Update: A Look at the Final Senate Bill
Dec. 3, 2017
Based on comments from some people (thanks!), I had to revisit my consideration of the Senate bill passed on Saturday morning because the text I had access to was merely the one that was sent to the floor of the Senate on Nov. 28… it was far from the one finally voted on. In a sense, this demonstrates the ridiculousness of the procedure used to reset tax policy by this government: a bill, drafted within 48 hours by markup and amendment, voted on before anyone could read it or score it, and not even available on the standard congressional bill recording systems for the public to consider. But, I digress.
One commenter sent me the link to the bill , merely a scan of text. I had to run it through optical character recognition  to convert it to searchable text. This allowed me to look for mention of the provisions striking text or subsections from U.S. Tax Code section 117, the one dealing with qualified tuition reductions and qualified scholarships.
What did I find when I searched? Nothing. Indeed, the final draft of the Senate bill does not appear to touch at all this section of the U.S. Tax Code. So, my original post really still only applied to H.R. 1 as passed by the House of Representatives.
There is still the conference process and reconciliation of the bill between the two houses of Congress. It’s possible these provisions could come over from the House version of the bill. Now is the time to contact your members of Congress to influence this process. But be vigilant. This Congress is clearly willing to make sweeping policy changes under cover of darkness in very short periods of time. The average American citizen’s window of influence is small, and rapidly closing.
Here is the text of the Senate version of the bill, as recovered from the scanned document by OCR. Beware! OCR is NOT 100% accurate and words and meaning may have been changed by this process. The Senate should not rush such large bills before they can be placed into their public accounting system, so I wouldn’t have to do inaccurate things like this just to search the bill.
Original Post: Only Applies to H.R. as sent to the Senate Floor, so really only H.R. 1 as passed by the House.
Dec. 2, 2017
Early this morning, the United States Senate passed their version of the tax reform bill (see above). As originally sent to the Senate floor, this bill touches the section of the United States tax code that regards tuition waivers for graduate students who are pursuing higher degrees after college (post-secondary education). While the Senate bill does not contain changes to the relevant portion of the tax code, the reconciliation process lies ahead… and given how dark this process has been so far, there is no guarantee of light shining on reconciliation of the House and Senate versions of this bill. The provisions affecting how graduate students are taxed could survive into the final version of the bill sent to the President, and that has profound implications.
This is especially true for STEM education, which has traditionally relied on graduate students serving as either teaching assistants or research assistants during their time as a student. Agreeing to perform one of those duties has resulted in a “tuition waiver” from the institution. What happens now to that waiver is a complicated question. It is wise to look at the changes to the U.S. tax code proposed in both bills, and assuming that some reconciled version of these two bills has passed into law, to look at what options U.S. colleges and universities have for continuing to produce competitive STEM researchers.
The existing United States tax code, section 117, defines the kind of assistance for graduate students that shall not be counted as taxable income. One of these is a qualified tuition reduction. It is this kind of assistance that has resulted in a lot of the recent controversy, which I and others have labeled as the “Grad Tax.” The other kind is a qualified scholarship. This is also not counted as taxable income. That remains true even in the tax reform bill that has been produced by the U.S. House.
In the version of the bill passed by the House, section 117(d) is struck from the U.S. tax code. It is this section that, up till now, has protected qualified tuition reductions from being counted as taxable income.
What is a qualified tuition reduction? When a graduate student is accepted to a Ph.D. program, for instance, they are provided a stipend for paying for living expenses. In addition, tuition to the institution is waived under the condition that they perform activities within their department. They can typically either serve as assistants in the teaching environment, which is normal prior to qualifying for the actual Ph.D. program or when external research funds are not yet available, or they must serve as research assistants to faculty, which is anyway required in the pursuit of a Ph.D. (a research-based degree). The changes to the U.S. tax code regarding qualified tuition reductions would now tax any qualified tuition reduction as if it were income paid to the student.
An example of the consequences for graduate students was recently printed in the Dallas Morning News in the form of a letter from one of our own students. As he noted, we pay our graduate students about $22,000 a year as a stipend for their duties as either a teaching assistant or a research assistant. SMU tuition waivers, which amounts to about $45,000, are provided under the condition that they fulfill one of those prescribed duties – a qualified tuition reduction. Up until now that waiver has not counted as part of their income because it is money that they never see.
However, under the language of either of the two bills in the U.S. Congress, this qualified tuition reduction now counts as taxable income. So to the U.S. federal government their total graduate student income would look like $67,000 per year – on par with a prestigious post-doctoral fellowship or an Assistant Professor position at a research institution! Whereas in the past the stipend (the taxable part) was so modest that their tax burden was also very low and they retained the use of most of their stipend money for living expenses, now with the added burden of the qualified tuition reduction their taxes would go way up. It’s estimated that about 20 to 30% of the stipend amount would now be paid to the federal government in the form of taxes, greatly decreasing their ability to put food on the table, a roof over their heads, have affordable transportation to and from work, or other living needs (child care, for instance).
However, both of the bills passed by the U.S. Congress retain section 117(a) which states that a qualified scholarship offered by the institution is still not taxable income (c.f. ). So it may be that universities and colleges will have to stop offering a tuition waiver (qualified tuition reduction), one that carries the condition that the graduate student fulfill some duty to the university. Instead, having admitted graduate students to their programs, perhaps instead they can simply offer every single one of those candidates a qualified scholarship. This would allow the students to avoid being put into a tax bracket they’re not actually in, while preserving stem education in the United States.
