The tax deduction in tuition and fees (DTF) was implemented in 2001 as part of the Economic Growth and Tax Relief Reconciliation Act. Under this program, households could deduct tuition and fees paid for undergraduate or graduate education from gross income without needing to itemize deductions. Households are eligible to use the DTF based on adjusted gross income (AGI) net of all other above-the-line deductions. Beginning in 2004, the maximum deductions followed a tier system in which joint (single) filers with eligible income of less than $130,000 ($65,000) were eligible for a $4,000 maximum deduction, while households with eligible incomes of $130,000-$160,000 ($65,000-$80,000) were eligible for a $2,000 maximum deduction. Households above $160,000 ($80,000) were ineligible for the deduction. The change in tax liability is based on whether the household claimed DTF scaled by the marginal tax rate at their income level.
Hoxby and Bulman (2016) exploit income eligibility thresholds to estimate the impact of the above-the-line deduction of tuition and fees on enrollment. They use a regression discontinuity design but leave out observations right around the threshold to account for the possibility of manipulation in the running variable. This MVPF estimate considers the MVPF implied by the discontinuity faced by joint filers with incomes near $160,000.
Hendren and Sprung-Keyser (2020) take the causal estimates from Hoxby and Bulman (2016) and project the impact of the tuition deduction on lifetime earnings and tax revenue. They utilize estimates from Zimmerman (2014) on the impact attendance of college on earnings and assume that the returns to college are constant in percentage terms over the lifecycle.
MVPF = 0.8
Hendren and Sprung-Keyser (2020) calculate net costs beginning with the direct cost of the tax deduction. This is estimated at $336, which is the average deduction claimed of $1199 multiplied by the marginal tax rate of 28% at $160,000. There is no need to adjust the calculation for changes in future government revenue. The second stage regression finds that, at the discontinuity, college attendance does not change amongst students that graduated high school in the previous year (i.e., the point estimate of the effect is 0). The lack of any enrollment changes means that the policy doesn’t impact incomes and doesn’t affect costs through changes in future tax revenue. There is, however, an increase in government educational costs as individuals attend different schools in response to the policy. That increases costs by $98 and results in a final net cost of $434.
The WTP is $336, driven entirely by the change deductions claimed.
The calculated MVPF is 0.77 with a 95% confidence interval of [-1.83, 57.84].
Hendren, Nathaniel and Ben Sprung-Keyser (2020). “A Unified Welfare Analysis of Government Policies.” The Quarterly Journal of Economics, 135(3): 1209–1318. DOI: https://doi.org/10.1093/qje/qjaa006
Hoxby, Caroline M. and George B. Bulman (2016). “The Effects of the Tax Deduction for Postsecondary Tuition: Implications for Structuring Tax-Based Aid”, Economics of Education Review, 23-60.
https://www.sciencedirect.com/science/article/abs/pii/S0272775715001326
Zimmerman, Seth D. (2014). “The Returns to College Admission for Academically Marginal Students.” Journal of Labor Economics, 32(4), 711-754. DOI: https://doi.org/10.1086/676661