October 9, 1978
Page 34776
Mr. MUSKIE. Mr. President, I yield myself 3 minutes.
Mr. President, I ask unanimous consent to include in the RECORD at this point a statement by my distinguished colleague, Senator HATHAWAY.
The PRESIDING OFFICER. Without objection, it is so ordered.
STATEMENT BY SENATOR HATHAWAY SUNSET LEGISLATION AND TAX EXPENDITURES
I support an amendment to extend the provisions of sunset legislation to Federal tax expenditures through a detailed review process by the Senate Finance and House Ways and Means Committees.
I believe sunset legislation is one of the most effective tools that the Congress has to review and control Federal spending. With the adoption of a comprehensive sunset and the Congressional Budget, we will have the tools to effectively control Federal programs.
To include only direct spending programs in sunset will omit the fastest growing portion of the Federal budget — tax expenditures. In Fiscal Year 1978, the revenue losses associated with these provisions are estimated at over $124 billion, compared with a revenue loss of $52 billion in Fiscal Year 1971. According to the Congressional Budget Office, these losses are expected to rise to $199 billion by Fiscal Year 1983. This growth stems in part from the fact that tax incentives — unlike most authorizations — are often enacted in perpetuity and are not required to run the gauntlet of periodic reauthorization and the annual appropriations process.
For example, a study on tax expenditures by the Senate Budget Committee discusses "Higher Education" as follows:
TAX EXPENDITURES
Tax expenditures account for a large portion of total Federal assistance for higher education. The major tax expenditures providing benefits directly to students and their families are the exemption for student dependents, the deduction for interest paid on student loans, and the exclusion from taxable income of scholarships, grants, fellowships, GI bill education benefits, and social security student benefits.
The major tax expenditures that aid educational institutions are the tax deduction for charitable contributions, the exclusion from taxable income of unrealized capital gains on gifts and bequests to higher education institutions, the deduction of State and local taxes used to support higher education.
Annual loan volume is in many ways a better measure than outlays of program activity in any given year for higher education direct and guaranteed student loan programs. Annual loan volume reflects the sum of all loans obligated during a fiscal year under direct loan programs and the value of all commercial loans insured under loan guarantee programs. Outlays, on the other hand, reflect only administrative costs and net lending activity — interest subsidies, loan defaults, new loans, and repayments on prior-year loans. As such, outlay figures tend to underestimate the full effect of these programs. The total amount of loan funds available under the national direct student loan program, according to the HEW Office of Education, will be approximately $805,000,000 annually in fiscal years 1978-80. The amount of loans guaranteed under the guaranteed student loan program is expected to be $1,648,000,000 in fiscal year 1978, $2,673,000,000 in fiscal year 1979, and $2,949,000,000 in fiscal year 1980.
There are a number of minor programs that provide aid to institutions that render certain student services. Also, a substantial amount of Federal funds go to institutions for research purposes. These latter programs have not been included in this table since they primarily involve the purchase of services by the Federal Government, and do not have as their major purpose the dispersing of aid to institutions. To some extent, however, these research grants help defray institutional costs of instruction.
RELATIONSHIPS BETWEEN THE TAX EXPENDITURES AND SPENDING PROGRAMS
Distribution of benefits; individual beneficiaries
Except for guaranteed student loans and GI bill education benefits — over two-thirds of all student aid spending program benefits are concentrated among students with family income below $10,000. This distribution results primarily because all of these programs, except for social security student benefits, make financial need a major consideration in distributing benefits. Guaranteed student loans are not needs-tested, but loan recipients qualify for the in-school subsidy only if their family's income is less than $31,000. GI education benefits and social security student benefits are provided to persons in all income classes without regard to need. However, social security benefits are distributed progressively across income classes since recipients come from families whose incomes are generally low because the primary worker is dead, disabled, or retired.The table below indicates the distribution of spending program outlays for higher education by income class.