However since I am not a expert in U.S. tax law, it is unclear to me what consequences universities face if they re-brand from qualified tuition reduction to qualified scholarship. Since in U.S. tax law, no good deed goes unpunished, it is entirely likely that there is some hidden cost of which, as a faculty member, I would not be aware. It may be unattractive for universities to make this paradigm shift, because of some other complicated financial penalty they would have to bear as a consequence of making such a change.
Of course, the alternative to this re-branding is that universities and colleges increase the minimum stipends that they offer graduate students in order to offset the new tax burden. For instance, at our institution, it’s been estimated that stipends in our program would have to raise from $22,000 a year to about $28,000 a year. Such an addition balances the fact that you are raising it to offset their tax burden, while at the same time not trying to put them in an even higher tax bracket where they would yet again be taxed even more, therefore undoing the good of the stipend increase in the first place. In our department alone, this would cost the University an additional $100,000 per year… and we are not the only STEM department with a Ph.D. program.
Now, of course, nobody really knows all the final details because these bills have not been made into a single, final bill. In the worst-case scenario, it is clear that universities and colleges will have to change the way that they attract and retain the best and brightest graduate candidates, who otherwise now might be strongly tempted to apply to programs in other countries. It has traditionally been the case that it is financially unattractive for U.S. students to want to go abroad for their graduate education because the financial incentives and time pressures on graduate students in other countries are very different from those in the United States. However with this shifting ground in the U.S. tax code and its potential implications for the costs of graduate education in the U.S., it may be that our brightest students seeking post-secondary education in STEM will be driven into the arms of other countries, further ceding leadership of the United States in the global science community.
There is also the chance of a completely lost generation – students from poverty who made it through college on scholarships and financial assistance only to get to the stage of post-secondary education and find it unaffordable. Research is a full-time job, even if a student is only supported at a part-time level. Holding down a second part-time job would make progress toward the Ph.D. nearly impossible, though people have done it. It’s just not common, and it’s not common because it’s exceptionally difficult. These students cannot afford to go abroad for their Ph.D.s, and, having been priced out of the U.S. system, would have to abandon their education path in favor of a job that can be obtained with just a Bachelors degree. All the most desirable jobs in the U.S. now are based on the discoveries of past generations of graduate students who made great discoveries and great technologies. We would lose that for the future. So while taking a post-college job in the current economy would still be possible, there would be no “economy of the future” as people abandon Ph.D.s in order to put food on the table. The collapse of the U.S. technological economy, and technological leadership, is more of a possibility than ever before.
Depending on what happens in reconciliation, the foundations of post-secondary STEM education as we have known could be about to change radically. That radical change maybe the change of one phrase with some unknown financial consequences to universities and colleges (certainly, it would no longer tie tuition waivers to duties to the university), it may be the cutting of graduate programs or the cutting of other programs to fund graduate programs, it may mean raising undergraduate tuition yet again way above inflation, or it may be the loss of an entire generation or more of students from our education system to the education systems of other countries.
If we begin to lose our best and brightest students to other countries, there is a fair chance they will not return. History tells us so. It generally seems to be the case that once somebody puts down roots in a place, they are reluctant to pull those roots back up. We have seen other countries drained of their brains when they have lost those students to the U.S. education system. Perhaps we are about to learn what that feels like in return. But only time will tell.
Epilogue: a personal addition
“It only has to do with the respect with which we regard one another, the dignity of men, our love of culture. It has to do with those things. It has to do with, are we good painters, good sculptors, great poets? I mean all the things that we really venerate and honor in our country and are patriotic about. It has nothing to do directly with defending our country except to help make it worth defending.” — Physicist Robert R. Wilson, in response to a question from the U.S. Congress about how the particle accelerator at what is now Fermi National Accelerator Laboratory would benefit the nation’s security.
On a personal note, never in my lifetime of scientific and policy engagement in this country, even in previous shifts of the landscape under various administrations, have I felt so great a hatred for education and the value of an education. Our educational institutions are under a massive assault, from the gutting of public education in K-12, to the requirement of religious education that interferes with scientific education, to the attacks on universities for their endowments, or charitable donations, or their graduate programs. In one year, using a pincer movement that I think General Patton would have been proud of (even if he understood its terrible consequences for the nation he so loved), the U.S. government has done more to make this country not worth defending than any other year under any other administration.
 Original U.S. Tax Code, section 117: https://www.law.cornell.edu/uscode/text/26/117. Senate Bill: https://www.congress.gov/115/bills/hr1/BILLS-115hr1pcs.xml (the relevant section is 1204.a.3 and 1204.e.1). House Bill: https://www.congress.gov/115/bills/hr1/BILLS-115hr1eh.xml (relevant sections are the same as in the Senate bill)
After posting the original draft of this, it was updated to fix some small typos and to add the paragraph on the “lost generation” of students who, due to origins in poverty, are priced out of a Ph.D.
On December 3, after helpful reader comments, this was updated to consider the actual final text of the Senate bill, which was not available on the morning of Dec. 2 despite the Senate having passed the bill. This altered significantly what conclusions can be drawn for now, at least until reconciliation. The original text from the post is updated to reflect that this was for H.R. 1 as passed by the House.