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While considerable attention is paid to the role Pell Grants play in subsidizing higher education, the federal government forgoes nearly as much revenue every year through tax incentives also aimed at making a postsecondary education more affordable. Unlike the Pell Grant program however, higher education tax incentives are not targeted specifically to parents and students from low-income families—rather in some cases, the highly complicated system actually results in greater benefits for wealthier Americans.

There are three main tax incentive programs that are designed to make higher education more affordable, the American opportunity tax credit, the lifetime learning credit, and the tuition and fees deduction. By law, taxpayers can only take advantage of one of these programs each year they file their taxes, meaning that savvy filers will calculate their tax burden multiple times applying the different incentives each time to figure out which program they should participate in. There is also a fourth program that allows taxpayers to take a student loan interest deduction, though this incentive is usually most relevant after a higher education degree has been completed.

Gordon Mermin, a senior research associate at the Urban Institute’s Urban-Brookings Tax Policy Center and an expert in higher education tax incentives, spoke with InsideSoures about how the current system works and what kind of reform proposals are being discussed. Mermin also helps maintain a simulation model of the federal tax system that allows researchers to evaluate who would benefit and who would suffer from proposals to alter the tax code.

The largest federal tax incentive program for higher education, the American opportunity tax credit, is a partially-refundable credit that evolved out of an older program that was non-refundable. The refundability of the credit is significant because non-refundable credits only benefit those taxpayers with higher incomes that actually owe the government federal income tax. The American opportunity tax credit, which is restricted to undergraduates, gives high-income earners up to $2,500 back on their taxes on the first $4,000 they spend on postsecondary tuition, fees, and textbooks. However, only $1,000 worth of that credit is refundable, meaning that those students and families who don’t owe federal taxes are more limited in how much the program benefits them.

Mermin explained that the current expanded program took shape during Obama’s first term as part of the stimulus package negotiations. He said that the American opportunity tax credit, which alone costs over $17 billion per year, reflects a political compromise “between those who wanted to provide tax assistance to low and moderate income folks and those who wanted to provide some assistance to people with incomes too high to qualify for financial aid.”

The lifetime learning credit works in a similar way to the American opportunity credit, but is entirely non-refundable and is designed more specifically to benefit older learners, typically those in graduate programs or those pursuing technical certifications as adults.

Finally, the tuition and fees deduction allows taxpayers to deduct up to $4,000 from their total yearly income, which is then used to calculate tax burdens. Like the other programs, the tuition and fees deduction would benefit those in higher tax brackets more than those in lower tax brackets, because as Mermin notes, a high-income earner may save 39 cents on the dollar through the deduction while a lower earner may save 10 cents or less for each dollar deducted.

Another complication, according to Mermin, is the order in which the tax incentives appear on income tax returns. Because the tuition and fees deduction appears first on the government forms, and taking the deduction is incompatible with taking an American opportunity tax credit or lifetime learning credit, some analyses show that filers will mistakenly take the deduction when they would save more through one of the credit options.

Overall, Mermin argues that the system “doesn’t have to be this complicated” and “could be more progressive.” Some reforms to simplify the system would roll all three main higher education incentive programs into one tax credit, though such proposals would inevitably create winners and losers. Other proposals, particularly from the left, would lift the cap on the dollar value of the American opportunity tax credit that is refundable, which would be aimed at further helping low-income families.

Conservatives might oppose the latter reform proposal for a few reasons. First making the programs more refundable would lead to more government spending at a time when government is running high deficits. Secondly, some on the right may argue that Pell Grants already give thousands to low-income students and families each year, so while the tax incentives offered by the government may not be progressive, the system as a whole does already mostly benefit low-income families. Finally, conservatives have long pointed to analysis from former Education Secretary Bill Bennett that federal higher education subsidies actually increase the cost of higher education, a theory known as the Bennett hypothesis, which would argue that such proposals are actually counter-productive.

While not as high as the more than $30 billion per year the federal government spends on Pell Grants, the total price tag associated with higher education tax incentives reaches to over $20 billion per year, making the package of programs a significant part of the government’s efforts to defray the cost of higher education and increase accessibility. With news that the Trump administration is eyeing a systematic overhaul of the tax code, possible changes to the higher education tax incentive programs will be an important area for education policy-makers and interest groups to watch.

