February 24, 2000
If S. 1134 were presented to the President, the Secretaries of the
Treasury and Education would recommend that he veto the bill. In 1998, the
President vetoed legislation -- H.R. 2646, the "Education Savings and
School Excellence Act of 1998" -- that included provisions similar to those
contained in S. 1134. At that time, the President described the bill's
modifications to Education IRAs as bad education policy and bad tax policy.
S. 1134 is equally flawed.
Every American child deserves a high-quality elementary and secondary education. The President's FY 2001 Budget contains a series of education tax initiatives, including a College Opportunity tax cut to defray the cost of higher education for families, and tax-credit bonds to assist State and local governments in meeting the cost of financing construction, rehabilitation, or repair of public schools. S. 1134 fails to advance education reform and distracts from the need to invest in public schools, where the vast majority of our students learn. It does nothing to reduce class size, improve teacher quality, or help students meet high academic standards. In addition, the provisions to repair or modernize schools are woefully inadequate. Targeting limited Federal resources toward building stronger public schools will help ensure that all our Nation's children receive the education they need to become productive citizens. S. 1134 would divert needed resources away from public schools.
S. 1134 would disproportionately benefit the most affluent families and provide little benefit to lower- and middle-income families. Moreover, given the expansion of tax-preferred savings vehicles in the Taxpayer Relief Act of 1997, which the Administration supported, further increasing the contribution limits for Education IRAs is unlikely to provide significant additional incentives for families to increase their savings for educational purposes. Instead, S. 1134 would reward many families, particularly those with substantial incomes, for what they may already do.
S. 1134 would also create significant compliance problems. The bill permits tax-free withdrawals from Education IRAs for, among other things, tuition, fees, academic tutoring, special needs services, books, room and board, and supplies and equipment expenses incurred in connection with enrollment or attendance in public or private elementary or secondary schools. Distinguishing between withdrawals that should not be subject to tax and those that should will add significant record-keeping requirements for families and schools and will lead to frequent disputes about the use of the withdrawals for discretionary purchases.
S. 1134 would affect receipts; therefore, it is subject to the pay-as-you-go requirement of the Omnibus Budget Reconciliation Act of 1990. Although last year's proposal was paid for with tax offsets, S. 1134 would likely reduce federal revenues because many of last year's offsets have been used to pay for other legislation. We are concerned that piecemeal enactment of tax cuts such as S. 1134 outside of an overall fiscal framework will threaten to undermine debt reduction and impair our ability to address other important national priorities.