by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The argument for taxing these tuition discounts is that the goal of tax reform should be to remove “loopholes” in order to lower tax rates for everyone. When asked about the implications of repealing 117(d) for private schools, a spokesperson for the House Ways and Means Committee said, “Parents teaching at private K–12 schools, like all Americans, will be taxed at lower, simpler rates based on the compensation they receive — not based on the maze of costly deductions and exclusions Americans must navigate today.” However, while it’s true that many families would get a tax break under tax reform, it seems quite possible that many of those whose tuition discounts would be taxed would end up paying considerably more on net. It is unlikely, for instance, that the physics student from Carnegie Mellon would end up paying lower taxes if he had to pay an extra $7,000 in taxes on his discounted tuition.
Further complicating the case for taxing the tuition discounts of families of employees is the fact that tuition discounts through a student scholarship would remain untaxed. Thus, if a school discounted tuition as part of an athletic or academic scholarship, that would not be counted as compensation. But if a school discounted tuition for a child of an employee, it would count as compensation. Treating tuition discounts as compensation for some but not for others might be the opposite of making the tax system clearer. It’s also worth noting that the House plan continues to exempt other employment benefits, including employer contributions to health-insurance plans, from taxable income.