are
taken into account in the taxable year in which they are made.
Coordination with HOPE and Lifetime Learning credits
If an exclusion from gross income is allowed for
distributions from an education IRA with respect to an
individual, then neither the HOPE nor Lifetime Learning credit
may be claimed in the same taxable year with respect to the
same individual. However, an individual may elect to waive the
exclusion with respect to distributions from an education IRA.
If such a waiver is made, then the HOPE or Lifetime Learning
credit may be claimed with respect to the individual for the
taxable year.
Coordination with qualified tuition programs
An excise tax is imposed on contributions to an education
IRA for a year if contributions are made by anyone to a
qualified State tuition program on behalf of the same
beneficiary in the same year. The excise tax is equal to 6
percent of the contributions to the education IRA. The excise
tax is imposed each year after the contribution is made, unless
the contributions are withdrawn.
reasons for change
Education IRAs were intended to help families plan for
their children's education. However, the Committee believes
that the present-law limits on contributions to education IRAs
do not permit taxpayers to save adequately. Therefore, the
Committee bill increases the contributions limits to education
IRAs and provides an exclusion for certain employer
contributions to education IRAs.
The Committee believes that education IRAs should be
expanded to provide greater flexibility to families in
providing for their children's education at all levels of
education. Thus, the Committee bill allows education IRAs to be
used for expenses related to elementary and secondary
education.
The Committee believes that other modifications will also
improve the attractiveness and operation of education IRAs,
thus improving the effectiveness of education IRAs in assisting
families in paying for education. Such modifications include
more flexible rules for education IRAs for special needs
beneficiaries and relaxation of the rules restricting the use
of education IRAs and other tax benefits for education in the
same year.
Finally, the Committee wishes to recognize the tireless
work of our late colleague Senator Paul Coverdell to improve
the quality of education in our country. Thus, the Committee
bill renames education IRAs as Coverdell education savings
accounts.
explanation of provisions
Redesignation of education IRAs as Coverdell education savings accounts
The bill renames ``education IRAs'' as ``Coverdell
education savings accounts.''
Annual contribution limit
The bill increases the annual limit on contributions to
Coverdell education savings accounts from $500 to $2,000. Thus,
under the bill, aggregate contributions that may be made by all
contributors to one (or more) Coverdell education savings
account established on behalf of any particular beneficiary is
limited to $2,000 for each year.
Exclusion for contributions to Coverdell education savings accounts
The bill provides an exclusion from gross income and wages
for Social Security tax purposes for certain employer
contributions to a Coverdell education savings account for the
employee, the employee's spouse, or a lineal descendent of the
employee or his or her spouse (provided such individual
otherwise meets the eligibility requirements for Coverdell
education savings accounts). The maximum amount excludable is
$500 per year per each beneficiary. Thus, for example, if an
employee has two children under age 18, the employer could
contribute $500 each year to a Coverdell education savings
account for each child. The exclusion does not apply to self-
employed individuals. The employer is required to report the
amount of any Coverdell education savings account contributions
on the employee's W-2 for the year.
In order to be excludable from gross income, the
contribution must be made pursuant to a plan that meets the
requirements of an educational assistance program under section
127. Thus, for example, the plan must be in writing and must
satisfy nondiscrimination rules.
Coverdell education savings accounts contributions that are
excludable from gross income are treated as earnings for
purposes of determining the amount includable in gross income,
if any, due to a withdrawal from the Coverdell education
savings account.
Qualified education expenses
The bill expands the definition of qualified education
expenses that may be paid tax-free from a Coverdell education
savings account to include ``qualified elementary and secondary
school expenses,'' meaning expenses for (1) tuition, fees,
academic tutoring, special need services, books, supplies,
computer equipment (including related software and services),
and other equipment incurred in connection with the enrollment
or attendance of the beneficiary at a public, private, or
religious school providing elementary education (kindergarten
through grade 12) as determined under State law, and (2) room
and board, uniforms, transportation, and supplementary items or
services (including expended day programs) required or provided
by such a school in connection with such enrollment or
attendance of the beneficiary.
Phase out of contribution limit
The bill increases the phase-out range for married
taxpayers filing a joint return so that it is twice the range
for single taxpayers. Thus, the phase-out range for married
taxpayers filing a joint return is $190,000 to $220,000 of
modified AGI.
Special needs beneficiaries
The bill provides that the rule prohibiting contributions
to a Coverdell education savings account after the beneficiary
attains 18 does not apply in the case of a special needs
beneficiary (as defined by Treasury Department regulations). In
addition, a deemed distribution of any balance in a Coverdell
education savings account does not occur when a special needs
beneficiary reaches age 30.
Contributions by persons other than individuals
The bill clarifies that corporations and other entities
(including tax-exempt organizations) are permitted to make
contributions to Coverdell education savings accounts,
regardless of the income of the corporation or entity during
the year of the contribution.
Contributions permitted until April 15
Under the proposal, individual contributors to Coverdell
education savings accounts are deemed to have made a
contribution on the last day of the preceding taxable year if
the contribution is made on account of such taxable year and is
made not later than the time prescribed by law for filing the
individual's Federal income tax return for such taxable year
(not including extensions). Thus, individual contributors
generally may make contributions for a year until April 15 of
the following year.
Qualified room and board expenses
The bill modifies the definition of room and board expenses
considered to be qualified higher education expenses. This
modification is described in Part II.A.2, below.
Coordination with HOPE and Lifetime Learning credits
The bill allows a taxpayer to claim a HOPE credit or
Lifetime Learning credit for a taxable year and to exclude from
gross income amounts distributed (both the contributions and
the earnings portions) from a Coverdell education savings
account on behalf of the same student as long as the
distribution is not used for the same educational expenses for
which a credit was claimed.
