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With tuition bills arriving, Senate panel questions college tax breaks

Updated at 6:35pm ET If you’re the parent of a college student and that first semester tuition bill just arrived in your mailbox, Senate Finance Committee chairman Max Baucus, D-Mont., held a hearing of particular interest to you on Wednesday.

J. Scott Applewhite / AP

Sen. Max Baucus, D-Mont., a member of the Senate Agriculture, Nutrition and Forestry Committee, steps off the Senate floor.

The issue Baucus was addressing: whether the array of tax breaks for higher education – 18 separate provisions in the tax code – can be simplified.

But if you’re that tuition-paying parent (or student) you probably already knew one point the expert witnesses made to the committee: the welter of different tax preferences for higher education – engineered by different Congresses over many years – is complex, probably duplicative in some cases, and not particularly user-friendly.

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Baucus himself pointed in dismay at the 87-page Internal Revenue Service guide for obtaining education tax credits. “Based on the complexity of this guide, one would think the IRS expected all of America’s future students to want to major in accounting,” he said.

Even more disheartening was the message delivered by James White, director of Strategic Issues for Congress’s watchdog agency, the Government Accountability Office: The experts just don’t know which of the tax breaks is effective in getting students to attend and, more importantly, to finish college or university. (About 45 percent of students who start at a four-year institution don’t finish by getting a degree, according to the National Center for Education Statistics.)

The two biggest education tax preferences are the deduction for charitable contributions to colleges and universities (worth about $6.5 billion a year) and the Hope education tax credit (worth about $5 billion a year).

“Which ones work the best? Which ones do we pare back or perhaps even eliminate? We’ve got 529 (savings) plans, Coverdell (education savings accounts), the American Opportunity tax credit, a couple of others. What works for students and what really doesn’t work that much?” Baucus asked.

“We don’t know the effect on price (tuition) nor do we understand very well the impact on students’ access to education – the extent to which these programs affect that,” White replied. “What’s needed here to get you to the answer to the questions you’re asking is some better research by the Department of Education about the effect of these different programs on students’ access to education … the extent to which they go on to graduate, and what the ultimate outcome is for the billions of dollars being spent on these programs right now.”

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Sen. John Thune, R- S.D., then asked how the different higher education tax breaks compare to each other in their cost effectiveness, and if Congress were forced to pick only one, which one should survive? Is an outright grant more effective than a tax credit?

White’s answer was equally discouraging: “Part of the problem here is that we are spending tens of billions of dollars on these programs and we don’t know the answer to the question you are asking,” he told Thune.

White said in an interview after the hearing, “You have to try to estimate statistically what would have happened without the (federal) assistance, and then you can figure out what difference the assistance makes. But that’s a challenging thing to do statistically and that’s why it hasn’t been done.”

He added, “you want to look at the ultimate benefit that the country is getting from the large amount of money that we’re spending on these programs."

Later Wednesday when the Senate approved a bill to extend current tax rates for most income earners, the bill included a one-year extension of the one of the education tax credits, the American Opportunity tax credit, first created in 2009. Baucus voted for the bill.

Asked about White's testimony about the lack of evidence about which breaks are effective, Baucus said, "Lots of other people do think they have an idea (about the effectiveness of education tax preferences). Financial aid directors at American colleges and universities have a pretty good idea of what students need, what works, what doesn't work."

As for the American Opportunity credit, Baucus said, "I think it's pretty effective."

Earlier at the hearing, another witness, Prof. Susan Dynarski from the University of Michigan School of Public Policy, suggested one practical step to help parents and students: make education tax breaks “advance-able” – paid at the time when people pay the tuition so they need not wait until the following April when they file their returns.

She also told the committee there was strong evidence in the research that streamlined financial aid forms would lead more students to attend college or university. “College attendance rose 7 percentage points among those allowed to use a vastly simplified proves for applying for aid,” she said in her written testimony.

Next year is shaping up as the moment for a once-in-a generation fundamental tax reform – eliminating tax breaks, flattening rates and broadening the tax base by making more income subject to taxation.

The result: a tax code that will be simpler, more efficient, less riddled with favors for specific groups, and – depending on your point of view – fairer.

If the Democrats retain control of the Senate, tax reform will be designed in large part by Baucus, who’s up for re-election in 2014.

But Baucus’s hearing Wednesday showed that despite the rhetoric about fundamental reform, the urge to engineer a better society through the tax code remains powerful. Baucus indicated that even after next year’s reform, both tax preferences for higher education and direct federal spending such as Pell Grants will continue to exist.

Stating one of the things on his to-do list for next year’s reform effort, Baucus ended the hearing by saying, “It seems to me we’ve got to simplify and streamline both the law” and the forms parents and students use to seek aid.