In contrast to the spending programs, higher education tax expenditures provide benefits regardless of family need, but provide no educational support to those low-income families without tax liability. Moreover, since the size of tax expenditure benefits depends upon the recipient's marginal tax bracket, taxpayers in relatively higher brackets receive proportionally greater benefits than those in lower brackets.
Higher education tax expenditures, in the aggregate, are more concentrated among middle and upper income taxpayers than spending program benefits. For example, while 27 percent of the benefits of the parental exemption for students — the largest tax expenditure aiding individuals — accrued to families with expanded gross income over $20,000 in fiscal year 1977, the table below indicates that, in the same year, only 1 percent of all basic and supplemental education opportunity grants and work study benefits went to those with family adjusted gross income above $20,000.
INSTITUTIONAL BENEFICIARIES
Tax expenditures and spending programs directly assisting colleges and universities benefit very different types of institutions. The strengthening developing institutions program primarily assists colleges and vocational schools that need funds to compete with other public and private schools that are relatively secure financially. In contrast, the deduction for charitable contributions and the exclusion of unrealized capital gains on gifts and bequests to educational institutions benefit mainly those institutions that most effectively attract these forms of charitable giving. These latter institutions are very often long established and relatively secure financially; few would qualify as developing institutions.
The exemption of interest income from State and local bonds makes it easier for State and local governments to raise funds to support higher education. The benefits of this tax expenditure go to public rather than private institutions.
Empirical studies have not yet reached a consensus as to the effectiveness of the charitable contribution deduction in encouraging giving. Some studies conclude that the deduction increases charitable giving by more than the foregone Treasury revenue and that educational institutions gain more from the deduction than they would from a tax credit or matching grant program. The deduction for charitable contributions is, however, not likely to provide much assistance to developing institutions. Thus, direct Federal spending to strengthen developing institutions complements tax expenditures in this area.
EXPANDING ACCESS TO HIGHER EDUCATION
Education benefits distributed according to need expand access to higher education more efficiently than benefits distributed across all income classes. Programs distributing benefits on a needs basis provide aid to families with only marginal resources who otherwise might not be able to finance the costs of higher education. In contrast, tax expenditures and outlays distributed without regard to need often provide benefits to students from middle and upper income families who are more likely to have the resources to finance higher education without additional Government aid. For many of these students, the provision of aid has little or no effect on their ability to attend an institution of higher education.
The relative size of Federal educational benefit payments also has an important effect on expanding student access to higher education. Educational aid "packages," made up of varying amounts of direct grants, student loans, and work study wages, often finance a substantial percentage of total educational expenses, significantly affecting a student's ability to attend an educational institution.
Tax expenditures, on the other hand, provide low levels of financial aid relative to total college costs. The parental exemption for dependent students is worth only $150 per student for families taxed at the median marginal rate of 20 percent. The tax expenditures that arise from the exclusion of scholarship, fellowship, GI bill, and student social security benefits are only a small percentage of the value of these direct payments for most recipients. Moreover, since tax expenditure benefits are increased in value for recipients in higher marginal tax brackets, low-income persons with the least ability to afford a college education receive the smallest tax expenditure benefits. Present tax expenditure provisions provide, at most, only marginal assistance in financing the costs of higher education.
EFFECT ON TUITION COSTS
Both tax and direct spending programs that provide student aid may allow institutions to raise tuition, capturing some or all of the benefits meant for students. It is difficult to determine the extent to which institutions engage in this practice. Several theories have been offered, but none has been empirically tested. In general, institutions experience conflicting pressures to remain both financially viable and price competitive.
Spending and tax programs that distribute benefits to a narrowly defined group of students may be less likely to result in tuition increases compared to more widely available tax or spending programs. Subsidy-induced tuition increases may drive away a significant number of unaided students as well as the students whose education assistance benefits are captured by the institution. Schools that raise tuition may also find themselves in a weaker competitive position if other institutions do not adopt similar pricing policies.