Coordination with qualified tuition programs
The bill repeals the excise tax on contributions made by
any person to a Coverdell education savings account on behalf
of a beneficiary during any taxable year in which any
contributions are made by anyone to a qualified State tuition
program on behalf of the same beneficiary.
If distributions from a Coverdell education savings account
and qualified tuition programs exceed the beneficiary's
qualified higher education expenses for the year (after
reduction by amounts used in claiming the HOPE or Lifetime
Learning credit), the beneficiary must allocate the expenses
between the distributions to determine the amount includible in
income.
Effective date
The provisions modifying Coverdell education savings
accounts are effective for taxable years beginning after
December 31, 2001, except that the redesignation of Coverdell
education savings accounts as Coverdell education savings
accounts is effective on the date of enactment.
2. Private prepaid tuition programs; exclusion from gross income of
education distributions from qualified tuition programs (sec.
102 of the bill and sec. 529 of the Code)
present law
Section 529 of the Code provides tax-exempt status to
``qualified State tuition programs,'' meaning certain programs
established and maintained by a State (or agency or
instrumentality thereof) under which persons may (1) purchase
tuition credits or certificates on behalf of a designated
beneficiary that entitle the beneficiary to a waiver or payment
of qualified higher education expenses of the beneficiary, or
(2) make contributions to an account that is established for
the purpose of meeting qualified higher education expenses of
the designated beneficiary of the account (a ``savings account
plan''). The term ``qualified higher education expenses''
generally has the same meaning as does the term for purposes of
Coverdell education savings accounts (as described above) and,
thus, includes expenses for tuition, fees, books, supplies, and
equipment required for the enrollment or attendance at an
eligible educational institution,\2\ as well as certain room
and board expenses for any period during which the student is
at least a half-time student.
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\2\ An ``eligible education institution'' is defined the same for
purposes of education IRAs (described in Part II.A.1, above) and
qualified State tuition programs.
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No amount is included in the gross income of a contributor
to, or a beneficiary of, a qualified State tuition program with
respect to any distribution from, or earnings under, such
program, except that (1) amounts distributed or educational
benefits provided to a beneficiary are included in the
beneficiary's gross income (unless excludable under another
Code section) to the extent such amounts or the value of the
educational benefits exceed contributions made on behalf of the
beneficiary, and (2) amounts distributed to a contributor
(e.g., when a parent receives a refund) are included in the
contributor's gross income to the extent such amounts exceed
contributions made on behalf of the beneficiary.\3\
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\3\ Distributions from qualified State tuition programs are treated
as representing a pro rata share of the contributions and earnings in
the account.
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A qualified State tuition program is required to provide
that purchases or contributions only be made in cash.\4\
Contributors and beneficiaries are now allowed to direct the
investment of contributions to the program (or earnings
thereon). The program is required to maintain a separate
accounting for each designated beneficiary. A specified
individual must be designated as the beneficiary at the
commencement of participation in a qualified State tuition
program (i.e., when contributions are first made to purchase an
interest in such a program), unless interests in such a program
are purchased by a State or local government or a tax-exempt
charity described in section 501(c)(3) as part of a scholarship
program operated by such government or charity under which
beneficiaries to be named in the future will receive such
interests as scholarships.
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\4\ Special estate and gift tax rules apply to contributions made
to and distributions made from qualified State tuition programs.
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A transfer of credits (or other amounts) from one account
benefiting one designated beneficiary to another account
benefiting a different beneficiary is considered a distribution
(as is a change in the designated beneficiary of an interest in
a qualified State tuition program), unless the beneficiaries
are members of the same family. For this purpose, the term
``member of the family'' means: (1) the spouse of the
beneficiary; (2) a son or daughter of the beneficiary or a
descendent of either; (3) a stepson or stepdaughter of the
beneficiary; (4) a brother, sister, stepbrother or stepsister
of the beneficiary; (5) the father or mother of the beneficiary
or an ancestor of either; (6) a stepfather or stepmother of the
beneficiary; (7) a son or daughter of a brother or sister of
the beneficiary; (8) a brother or sister of the father or
mother of the beneficiary; (9) a son-in-law, daughter-in-law,
father-in-law, mother-in-law, brother-in-law, or sister-in-law
of the beneficiary; or (10) the spouse of any person described
in (2)-(9).
Earnings on an account may be refunded to a contributor or
beneficiary, but the State or instrumentality must impose a
more than de minimis monetary penalty unless the refund is (1)
used for qualified higher education expenses of the
beneficiary, (2) made on account of the death or disability of
the beneficiary, or (3) made on account of a scholarship
received by the beneficiary to the extent the amount refunded
does not exceed the amount of the scholarship used for higher
education expenses.
To the extent that a distribution from a qualified State
tuition program is used to pay for qualified tuition and
related expenses (as defined in sec. 25A(f)(1)), the
beneficiary (or another taxpayer claiming the beneficiary as a
dependent) may claim the HOPE credit or Lifetime Learning
credit with respect to such tuition and related expenses
(assuming that the other requirements for claiming the HOPE
credit or Lifetime Learning credit are satisfied and the
modified AGI phaseout for those credits does not apply).
reasons for change
The Committee believes that distributions from qualified
State tuition programs should not be subject to Federal income
tax to the extent that such distributions are used to pay for
qualified higher education expenses of undergraduate or
graduate students who are attending college, university, or
certain vocational schools. In addition, the Committee believes
that the present-law rules governing qualified tuition programs
should be expanded to permit private educational institutions
to maintain certain prepaid tuition programs. The Committee
believes that the amount of room and board expenses that can be
paid with tax-free distributions from prepaid tuition plans
should reflect current costs.
explanation of provision
Qualified tuition program
The bill expands the definition of ``qualified tuition
program'' to include certain prepaid tuition programs
established and maintained by one or more eligible educational
institutions (which may be private institutions) that satisfy
the requirements under section 529 (other than the present-law
State sponsorship rule). In the case of a qualified tuition
program maintained by one or more private eligible educational
institutions, persons are able to purchase tuition credits or
certificates on behalf of a designated beneficiary (as set
forth in sec. 529(b)(1)(A)(i)), but are not able to make
contributions to a savings account plan (as described in
section 529(b)(1)(A)(ii)). Except to the extent provided in
regulations tuition program maintained by a private institution
would not be treated as qualified unless it has received a rule
or determination that the program satisfies applicable
requirements.
