The Republican-drafted tax reform bill, headed for votes in both chambers of Congress this week, does not contain several earlier proposals that would have adversely affected graduate students. But a tax on some large private college endowments made it into the final version of the legislation (H.R. 1).
Additionally, the 505-page bill sharply cuts business taxes while also halving a tax break intended to encourage development of drugs for rare diseases.
For students, the measure most notably omits a controversial provision that would have treated the value of graduate student tuition waivers as taxable income. The measure was included in a tax bill passed by the House of Representatives last month but was left out of legislation that narrowly cleared the Senate on Dec. 2.
“We’re pleased that initial provisions of the bill that would have significantly increased the taxable income of graduate students and student borrowers were scrapped,” says Peter McPherson, president of the Association of Public & Land-grant Universities. “For students, the bill is significantly better than earlier proposals, and we commend policymakers for making changes.”
Under current tax law, many doctoral and graduate students who work as research or teaching assistants receive tuition waivers that are not counted as taxable income. About 145,000 graduate students benefit, roughly 60% percent of whom study science, technology, engineering, and math, according to the most recent data available from the Department of Education.
Graduate students at more than 60 universities across the U.S. staged rallies and walk-outs against the House tax plan on Nov. 29. Ending the tax-exempt status of tuition waivers, they argued, would increase their taxable income by thousands of dollars each year.
Following the protests, the proposal was eliminated after a group of 31 House Republicans, led by Rep. Pete Sessions (R-Tex.), urged House and Senate leaders to keep tuition waivers tax-free.
However, GOP negotiators agreed to include a 1.4% excise tax on investment income from endowments at private colleges with an enrollment of at least 500 students and with assets valued at $500,000 per full-time student.
That provision mirrors the more modest proposal included in the Senate tax bill, rather than a House proposal that would have affected many more institutions by taxing colleges with assets valued at $250,000 per full-time student. The endowment tax in the final bill will affect about 35 institutions and is estimated to raise about $1.8 billion in revenue over 10 years.
“An excise tax on the endowments of some private colleges and universities, regardless of how many or how few institutions it affects, is a remarkably bad idea that takes money that would otherwise be used for student aid, research, and faculty salaries and sends it to the Department of the Treasury to finance corporate tax cuts,” says Ted Mitchell, president of the American Council on Education, a higher-education trade group.
On the business side, the corporate tax rate, now at 35% and the highest statutory rate in the world, would be cut substantially to 21%, beginning Jan. 1, 2018. The earlier House and Senate bills had proposed 20%, with the Senate delaying the effective date until 2019.
The bill also moves the U.S. to a territorial tax system that generally would not subject U.S.-based companies’ future foreign profits to U.S. taxation.
Unlike most developed nations, the U.S. currently applies its 35% corporate rate on companies’ worldwide earnings, not just their U.S. income. But companies can defer taxes on their overseas profits until they return those earnings to the U.S., or “repatriate” them. The deferral provision has led companies to stockpile those earnings overseas.
Under the legislation, earnings that multinationals currently hold offshore as cash and cash equivalents would be taxed at 15.5%, while income invested in illiquid assets, such as plants and equipment, would be taxed at 8%.
U.S. drugmakers stand to benefit significantly from the repatriation portion of the bill. The pharma sector is known for the large amounts of money it keeps offshore and would be able to bring that money home at a reduced rate.
Pfizer, Merck, Gilead Sciences, Amgen, AbbVie, Eli Lilly, and Bristol-Myer Squibb together held more than $400 million in offshore cash at the end of 2016, according to an analysis by the Institute on Taxation and Economic Policy, a research and advocacy organization.
The bill also retains but cuts in half the tax credit that encourages biotechnology and pharmaceutical companies to develop orphan drugs to treat rare disease that affect fewer than 200,000 people. Since 1983, companies have been allowed to write off 50% of the cost of human clinical studies to develop drugs aimed at small patient populations.
The House bill would have killed the orphan drug tax credit entirely, while the Senate bill cut the credit to 27.5% of research costs. The final bill reduces that amount to 25%, a move that is expected to boost government revenue by $32.5 billion over a decade.
Republicans worked out differences between the House and Senate bills last week, with the intent of using their majorities to submit a final measure to President Donald J. Trump for his signature before Christmas.
Democrats are expected to remain united in opposition against the tax-cutting bill, claiming it provides most of its benefits to wealthy individuals and corporations.