ADMINISTRATION
Compared to the current tax expenditures for higher education, which distribute funds with few eligibility restrictions, the higher education spending programs target benefits to those with financial need and, therefore, involve more administrative costs and require more effort on the part of applicants to obtain funds. Under the grant and loan programs, student applicants must document need by submitting personal financial statements which require screening and evaluation by the administering agency or institution. Also, administrative judgments are often necessary regarding the distribution of limited appropriations among qualified applicants. The inevitable existence of fraud and abuse increases the administrative burdens in these programs. In the loan programs, high default rates are a problem because student loan recipients are often difficult to find for billing purposes after their graduation.
In contrast, the distribution of higher education assistance through current tax expenditures involves relatively little paperwork for taxpayers or the Internal Revenue Service. Since recipients are not required to document financial need, benefits can be obtained by merely claiming the relevant deductions, exclusions, or exemptions on annual tax forms. The validity of these claims is checked by the Internal Revenue Service through the auditing of tax returns. This procedure is less burdensome and costly than the screening of grant and loan applications because audits are limited to a small fraction of tax returns each year. However, the amount of revenue lost each year as a result of incorrect or fraudulent higher education tax expenditures claims that go unaudited is not known and could be substantial.
The administration of existing tax expenditures is also simpler than of the spending programs because there are no statutory limits on the amount of aid that can be distributed among beneficiaries, and default problems do not arise because the tax expenditures need not be repaid.
OVERLAP OF BENEFITS
All Federal spending programs for higher education, except for the work study and strengthening developing institutions programs, give rise to tax expenditures for recipients with tax liability, producing an overlap between tax and spending program assistance for such recipients. In the case of grant programs, tax expenditures result from the exclusion of grant benefits from taxable income. In the case of loan programs, tax expenditures arise from the deductibility of nonbusiness and noninvestment related interest payments. Because these education spending programs are largely needs tested, their benefits are concentrated among families in the low tax brackets. Consequently the tax expenditures associated with these direct spending programs are smaller, on average, than they would be if direct spending benefits were distributed without regard to need to those in higher marginal tax brackets.
LEGISLATIVE INITIATIVES
Both the Senate and the House of Representatives recently have passed college tuition tax credits as a form of higher education financial aid for middle-income families not usually eligible for direct Federal assistance. The conference bill would allow full-time undergraduate and post- secondary vocational students or their parents a credit against tax liability of either 85 percent of eligible education expenses. The maximum annual credit would be limited to no more than $250 per taxpayer.The original House and Senate provisions would be phased in either over 2- or 3-year periods and would result in annual revenue losses when fully effective of $1.1 billion under the House bill and $2.8 billion under the Senate version. The conference committee to reconcile the two versions recommended a version with an estimated revenue impact of $.95 billion.
Moreover, benefits to low- and middle-income students from a tax credit would be limited if the credit were reduced or eliminated for students receiving direct Federal student grants or other tax-exempt educational assistance. Only low- and middle-income students currently receive such assistance. The bills approved by each House include rules that would reduce or eliminate tuition tax credits for students who receive such direct assistance.
The distribution of benefits of a tuition tax credit with an offset provision would be concentrated among taxpayers with family income between $15,000 and $40,000. Although a larger percentage of benefits under this type of provision would accrue to low-income persons than under existing tax expenditure provisions, benefits for low-income persons would be reduced significantly by the offset requirement.
As an alternative to the tuition tax credit, the Carter Administration proposed a sizable expansion of the present direct loan, work study, and grant programs, with particular emphasis on expanding the basic education opportunity grant program, in order to funnel aid to middle- income families that presently receive few benefits or are ineligible for program support. This proposal would aid middle-income families in financing higher education costs without necessarily funding those in higher income brackets. It would also provide larger grants to fewer students than the tuition tax credit proposals. The Carter proposal, however, would involve somewhat higher administrative costs.
The Senate has passed and the House is considering modified versions of the Carter proposal as additions rather than as alternatives to tuition tax credit legislation.