Exclusion from gross income
Under the bill, an exclusion from gross income is provided
for distributions made in taxable years beginning after
December 31, 2001, from qualified State tuition programs to the
extent that the distribution is used to pay for qualified
higher education expenses. This exclusion from gross income is
extended to distributions from qualified tuition programs
established and maintained by an entity other than a State (or
agency or instrumentality thereof) for distributions made in
taxable years after December 31, 2003.
Qualified higher education expenses
The bill provides that, for purposes of the exclusion for
distributions from qualified tuition plans, the maximum room
and board allowance is the amount applicable to the student in
calculating costs of attendance for Federal financial aid
programs under section 472 of the Higher Education Act of 1965,
as in effect on the date of enactment of this Act, or, in the
case of a student living in housing owned or operated by an
eligible educational institution, the actual amount charged the
student by the educational institution for room and board.\5\
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\5\ This definition would also apply to distributions from
education IRAs.
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Coordination with HOPE and Lifetime Learning credits
The bill allows a taxpayer to claim a HOPE credit or
Lifetime Learning credit for a taxable year and to exclude from
gross income amounts distributed (both the principal and the
earnings portions) from a qualified tuition program on behalf
of the same student as long as the distribution is not used for
the same expenses for which a credit was claimed.
Rollovers for benefit of same beneficiary
The bill provides that a transfer of credits (or other
amounts) from one qualified tuition program for the benefit of
a designated beneficiary to another qualified tuition program
for the benefit of the same beneficiary is not considered a
distribution. This rollover treatment applies to a maximum of
three such transfers with respect to the same designated
beneficiary.
Member of family
The bill provides that, for purposes of tax-free rollovers
and changes of designated beneficiaries, a ``member of the
family'' includes first cousins of the original beneficiary.
Effective date
The provision is effective for taxable years beginning
after December 31, 2001, except that the exclusion from gross
income for certain distributions from a qualified tuition
program established and maintained by an entity other than a
State (or agency or instrumentality thereof) is effective for
taxable years beginning after December 31, 2003.
B. Educational Assistance (Title II of the Bill)
1. Exclusion for employer-provided educational assistance (sec. 201 of
the bill and sec. 127 of the Code)
Present Law
Educational expenses paid by an employer for its employees
are generally deductible by the employer.
Employer-paid educational expenses are excludable from the
gross income and wages of an employee if provided under a
section 127 educational assistance plan or if the expenses
qualify as a working condition fringe benefit under section
132. Section 127 provides an exclusion of $5,250 annually for
employer-provided educational assistance. The exclusion does
not apply to graduate courses beginning after June 30, 1996.
The exclusion for employer-provided educational assistance for
undergraduate courses expires with respect to courses beginning
after December 31, 2001.
In order for the exclusion to apply, certain requirements
must be satisfied. The educational assistance must be provided
pursuant to a separate written plan of the employer. The
educational assistance program must not discriminate in favor
of highly compensated employees. In addition, not more than
five percent of the amounts paid or incurred by the employer
during the year for educational assistance under a qualified
educational assistance plan can be provided for the class of
individuals consisting of more than five percent owners of the
employer (and their spouses and dependents).
Educational expenses that do not qualify for the section
127 exclusion may be excludable from income as a working
condition fringe benefit.\6\ In general, education qualifies as
a working condition fringe benefit if the employee could have
deducted the education expenses under section 162 if the
employee paid for the education. In general, education expenses
are deductible by an individual under section 162 if the
education (1) maintains or improves a skill required in a trade
or business currently engaged in by the taxpayer, or (2) meets
the express requirements of the taxpayer's employer, applicable
law or regulations imposed as a condition of continued
employment. However, education expenses are generally not
deductible if they relate to certain minimum educational
requirements or to education or training that enables a
taxpayer to begin working in a new trade or business.\7\
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\6\ These rules also apply in the event that section 127 expires.
\7\ In the case of an employee, education expenses (if not
reimbursed by the employer) may be claimed as an itemized deduction
only if such expenses, along with other miscellaneous expenses, exceed
two percent of the taxpayer's AGI. An individual's total deductions may
also be reduced by the overall limitation on itemized deductions under
section 68. These limitations do not apply in determining whether an
item is excludable from income as a working condition fringe benefit.
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Reasons for Change
The Committee believes that the exclusion for employer-
provided educational assistance has enabled millions of workers
to advance their education and improve their job skills without
incurring additional taxes and a reduction in take-home pay. In
addition, the exclusion lessens the complexity of the tax laws.
Without the special exclusion, a worker receiving educational
assistance from his or her employer is subject to tax on the
assistance, unless the education is related to the worker's
current job. Because the determination of whether particular
educational assistance is job related is based on the facts and
circumstances, it may be difficult to determine with certainty
whether the educational assistance is excludable from income.
This uncertainty may lead to disputes between taxpayers and the
Internal Revenue Service.
The Committee believes that reinstating the exclusion for
graduate-level employer-provided educational assistance will
enable more individuals to seek higher education, and that
further extension of the exclusion is important.
The past experience of allowing the exclusion to expire and
later extending it retroactively has created burdens for
employers and employees. Employees may have difficulty planning
for their educational goals if they do not know whether their
tax bills will increase. For employers, the lack of permanence
of the provision has caused severe administrative problems.
Uncertainty about the exclusion's future may discourage some
employers from providing educational benefits.
explanation of provision
The bill extends the exclusion for employer-provided
educational assistance to graduate education and makes the
exclusion (as applied to both undergraduate and graduate
education) permanent.
