The US Senate tax bill that Republicans passed early this morning faces scathing criticism for the debt burden it creates for the next generation, the tax breaks it gives to the rich, and the hasty way it was cobbled together.
In many ways, the bill does favor the rich over the middle and lower class—it gives private jet owners a tax break, while destabilizing healthcare for millions of Americans by removing the individual mandate, as an example. Yet the provision that may impact the greatest number of US families is the bill’s treatment of children’s education.
America’s $634 billion public school system educates about 51 million kids from prekindergarten to 12th grade in 98,200 public schools nationwide. The vast majority of that budget, about 92%, comes from state and local taxes, with the remainder from federal programs mostly aimed at the most vulnerable school districts and students.
Most American families rely on this system—less than 10% of households send their kids to private school, and that percentage has dropped significantly in recent years for middle and lower class families. That’s because they’re expensive—private school tuition in the US averages $9,975 per year per student, can go as high as $75,940 a year, and costs have been rising rapidly.
Under both the GOP Senate’s nearly 500-page bill (pdf) and the House version, the amount that US households pay in state income taxes (which can be as high as 13% in states like California) and local taxes is no longer deductible on federal income tax forms, with the exception of property taxes up to $10,000. Both versions need to be reconciled together and voted on again by Congress before they go to president Donald Trump’s desk to be signed into law. Because they both treat state and local taxes the same way, this aspect of the bill isn’t expected to change.
Making state and local taxes no longer deductible from federal income taxes essentially subjects US households to “double taxation,” by taxing them twice on the income they earn, according to a report (pdf) from the Government Finance Officers Association (GFOA), a non-partisan group of state and local finance professionals from the US and Canada.
The change is going to hit public school budgets hard, the GFOA says. Towns and states will be pressured by local citizens to reduce their taxes, which they can no longer deduct from their federal income taxes, the group predicts, and this is likely to slash school budgets. Using tax data from Conroe, Texas, pop. 82,000, and surrounding Montgomery County as an example, the GFOA estimates that the tax impact on the school budget could be (pg. 12) $125 million a year, about 16% of the county’s annual school budget (pdf).
Meanwhile, the bill expands the use of “529 plans” to include private schools. These savings plans were designed to encourage families to save for college, and work in part because they’re tax free—earnings from them that are spent on tuition are not subject to any federal tax. The new GOP bill expands these plans to include elementary and high schools, which means tuition payments towards private schools are now tax free.
That means that the ” school tuition” that parents of public school kids are paying, in the form of state and local taxes, isn’t deductible from their federal taxes, and public schools themselves will have less money to spend on kids. But rich families who can afford private school get a brand new tax break. That’s a win for the 10%.
This article has been corrected. It originally said erroneously that contributions to 529 plans don’t incur federal tax. Earnings on 529 plans, as opposed to contributions, are tax-free.