CONTINUATION OF STATEMENT
Thus, present tax expenditures are half as large as direct Federal expenditures in higher education and I believe both should be reviewed in the sunset legislation.
As Senator Glenn pointed out on September 30, 1978; this bill does not sunset tax expenditures, it merely provides an initial review process. The amendment does not terminate or modify in any way any tax incentive provision. It merely requires the tax writing committees to report and the Congress to enact, in the next session a procedure for orderly review and reauthorization of all tax incentives, a procedure to be in place by the end of 1980, with the reauthorization process stretching out over a 10-year period. At the present time there is no such regular review process, and during the last few years the Federal revenue foregone as a result of tax incentives has risen from $52 billion in 1971 to $124 billion this year, and is estimated to be $187 billion by 1983.
We must keep watch on this fastest growing part of our Federal deficit, one which receives little or no scrutiny compared to direct Federal expenditures which periodically must go through an authorization and appropriations process.
I want to stress a most important factor. The review is neutral. The tax writing committees, in reviewing tax incentives, may find particular incentives working so well that they should be increased, and I would probably support that.
In other cases, the incentives would not be changed. In still other cases, where the incentive provisions are not doing the job for which they were originally intended, and were siphoning off what would otherwise be tax revenue, the committees could and should recommend termination — "sunsetting" of such incentives. In that case, I would hope and expect that as revenue once foregone became available to the Federal Treasury, a reduction in tax rates for individuals and corporations alike would result. Thus, far from prompting a tax increase, the amendment is designed to produce a tax cut for the average American taxpayer.
It is important to this country that sunset legislation be enacted this year — and that it include a tax expenditure provision.
Mr. MUSKIE. Mr. President, I hear the argument to have orderly procedure and to eliminate nongermane amendments.
Mr. President, we did set aside these amendments, the sunset amendment, the Glenn amendment, the Humphrey-Hawkins amendment, for what purpose? So that nongermane amendments could be considered, taken up, and enacted.
We approved a lot of nongermane amendments. Apparently, what we are really talking about are two classes of nongermane amendments; nongermane amendments that the floor managers of the bill approve, and nongermane amendments that they do not approve. That seems to be the argument.
Mr. President, for many years I have thought we ought to have a rule of germaneness to deal with this kind of situation, as a safeguard against this kind of chaos. But we do not. The reason we do not is that the Senate wishes to reserve to itself the flexibility to take up important matters at any time that may not necessarily be germane to the pending business. Those of us who have been around here all understand that.
For 2 days I have agreed to put my amendment aside so that nongermane amendments of lesser importance, even amendments that might not be consistent with the public interest, might be considered and acted upon.
The reason I offered sunset to this bill is that with a week or less left, this is the only chance I can see to get this high priority issue before the Senate and, hopefully, eventually before the House; the last chance. It is an idea we have been trying to implement for 3 years. So I have offered it to this bill.
In a parliamentary sense, it is not germane, but in a real sense it is germane. Because what we are talking about is enacting tax measures that reduce revenues, as this one does at this point, by $50 billion on an annual basis. We ought to be considering an effective policy and program to reduce spending so that deficits will not go through the roof. So in a practical policy sense, sunset is as relevant to this bill as anything else one could consider.
It is not the ideal place to have it. I would rather have it considered separately. I would rather have the House consider it separately. But if this cloture petition prevails you can kiss sunset goodbye for the rest of this session. There is no other vehicle that will permit us to act on it, and at the same time get the issue to the House in a way that will permit the House to act on it.
I am only speaking about sunset. There are other important issues, which are important to other Senators, that have been offered to this bill. This is a legitimate way to consider them.
As a matter of fact, the Senate really wants to consider them and if we are able to get time agreements, this could be the most expeditious way in which to dispose of them, rather than going through this parliamentary maneuver on every new legislative vehicle that comes along.
I urge my colleagues to vote "no" on this first cloture motion and give us an opportunity to dispose of these other issues on an up or down basis.
I yield, at this point, 3 minutes to my good friend from Wisconsin.