Effective date.--The provision is effective with respect to
courses beginning after December 31, 2001.
2. Modifications to student loan interest deduction (sec. 202 of the
bill and sec. 221 of the Code)
present law
Certain individuals may claim an above-the-line deduction
for interest paid on qualified education loans, subject to a
maximum annual deduction limit. The deduction is allowed only
with respect to interest paid on a qualified education loan
during the first 60 months in which interest payments are
required. Required payments of interest generally do not
include voluntary payments, such as interest payments made
during a period of loan forbearance. Months during which
interest payments are not required because the qualified
education loan is in deferral or forbearance do not count
against the 60-month period. No deduction is allowed to an
individual if that individual is claimed as a dependent on
another taxpayer's return for the taxable year.
A qualified education loan generally is defined as any
indebtedness incurred solely to pay for certain costs of
attendance (including room and board) of a student (who may be
the taxpayer, the taxpayer's spouse, or any dependent of the
taxpayer as of the time the indebtedness was incurred) who is
enrolled in a degree program on at least a half-time basis at
(1) an accredited post-secondary educational institution
defined by reference to section 481 of the Higher Education Act
of 1965, or (2) an institution conducting an internship or
residency program leading to a degree or certificate from an
institution of higher education, a hospital, or a health care
facility conducting postgraduate training.
The maximum allowable annual deduction is $2,500. The
deduction is phased out ratably for single taxpayers with
modified AGI between $40,000 and $55,000 and for married
taxpayers filing joint returns with modified AGI between
$60,000 and $75,000. The income ranges will be indexed for
inflation after 2002.
reasons for change
The Committee believes that it is appropriate to expand the
deduction for individuals who pay interest on qualified
education loans by repealing the limitation that the deduction
is allowed only with respect to interest paid during the first
60 months in which interest payments are required. In addition,
the repeal of the 60-month limitation lessens complexity and
administrative burdens for taxpayers, lenders, loan servicing
agencies, and the Internal Revenue Service. The Committee also
believes it appropriate to increase the income phase-out ranges
applicable to the student loan interest deduction to make the
deduction available to more taxpayers and to reduce the
potential marriage penalty caused by the phase-out ranges.
explanation of provision
The bill increases the income phase-out ranges for
eligibility for the student loan interest deduction to $50,000
to $65,0000 for single taxpayers to $100,000 to $130,000 for
married taxpayers filing joint returns. These income phase-out
ranges are indexed for inflation after 2002.
The bill repeals both the limit on the number of months
during which interest paid on a qualified education loan is
deductible and the restriction that voluntary payments of
interest are not deductible.
Effective date.--the provision is effective for interest
paid on qualified education loans after December 31, 2001.
3. Eliminate tax on awards under the National Health Service Corps
Scholarship Program and the F. Edward Hebert Armed Forces
Health Professions Scholarship and Financial Assistance Program
(sec. 203 of the bill and sec. 117 of the Code)
present law
Section 117 excludes from gross income amounts received as
a qualified scholarship by an individual who is a candidate for
a degree and used for tuition and fees required for the
enrollment or attendance (or for fees, books, supplies, and
equipment required for courses of instruction) at a primary,
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to
scholarship amounts covering regular living expenses, such as
room and board. In addition to the exclusion for qualified
scholarships, section 117 provides an exclusion from gross
income for qualified tuition reductions for certain education
provided to employees (and their spouses and dependents) of
certain educational organizations.
The exclusion for qualified scholarships and qualified
tuition reductions does not apply to any amount received by a
student that represents payment for teaching, research, or
other services by the student required as a condition for
receiving the scholarship or tuition reduction.
The National Health Service Corps Scholarship Program (the
``NHSC Scholarship Program'') and the F. Edward Hebert Armed
Forces Health Professions Scholarship and Financial Assistance
Program (the ``Armed Forces Scholarship Program'') provide
education awards to participants on the condition that the
participants provide certain services. In the case of the NHSC
Program, the recipient of the scholarship is obligated to
provide medical services in a geographic area (or to an
underserved population group or designated facility) identified
by the Public Health Service as having a shortage of health
care professionals. In the case of the Armed Forces Scholarship
Program, the recipient of the scholarship is obligated to serve
a certain number of years in the military at an armed forces
medical facility. Because the recipients are required to
perform services in exchange for the education awards, the
awards used to pay higher education expenses are taxable income
to the recipient.
reasons for change
The Committee believes it appropriate to provide tax-free
treatment for scholarships received by medical, dental,
nursing, and physician assistant students under the NHSC
Scholarship Program and the Armed Forces Scholarship Program.
explanation of provision
The proposal would provide that amounts received by an
individual under the NHSC Scholarship Program or the Armed
Forces Scholarship Program are eligible for tax-free treatment
as qualified scholarships under section 117, without regard to
any service obligation by the recipient. As with other
qualified scholarships under section 117, the tax-free
treatment would not apply to amounts received by students for
regular living expenses, including room and board.
Effective date.--The provision is effective for education
awards received after December 31, 2001.
C. Tax Benefits for Certain Types of Bonds for Educational Facilities
and Activities (Title III of the Bill) (Secs. 301-302 of the Bill and
Secs. 142 and 146-148 of the Code)
present law
Tax-exempt bonds
In general
Interest on debt \8\ incurred by States or local
governments is excluded from income if the proceeds of the
borrowing are used to carry out governmental functions of those
entities or the debt is repaid with governmental funds (sec.
103).\9\ Like other activities carried out or paid for by
States and local governments, the construction, renovation, and
operation of public schools is an activity eligible for
financing with the proceeds of tax-exempt bonds.
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\8\ Hereinafter referred to as ``State or local government bonds.''
\9\ Interest on this debt included in calculating the ``adjusted
current earnings'' preference of the corporate alternative minimum tax.
