facebook-pixel

Commentary: Boosting tax burden on graduate students won't help the economy

Chris Detrick | The Salt Lake Tribune University of Utah students listen at Jon M. Huntsman Center during the Commencement Ceremony Thursday, May 4, 2017.

The U.S. House and Senate have released federal tax reform legislation aimed at simplifying the income tax system and providing tax relief for millions of citizens. Both the House and Senate bills include changes to federal tax brackets as well as increases in standard deductions.

The House bill includes a provision to remove the tax-free status of tuition waivers provided to graduate students, including those at the University of Utah. Over the past week, I worked to generate a fully documented, consistent estimate of the impact of pending federal tax reform legislation on our graduate students.

My analysis looked at the effects of federal, state and FICA taxes, and is also consistent with existing tax rules as well as proposed House and Senate packages. Many of these additional details have been left out of other discussions, even though the FICA and state tax implications are of similar impact as the federal income tax changes. My analysis also included the impact of the proposed legislation on graduate student support at public and private institutions and the illustrative effects of differential tuition and different stipend levels.

What I found is that under the House bill, the total increase in tax burden on graduate students ranges from 24 percent to 183 percent under various reasonable scenarios. Under the Senate bill, the total increase in tax burden on a graduate student ranges from a decrease of 6 percent to an increase of 3 percent.

Both tax proposals are clearly regressive, with graduate students at the lowest end of the stipend scale receiving the largest percentage tax increases.

My analysis also looked at the return on investment at the federal and state levels in the proposed packages. I found that for every $1 collected in federal taxes on tuition waivers, the federal government will directly lose $2 to $3 in future federal taxes. For every $1 collected in federal taxes on tuition waivers, the state of Utah will also directly lose up to 15 cents to 35 cents in state income tax revenue.

The economic impact of graduate education extends well beyond the taxes generated by the graduate’s paycheck. Holders of graduate degrees develop new technologies, increase productivity and are the driving force behind the Utah and national economies.

We often use a multiplier to account for the broader impacts on our economy. Conservative estimates of this multiplicative effect demonstrate that for every $1 collected in federal income tax on graduate tuition waiver, the federal government will forgo $10 to $15 in future federal tax income. To put this in perspective, a $1 investment in the Dow Jones Industrial Average 40 years ago, with dividends reinvested, would have yielded tax income to the federal government of $4 to $5.

If the House version of tax legislation is approved, universities that are on a fixed budget and wish to retain the quality of their programs will have to shrink graduate enrollment. I estimate the cuts at 10 percent to 20 percent for public universities like the University of Utah and up to 50 percent at private institutions. In contrast, the current Senate bill is supportive of fiscally prudent investment in graduate education and balancing the federal budget.

Based on my analysis, I believe it is clear that the tuition wavier tax provision of the House bill is strongly counterproductive to the main goal of tax reform — balancing the federal budget. The House bill creates a drag, not a boost to the federal tax income. Furthermore, an investment in retaining these tax waivers would provide a federal tax income that is superior to other types of corporate financial investments.

A tax reform policy that retains the tax-free status of graduate tuition waivers, as contained in the current Senate bill, is fiscally responsible and in line with our national priorities of economic competitiveness and development of a high-quality workforce to support our local economy.

The tax-free status of graduate tuition waivers is a critical support for graduate students as they develop new technologies and efficiencies that improve our lives, support better healthcare and create new industries. The Senate tax reform policies on graduate education also support our institutional commitment to increase the diversity of our national workforce and provide access to the benefits of graduate education to low-income and first-generation students. It improves the quality of our undergraduate education and directly leads to the betterment of our society.

The Senate proposal’s retention of the tax-free status of graduate tuition waivers is fiscally responsible and strongly supports the main goals of tax reform. It also provides a highly talented workforce to support economic growth and increased prosperity. Let’s urge our senators and representatives to safeguard this vital investment in our future.

David B. Kieda is the dean of the Graduate School and a professor of physics and astronomy at The University of Utah.