TAX RELIEF FOR WORKING STUDENTS
Overview: The Section 127 employer-provided educational assistance exclusion is a popular benefit, offered by hundreds of employers. Section 127 was created in 1978 and allows employees to receive up to $5,250 per year in tax-free tuition assistance from their employers to help pay for their education. Additional assistance above the $5,250 threshold must be reported as income. Employees with access to this benefit have improved wage mobility and increased job opportunities.
Currently, the House GOP tax reform bill (H.R. 1) eliminates this important tax benefit that helps over 1 million Americans who are trying to earn a degree while working. The Senate bill, recognizing the importance of this benefit, maintains Section 127 at current-law levels. These two proposals will need to be reconciled in a final tax package.
Impact of Current tax Proposals on the Middle Class
While some Americans may see an initial decrease in their tax liability following enactment of tax reform, many will see a tax increase in later years. This is in part because several provisions geared towards individuals, including rate reductions, are eventually phased out. Many will also lose the benefit of deductions and exemptions that reduce their tax bills under current law.
- House: According to the Joint Committee on Taxation, over 40 million working-class Americans will see a tax increase under H.R.1. More specifically, from 2023 to 2025, those earning between $20,000 and $40,000 would see an average tax increase, while those earning more than $1 million would see a reduction in their average tax rate as compared to current law.
Senate: While the proposed tax cuts result in an across-the-board tax cut on the Senate side, many Americans may experience tax increases if certain exclusions and deductions, such as Section 127, are eliminated.
Benefits of Section 127
For students whose families cannot provide financial assistance for college, benefits like Section 127 can make the difference in deciding whether or not to pursue a college education. Employer-provided education assistance has a wide variety of benefits, including:
- Addresses the Issue of Skills Shortages: According to Society on Human Resource Management (SHRM) research, 68 percent of employers across industries report challenging recruiting conditions in the current talent market. To mitigate this, organizations train existing employees to fill open positions. By investing in their existing talent pool, employers have seen a return on investment of more than 100 percent.
Ensures Global Competitiveness: According to SHRM’s 2017 Employee Benefits report, 61 percent of employers with 100 or more employees provide undergraduate tuition assistance, and 59 percent offer graduate assistance. This benefit facilitates investment in the workforce and ensures a talent pipeline as employers look to innovate and compete globally.
Supports Administration Priorities on Worker Training: Eliminating employer-provided education assistance goes against government efforts to encourage employer investment in training and development. President Trump and his Administration are currently exploring ways to create apprenticeship programs for employers and encourage investments in the training of employees.
Promotes Upward Mobility for Employees: Employees who take advantage of employer-provided education assistance improve their opportunities for upward mobility and wage growth. Entry-level and mid-management education assistance recipients received, on average, a 43 percent incremental wage increase over a three-year period as compared to non-recipients.
Need for Expansion of Section 127
This valuable benefit has remained at the current level of $5,250 for nearly 30 years. The benefit is not indexed for inflation and is not keeping up with the current cost of higher education.
The value of this exclusion has gone down as the price of college tuition has increased. Even community college costs an average of $10,000 for in-state students, not including housing, books, and supplies.
Tying Section 127 to inflation will help increase the value of this important benefit and allow over 1 million hardworking young Americans the opportunity to attend college debt-free.
A modest increase in Section 127 will result in a larger tax cut for students who are currently pursuing an education.
Tying Section 127 to inflation would cost less than $300 million over 10 years, according to the Joint Committee on Taxation.