---------------------------------------------------------------------------
Interest on bonds that nominally are issued by States or
local governments, but the proceeds of which are used (directly
or indirectly) by a private person and payment of which is
derived from funds of such a private person is taxable unless
the purpose of the borrowing is approved specifically in the
Code or in a non-Code provision of a revenue Act. These bonds
are called ``private activity bonds.'' \10\ The term ``private
person'' includes the Federal Government and all other
individuals and entities other than States or local
governments.
---------------------------------------------------------------------------
\10\ Interest on private activity bonds (other than qualified
501(c)(3) bonds) is a preference item in calculating the alternative
minimum tax.
---------------------------------------------------------------------------
Private activities eligible for financing with tax-exempt
private activity bonds
Present law includes several exceptions permitting States
or local governments to act as conduits providing tax-exempt
financing for private activities. Both capital expenditures and
limited working capital expenditures of charitable
organizations described in section 501(c)(3) of the Code--
including elementary, secondary, and post-secondary schools--
may be financed with tax-exempt private activity bonds
(``qualified 501(c)(3) bonds'').
States or local governments may issue tax-exempt ``exempt-
facility bonds'' to finance property for certain private
businesses. Business facilities eligible for this financing
include transportation (airports, ports, local mass commuting,
and high speed intercity rail facilities); privately owned and/
or privately operated public works facilities (sewage, solid
waste disposal, local district heating or cooling, and
hazardous waste disposal facilities); privately-owned and/or
operated low-income rental housing; and certain private
facilities for the local furnishing of electricity or gas. A
further provision allows tax-exempt financing for
``environmental enhancements of hydro-electric generating
facilities.'' Tax-exempt financing also is authorized for
capital expenditures for small manufacturing facilities and
land and equipment for first-time farmers (``qualified small-
issue bonds''), local redevelopment activities (``qualified
redevelopment bonds''), and eligible empowerment zone and
enterprise community businesses. Tax-exempt private activity
bonds also may be issued to finance limited non-business
purposes: certain student loans and mortgage loans for owner-
occupied housing (``qualified mortgage bonds'' and ``qualified
veterans' mortgage bonds'').
Private activity tax-exempt bonds may not be issued to
finance schools for private, for-profit businesses.
In most cases, the aggregate volume of private activity
tax-exempt bonds is restricted by annual aggregate volume
limits imposed on bonds issued by issuers within each State.
These annual volume limits are equal to $62.50 per resident of
the State, or $187.5 million if greater. The volume limits are
scheduled to increase to the greater of $75 per resident of the
State or $225 million in calendar year 2002. After 2002, the
volume limits will be indexed annually for inflation.
Arbitrage restrictions on tax-exempt bonds
The Federal income tax does not apply to the income of
States and local governments that is derived from the exercise
of an essential governmental function. To prevent these tax-
exempt entities from issuing more Federally subsidized tax-
exempt bonds than is necessary for the activity being financed
or from issuing such bonds earlier than needed for the purpose
of the borrowing, the Code includes arbitrage restrictions
limiting the ability to profit from investment of tax-exempt
bond proceeds. In general, arbitrage profits may be earned only
during specified periods (e.g., defined ``temporary periods''
before funds are needed for the purpose of the borrowing) or on
specified types of investments (e.g. ``reasonably required
reserve or replacement funds''). Subject to limited exceptions,
profits that are earned during these periods or on such
investments must be rebated to the Federal Government.
Present law includes three exceptions to the arbitrage
rebate requirements applicable to education-related bonds.
First, issuers of all types of tax-exempt bonds are not
required to rebate arbitrage profits if all of the proceeds of
the bonds are spent for the purpose of the borrowing within six
months after issuance.\11\
---------------------------------------------------------------------------
\11\ In the case of governmental bonds (including bonds to finance
public schools), the six-month expenditure exception is treated as
satisfied if at least 95 percent of the proceeds is spent within six
months and the remaining five percent is spent within 12 months after
the bonds are issued.
---------------------------------------------------------------------------
Second, in the case of bonds to finance certain
construction activities, including school construction and
renovation, the six-month period is extended to 24 months.
Arbitrage profits earned on construction proceeds are not
required to be rebated if all such proceeds (other than certain
retainage amounts) are spent by the end of the 24-month period
and prescribed intermediate spending percentages are
satisfied.\12\ Issuers qualifying for this ``construction
bond'' exception may elect to be subject to a fixed penalty
payment regime in lieu of rebate if they fail to satisfy the
spending requirements.
---------------------------------------------------------------------------
\12\ Retainage amounts are limited to no more than five percent of
the bond proceeds, and these amounts must be spent for the purpose of
the borrowing no later than 36 months after the bonds are issued.
---------------------------------------------------------------------------
Third, governmental bonds issued by ``small'' governments
are not subject to the rebate requirement. Small governments
are defined as general purpose governmental units that issue no
more than $5 million of tax-exempt governmental bonds in a
calendar year. The $5 million limit is increased to $10 million
if at least $5 million of the bonds are used to finance public
schools.\13\
---------------------------------------------------------------------------
\13\ The Small Business Job Protection Act of 1996 permitted
issuance of the additional $5 million in public school bonds by small
governments. Previously, small governments were defined as governments
that issued no more than $5 million of governmental bonds without
regard to the purpose of the financing.
---------------------------------------------------------------------------
Qualified zone academy bonds
As an alternative to traditional tax-exempt bonds, States
and local governments are given the authority to issue
``qualified zone academy bonds.'' Under present law, a total of
$400 million of qualified zone academy bonds may be issued in
each of 1998 through 2001. The $400 million aggregate bond
authority is allocated each year to the States according to
their respective populations of individuals below the poverty
line. Each State, in turn, allocates the credit to qualified
zone academies within such State. A State may carry over an
unused allocation for up to two years (three years for
authority arising before 2000).