As Mermin notes, however, historically, when there are winners and losers in a substantive policy change, (including those changes that would make the system simpler,) “the potential losers always win these arguments,” which adds inertia to the system and creates headwinds to reform efforts.

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Proposals to expand access, improve quality, and lower costs of early child care were discussed at a Washington, D.C. event on Wednesday at the Newseum, blocks away from the U.S. Capitol building.

The event, hosted by Atlantic Media, began with a discussion between Rep. Joaquin Castro, D-Texas, and Ronald Brownstein, Atlantic Media’s director for strategic partnerships. Following their dialogue, a panel of child-care experts from think tanks across the political spectrum debated federal child-care proposals before state child-care efforts in Alabama and Massachusetts were highlighted.

Child care is “not a conservative or a liberal issue” said Castro, who spent time underscoring child-care and Pre-K efforts in his native San Antonio. Castro’s twin brother Julián Castro was mayor of San Antonio where he pushed to expand the city’s Pre-K programs before he was tapped to become Secretary of Housing and Urban Development during President Obama’s second term.

One of Rep. Castro’s main talking points was that the quality of Pre-K programs matter. Incidentally, Texas is currently undergoing a major budget fight in which the Republican Gov. Gregg Abbott is facing down legislators in his own party over funding for quality Pre-K.

When the discussion turned to federal child-care policy, Rep. Castro signaled that he might be willing to work with the new administration. During the presidential campaign, then-candidate Trump proposed child-care reforms that would be funded through tax incentives. Ivanka Trump, the president’s daughter and a leading surrogate in the campaign’s outreach to women, is a key advocate for the plan.

While Republican leaders have yet to introduce specific child-care legislation, a question among policy wonks is whether the plan will be implemented primarily through tax credits or through tax deductions and savings accounts. Many at the event argued that a program built on tax credits would have more reach, while the latter options would appear to primarily benefit the higher-income families that pay more in federal taxes and have money to invest in educational savings accounts.

“If you offer a [tax] credit, I do believe it would cover many more Americans, if it’s just a tax deduction, that’s more problematic because it would leave out probably 40 percent of people,” said Castro.

Castro added the caveat that when taken with the new administration’s budget proposal—which includes deep cuts to discretionary spending that could affect Pre-K programs like Head Start—the end result could be “one step forward, one step back.” The San Antonio congressman also suggested that he would be willing to review the efficacy of existing federal Pre-K and child-care programs, which Brownstein said Republicans have proposed to streamline into one block grant.

The panel of think tank experts that followed were less forgiving of President Trump’s proposal. One of the panelists, Elaine Maag, a senior researcher at the Brookings Institution’s Tax Policy Center, recently co-authored a study that found the president’s proposal would cost $115 billion over ten years. Furthermore, Maag argued that the broad strokes of the proposal suggest a plan that would be regressive, meaning it would disproportionately benefit wealthier families.

According to what Maag said are conservative estimates, the majority of the plan’s benefits “will go to families [that earn] at least $100,000, and in fact, a quarter of those benefits will go to families with [that earn] at least $200,000” per year.

Katharine Stevens, another panelist and a resident scholar at the conservative American Enterprise Institute, appeared to agree that President Trump’s proposal could do more to address low and middle-income families. During the discussion, Stevens emphasized that the primary need for child-care aid exists in the same 40 percent of American families with young children who earn less than $50,000 per year that Castro had cited.

In Congress, Rep. Katherine Clark, D-Mass., circulated a “Dear Colleague” letter on Tuesday seeking co-sponsors to back her re-introduction of the “21st Century Child Care Investment Act.” Left-leaning groups like the Center for American progress backed that proposal last year. Notably, the Democrats’ proposal also relies on tax-credits to expand access and affordability for child care—though in their legislation the tax-credits would go directly to child-care providers rather than through parents. Rep. Clark is expected to introduce her legislation to the new Congress on Wednesday or Thursday.

There is no clear timetable for when Republicans plan to unveil their child care tax incentive program. Some have suggested that like their school choice proposal and elements of their healthcare proposal, child-care tax incentives could be part of a larger budget reconciliation process that would require the support of a simple majority of Senators.

While accomplishing these reforms would be easier without having to overcome a Democratic filibuster, it remains to be seen if GOP leaders who have advocated for a simpler tax code will take issue with adding complexity to the tax system.

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