Certain financial institutions (i.e., banks, insurance
companies, and corporations actively engaged in the business of
lending money) that hold qualified zone academy bonds are
entitled to a nonrefundable tax credit in the amount equal to a
credit rate multiplied by the face amount of the bond. An
eligible financial institution holding a qualified zone academy
bond on the credit allowance date (i.e., each one-year
anniversary of the issuance of the bond) is entitled to a
credit. The credit amount is includable in gross income (as if
it were a taxable interest payment on the bond), and the credit
may be claimed against regular income tax and alternative
minimum tax liability.
The Treasury Department sets the credit rate daily at a
rate estimated to allow issuance of qualified zone academy
bonds without discount and without interest cost to the issuer.
The maximum term of the bonds also is determined by the
Treasury Department, so that the present value of the
obligation to repay the bond is 50 percent of the face value of
the bond. Present value is determined using as a discount rate
the average annual interest rate of tax-exempt obligations with
a term of 10 years or more issued during the month.
``Qualified zone academy bonds'' are defined as bonds
issued by a State or local government, provided that: (1) at
least 95 percent of the proceeds is used for the purpose of
renovating, providing equipment to, developing course materials
for use at, or training teachers, and other school personnel in
a ``qualified zone academy'' and (2) private entities have
promised to contribute to the qualified zone academy certain
equipment, technical assistance or training, employee services,
or other property or services with a value equal to at least 10
percent of the bond proceeds.
A school is a ``qualified zone academy'' if (1) the school
is a public school that provides education and training below
the college level, (2) the school operates a special academic
program in cooperation with businesses to enhance the academic
curriculum and increase graduation and employment rates, and
(3) either (a) the school is located in a designated
empowerment zone or a designated enterprise community, or (b)
it is reasonably expected that at least 35 percent of the
students at the school will be eligible for free or reduced-
cost lunches under the school lunch program established under
the National School Lunch Act.
reasons for change
The policy underlying the arbitrage rebate exception for
bonds of small governmental units is to reduce complexity for
these entities because they may not have in-house financial
staff to engage in the expenditure and investment tracking
necessary for rebate compliance. The exception further is
justified by the limited potential for arbitrage profits at
small issuance levels and limitation of the provision to
governmental bonds, which typically require voter approval
before issuance. The Committee believes that a limited increase
of $5 million per year for public school construction bonds
will more accurately conform this present-law exception to
current school construction costs.
Further, the Committee wishes to encourage public-private
partnerships to improve educational opportunities. To permit
public-private partnerships to reap the benefit of the implicit
subsidy to capital costs provided through tax-exempt financing,
the Committee determining that it is appropriate to allow the
issuance of tax-exempt private activity bonds for public school
facilities.
explanation of provisions
Increase amount of governmental bonds that may be issued by governments
qualifying for the ``small governmental unit'' arbitrage rebate
exception
The additional amount of governmental bonds for public
schools that small governmental units may issue without being
subject to the arbitrage rebate requirements is increased from
$5 million to $10 million. Thus, these governmental units may
issue up to $15 million of governmental bonds in a calendar
year provided that at least $10 million of the bonds are used
to finance public school construction expenditures.
Allow issuance of tax-exempt private activity bonds for public school
facilities
The private activities for which tax-exempt bonds may be
issued are expanded to include elementary and secondary public
school facilities which are owned by private, for-profit
corporations pursuant to public-private partnership agreements
with a State or local educational agency. The term school
facility includes school buildings and functionally related and
subordinate land (including stadiums or other athletic
facilities primarily used for school events) \14\ and
depreciable personal property used in the school facility. The
school facilities for which these bonds are issued must be
operated by a public agency as part of a system of public
schools.
---------------------------------------------------------------------------
\14\ The present-law limit on the amount of the proceeds of a
private activity bond issue that may be used to finance land
acquisition does not apply to these bonds.
---------------------------------------------------------------------------
A public-private partnership agreement is defined as an
arrangement pursuant to which the for-profit corporate party
constructs, rehabilitates, refurbishes or equips a school
facility for a public school agency (typically pursuant to a
lease arrangement). The agreement must provide that, at the end
of the contract term, ownership of the bond-financed property
is transferred to the public school agency party to the
agreement for no additional consideration.
Issuance of these bonds is subject to a separate annual
per-State private activity bond volume limit equal to $10 per
resident ($5 million, if greater) in lieu of the present-law
State private activity bond volume limits. As with the present-
law State private activity bond volume limits, States can
decide how to allocate the bond authority to State and local
government agencies. Bond authority that is unused in the year
in which it arises may be carried forward for up to three years
for public school projects under rules similar to the
carryforward rules of the present-law private activity bond
volume limits.
Effective date
The provisions are effective for bonds issued after
December 31, 2001.
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate, the following statement is made
concerning the estimated budget effects of the revenue
provisions of the ``Affordable Education Act of 2001'' as
reported.
ESTIMATED REVENUE EFFECTS OF THE ``AFFORDABLE EDUCATION ACT OF 2001'' AS REPORTED BY THE COMMITTEE ON FINANCE
[Fiscal years 2002-2011, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-06 2002-11
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. Education IRAs--
a. Increase the annual contribution limit to tyba 12/31/01 -175 -315 -397 -483 -575 -671 -771 -874 -982 -1,114 -1,944 -6,355
$2,000; allow education IRA contributions for
special needs beneficiaries above the age of
18; allow corporations and other entities to
contribute to education IRAs; allow
contributions until April 15 of the following
year; allow a taxpayer to exclude education
IRA distributions from gross income and claim
the HOPE or Lifetime Learning credits as long
as they are not used for the same expenses;
repeal excise tax on contributions made to
education IRA when contribution made by
anyone on behalf of same beneficiary to QTP;
modify phaseout range for married taxpayers..
b. Rename education IRAs ``Coverdell Education tyba 12/31/01 No Revenue Effect
Savings Accounts''...........................
c. Allow tax-free expenditures for elementary tyba 12/31/01 -28 -50 -63 -77 -91 -106 -120 -137 -152 -171 -309 -996
and secondary school expenses................
d. Exclusion from income and wages for tyba 12/31/01 -144 -209 -249 -272 -295 -318 -341 -365 -390 -415 -1,166 -2,995
employer contributions to education IRAs.....
2. Qualified Tuition Plans--tax-free distributions tyba 12/31/01 -24 -53 -81 -111 -141 -170 -200 -234 -256 -283 -410 -1,553
from State plans; allow private institutions to
offer prepaid tuition plans, tax-deferred in
2002, with tax-free distributions beginning in
2004; allow a taxpayer to exclude QTP
distributions from gross income and claim the
HOPE or Lifetime Learning credits as long as they
are not used for the same expenses; expand
definition of family member to include cousins;
allow tax-free distributions for actual living
expenses.........................................
3. Employer Provided Assistance--permanently cba 12/31/01 -519 -720 -760 -804 -852 -904 -958 -1,012 -1,068 -1,127 -3,656 -8,725
extend the exclusion for undergraduate
courses and graduate level courses...........
4. Student loan interest--eliminate the 60-month ipa 12/31/01 -170 -245 -262 -277 -289 -305 -321 -338 -356 -375 -1,243 -2,937
rule; increase phaseout ranges to $50,000-$65,000
single/$100,000-$130,000 joint; indexed for
inflation after 2002.............................
5. Eliminate the tax on awards under the National tyba 12/31/01 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -5 -9
Health Corps Scholarship program and F. Edward
Hebert Armed Forces Health Professions
Scholarship program..............................
6. Increase arbitrage rebate exception for bia 12/31/01 (\1\) -3 -5 -6 -11 -15 -16 -17 -18 -19 -25 -109
governmental bonds used to finance qualified
school construction from $10 million to $15
million..........................................
7. Issuance of tax-exempt private activity bonds bia 12/31/01 -5 -19 -38 -61 -88 -120 -155 -191 -224 -257 -212 -1,160
for qualified education facilities with annual
volume cap the greater of $10 per resident or $5
million..........................................
-------------------------------------------------------------------------------------------------------------------------
Net Total................................... .................. -1,066 -1,615 -1,856 -2,092 -2,343 -2,610 -2,883 -3,169 -3,447 -3,762 -8,970 -24,839
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.
Legend for ``Effective'' column: bia = bonds issued after; cba = courses beginning after; ipa = interest paid after; tybba = taxable years beginning after.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
B. Budget Authority and Tax Expenditures
Budget authority
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that the revenue provisions of the bill as
reported involve no new or increased budget authority.
Tax expenditures
In compliance with section 308(a)(2) of the Budget Act, the
Committee states that the revenue-reducing provisions of the
bill involve increased tax expenditures (see revenue table in
Part III. A., above).
C. Consultation With Congressional Budget Office
In accordance with section 403 of the Budget Act, the
Committee advises that the Congressional Budget Office
submitted the following statement on this bill:
U.S. Congress,
Congressional Budget Office,
Washington, DC, April 23, 2001.
Hon. Charles E. Grassley,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for the Affordable
Education Act of 2001.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Erin
Whitaker.
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.
Affordable Education Act of 2001
Summary: The Affordable Education Act of 2001 would make a
number of changes in the tax code related to the financing of
educational expenses. The Joint Committee on Taxation (JCT)
estimates that these provisions would reduce revenues by about
$1.1 billion in 2002, by about $9 billion over the 2002-2006
period, and by $24.8 billion over the 2002-2011 period. Since
the bill would affect receipts, pay-as-you-go procedures would
apply. The bill contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would not affect the budgets of state, local, or tribal
governments.
Major provisions: The Affordable Education Act of 2001
would redesignate educational individual retirement accounts
(IRAs) as Coverdell Education Savings Accounts, increase the
limit on annual contributions to the accounts from $500 to
$2,000, expand the accounts to apply to elementary and
secondary education, allow contributions for a taxable year to
be made by April 15 of the following year, and repeal the 10
percent excise tax on certain contributions. The bill also
would expand the ability of married taxpayers filing joint
returns to contribute to education savings accounts. The bill
would increase the ranges of income for which the contribution
limits are phased out, from $150,000 to $160,000 to modified
adjusted gross income (AGI), to twice that of single taxpayers,
or $190,000 to $220,000 of modified AGI. These and the other
provisions of the bill would become effective on January 1,
2002, unless otherwise noted.
The bill also would expand the definition of qualified
state tuition programs to include prepaid tuition plans
established and maintained by certain educational institutions,
including private institutions. Furthermore, beneficiaries
would be allowed to exclude from taxable income all
distributions from such prepaid tuition programs at private
institutions starting in 2004, and distributions from all state
plans starting in 2002.
The Affordable Education Act of 2001 also would expand the
ability of taxpayers to deduct interest paid on their student
loans. The bill would increase the ranges of income for which
the deduction claimed by taxpayers is phased out ratably. The
phase-out range for taxpayers filing singly would change from
between $40,000 and $50,000 to between $50,000 and $60,000, and
the phase-out range for married taxpayers filing joint returns
would change from between $60,000 and $70,000 to between
$100,000 and $130,000. The phase-out ranges would be indexed
for inflation after 2002. In addition, the bill would repeal
the limit of 60 months during which a taxpayer can deduct such
interest payments.
The bill would make various other changes to tax incentives
for education. The bill would extend the exclusion from gross
income for employer-provided educational assistance to include
graduate education, and would make that exclusion permanent for
both undergraduate and graduate education. The bill would allow
certain education awards to be excluded from gross income. The
bill also would increase the amount of bonds for public schools
that small governmental units may issue without being subject
to the requirements for arbitrage rebate and would allow
governments to issue a limited amount of tax-exempt bonds for
certain privately-owned public school facilities. The bill
would allow taxpayers to claim HOPE of Lifetime Learning
credits if the distribution from education savings accounts or
from qualified tuition programs is not used for the same
expenses for which those credits were claimed.
Estimated cost to the Federal Government: The estimated
budgetary impact of the Affordable Education Act of 2001 is
shown in the following table. All estimates were provided by
JCT.
----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
------------------------------------------------------
2002 2003 2004 2005 2006
----------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES
Estimated Revenues....................................... -1,066 -1,615 -1,856 -2,092 -2,343
----------------------------------------------------------------------------------------------------------------
Source: Joint Committee on Taxation.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up procedures for
legislation affecting receipts or direct spending. The net
changes in governmental receipts that are subject to pay-as-
you-go procedures are shown in the following table. For the
purposes of enforcing pay-as-you-go procedures, only the
effects in the current year, the budget year, and the
succeeding four years are counted.
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
---------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in receipts................................. -1,066 -1,615 -1,856 -2,092 -2,343 -2,610 -2,883 -3,169 -3,447 -3,762
Changes in outlays.................................. Not applicable
--------------------------------------------------------------------------------------------------------------------------------------------------------
Intergovernmental and private-sector impact: The bill
contains no intergovernmental or private-sector mandates as
defined in UMRA and would not affect the budgets of state,
local, or tribal governments.
Estimate prepared by: Erin Whitaker.
Estimate approved by: G. Thomas Woodward, Assistant
Director for Tax Analysis.
IV. VOTES OF THE COMMITTEE
In compliance with paragraph 7(b) of rule XXVI of the
standing Rules of the Senate, the following statements are made
concerning the roll call votes in the Committee's consideration
of the ``Affordable Education Act of 2001.''
Motion to report the bill
The bill (S. 763, the ``Affordable Education Act of 2001'')
was ordered favorably reported, by a unanimous roll call vote
of 200 yeas and 0 nays March 13, 2001. The vote, with a quorum
present, was as follows:
Yeas.--Senators Grassley, Hatch, Murkowski, Nickles, Gramm,
Lott, Jeffords, Thompson, Snowe, Kyl, Baucus, Rockefeller,
Daschle, Breaux, Conrad, Graham, Bingaman, Kerry, Torricelli,
Lincoln.
Nays.--None.
Votes on other amendments
An amendment by Senators Torricelli and Lott to provide
that elementary and secondary school expenses are qualified
expenses that can be paid tax-free from an education IRA and
making other changes to education IRAs was adopted on a roll
call vote of 12 yeas and 8 nays. The vote, with a quorum
present, was as follows:
Yeas.--Senators Grassley, Hatch (proxy), Murkowski (proxy),
Nickles, Gramm, Lott, Thompson (proxy), Snowe, Kyl, Breaux
(proxy), Graham, Torricelli.
Nays.--Senators Jeffords, Baucus, Rockefeller, Daschle,
Conrad, Bingaman, Kerry, Lincoln.
An amendment by Senator Kerry regarding school construction
financing was defeated on a roll call vote which was a tie, 10
yeas and 10 nays. The vote, with a quorum present, was as
follows:
Yeas.--Senators Baucus, Rockefeller, Daschle, Breaux,
Conrad, Graham, Bingaman, Kerry, Torricelli, Lincoln.
Nays.--Senators Grassley, Hatch, Murkowski, Nickles, Gramm,
Lott, Jeffords, Thompson, Snowe, Kyl.
V. REGULATORY IMPACT AND OTHER MATTERS
A. Regulatory Impact
Pursuant to paragraph 11(b) of rule XXVI of the Standing
Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact that might be
incurred in carrying out the provisions of the bill as amended.
Impact on individuals and businesses
With respect to individuals, the bill modifies the rules
relating to (1) education IRAs, (2) qualified tuition plans,
(3) the exclusion for employer-provided educational assistance,
(4) the student loan interest deduction, and (5) the treatment
of certain awards. Individuals may elect whether to avail
themselves of the provisions of the bill. Thus, the provisions
do not impose increased regulatory burdens on individuals.
Certain provisions of the bill, such as the modifications to
the student loan interest deduction and the permanent extension
of the exclusion for employer-provided educational assistance,
simplify the present-law rules and, therefore, reduce burdens
on individuals electing to utilize the provision.
Similarly, to the extent the provisions of the bill affect
businesses, businesses may generally elect whether to avail
themselves of the provision of the bill, e.g., whether to
contribute to an education IRA on behalf of a beneficiary.
Certain provision of the bill, e.g., the permanent extension of
the exclusion for employer-provided education assistance, will
also provide simplification of the present-law rules for
businesses that utilize such provisions. Thus, the bill does
not impose increased regulatory burden on businesses.
Impact on personal privacy and paperwork
The provisions of the bill do not impact personal privacy.
Individuals may elect whether to avail themselves of the
provisions of the bill. Thus, the bill does not impose
increased paperwork burdens on individuals. Individuals who
elect to take advantage of the bill may in some cases need to
keep records in order to demonstrate that they qualify for the
tax treatment provided by the bill. In some cases the bill
simplifies present law, thus reducing recordkeeping
requirements.
B. Unfunded Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
The Committee on Finance has reviewed the provisions of the
bill as approved by the Committee on March 13, 2001. In
accordance with the requirements of Public Law 104-4, the
Committee has determined that no provisions of the bill contain
Federal private sector mandates.
C. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the Senate Committee on
Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
(the ``Code'') and has widespread applicability to individuals
or small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Internal Revenue Code and that have
``widespread applicability'' to individuals or small
businesses.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In the opinion of the Committee, it is necessary in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of rule XXVI of the Standing Rules
of the Senate (relating to the showing of changes in existing
law made by the bill as reported by the Committee).