FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, Senator Lautenberg, members of the Committee:

Thank you for the invitation to come here this morning to discuss the tax provisions of the President's FY 2001 Budget as they relate to education.

I am especially pleased to accompany Secretary Riley. No one in public life, except President Clinton himself, has had a longer and deeper commitment to improving education, both as a Governor and a Cabinet member, than Dick Riley. His leadership over the past seven years has been outstanding.

The new and expanded programs that the Secretary has discussed with you, as well as the new tax incentives for education I will cover, are possible as a budgetary matter because of the unprecedented performance of the American economy. In 1993, President Clinton outlined an economic strategy focused on three objectives: fiscal discipline, investments in the nation's infrastructure, including education, science and technology, and opening up foreign markets. This strategy has helped foster conditions for what is now the longest economic expansion in U.S. history. We have experienced, over the last seven years, an extraordinary increase in GDP, in job growth, in worker productivity and in personal income. Not only have we balanced the budget but also, we have begun to pay down the national debt. As our budget figures show, we can afford to make the new investments in education the Secretary spoke of, and at the same time use the tax system to provide major incentives to modernize our schools and to provide greater educational opportunity for more Americans. These programs promise continued gains in the future. By turning out better-educated, more productive young people, by helping workers of all ages improve their skills, we will keep this great engine of our economy going strong.

With the development of the high-tech, information based economy of the 21^st century, a high school education is no longer sufficient to provide Americans with the job skills and knowledge required to participate meaningfully in the new economy. A higher education is critical in determining who will prosper and who will be left behind. Real earnings for full-time male college graduates have increased by 15 percent over the past two decades, while they have fallen by more than a quarter for male high school dropouts. On average a bachelor's degree is worth some $17,000 more a year in the workplace than a high school diploma. This difference equals an estimated $600,000 over a lifetime.

I would add that the same applies to the world economy. In Southeast Asia and elsewhere, we see that developing countries that have invested in education have become increasingly competitive, while others lag behind. If other countries are to succeed in the global economy of this new century, they must take a far higher proportion of their children out of the factories and farms and put them into schools.

The tax policies in the Budget relating to education are focused on two types of investments: First, those that help construct, repair and modernize facilities to create a physical environment that promotes learning, especially in areas of greatest need; second, those that make it possible for more young people to take advantage of post-secondary education.

School Modernization Bonds

As Secretary Riley testified, there is a great need to modernize our school buildings, expand facilities and furnish our schools with the equipment needed to maximize the educational impact in the Information Age. Currently, about one-third of all public schools need extensive repairs. GAO has estimated that $112 billion is needed for this purpose. The average age of a public school is forty-two years, and school enrollment is higher than ever. Many school districts, however, have insufficient financial capacity to take on these tasks using the traditional method of issuing tax-exempt bonds.

The President's proposal provides for the issuance of $24.8 billion in tax credit bonds over two years to build or renovate up to 6,000 public schools. This proposal would cost $2.4 billion over five years in the budget.

As Secretary Riley testified, the President's proposed School Modernization Bonds proposal would help the federal government to spur new State and local investment in public schools by taking up the interest cost. Instead of receiving tax-exempt interest from the school district, the holder would receive all the interest from the federal government in the form of an income tax credit. The credit would be counted as part of taxable income, thus generating a net yield to the taxpayer that would be equivalent to an equally rated taxable bond. The program would be capped at $11 billion in 2001 and 2002, half of which would go to the 100 school districts with the largest number of children living in poverty, while the other half would be allocated among the states based on Education Act Title I grant formulas. An additional $200 million of bond authority would be set aside in both years for schools funded by the Bureau of Indian Affairs.

This program offers school districts and other issuers a major savings in debt service and with it, the ability to fund far more improvements. A typical 30-year, $10 million issue of tax-exempt bonds at 6 percent interest would require annual debt service payments of about $726,000 for thirty years. Under our proposal, the issuer would pay only $430,000 per year for fifteen years into a sinking fund earning 6 percent interest. This savings of about $296,000 a year would make possible an additional borrowing of $6.9 million of 15-year tax credit bonds, or an additional $4.1 million of 30-year tax-exemptions for school construction or renovation.

We also propose to expand the existing Qualified Zone Academy Bond program, which also uses the tax credit device and is also geared to low-income areas. We propose this program's bonding authority be raised from $400 million to $1.4 billion in 200l and an additional $1.4 billion in 2002; that these bonds should be made available for purchase by the general public instead of just financial institutions; and that the proceeds be made available for school construction in addition to the purposes allowed in current law (renovation, new equipment, curriculum development and teacher training.) This will make the program more relevant to current needs and, as in the case of the School Modernization program, speed development of efficient primary and secondary markets for the bonds. The revenue cost of both tax credit bond programs would be $2.4 billion in the first five years and $8 billion over ten years.

Closing the Digital Divide

Access to computers and the Internet, and the ability to use this technology effectively, are becoming increasingly important to full participation in our country's economic, political and social life. Unequal access to this technology and high tech skills because of income, educational level, race or geography could deepen the divisions that exist within American society. President Clinton has it a major priority to bridge the Digital Divide, and give all Americans the opportunity to acquire the skills they will need in the new economy of the new century a high priority. To this end, the Budget proposes three tax incentives. The first offers a 50 percent tax credit for corporate cash contributions to Qualified Zone Academies, libraries, and technology education centers in enterprise zones, empowerment communities and other low-income areas. The second offers taxpayers a deduction of two times the cost basis for computers and similar equipment, two years old or less that are donated to libraries and community technical centers. (A similar deduction is already in the Code but is limited to public schools). The third allows employers a tax credit for providing English literacy and workshop literacy, including computer literacy, to their employees. The tax cost of these proposals is $1.2 billion over five years and $2.1 billion over ten years.

Tuition and Expenses

Forty years ago, fewer than 30 percent of our young people who graduated from high school went on to college. Today, two out of every three go directly to college. We are closing in on a long held dream of a college education for every American. Since 1993, the President and Congress have taken numerous steps to make college more affordable, including direct student loans, increased Pell Grants, and the Hope Scholarship and Lifetime Learning tax credits. But tuition costs continue to rise and many students and their families are still struggling to make ends meet.

The President has worked with Members of Congress to design a new College Opportunity Tax Cut that will, when fully phased in, provide up to $2,800 in tax relief for students or their families. It allows the choice of either a 28 percent Lifetime Learning tax credit for tuition and required fees of up to $5,000 for FY 2001 and 2002 and $10,000 thereafter or a deduction up to those limits for such expenses. It can be used to defray the cost of college, graduate school or job training throughout life. It can be used by more than one member of a family.

The College Opportunity Tax Cut is a significant expansion of the Lifetime Learning Credit that Congress approved in 1997. The latter offered a credit of 20 percent and is phased out between $40,000 and $50,000 for single returns and between $80,000 and $100,000 for joint returns. The new proposal raises the credit to 28 per cent, and would raise the phase out range to between $50,000 and $60,000 for single returns and $100,000 to $120,000 for joint returns.

Our proposal also contains the essence of the bipartisan proposal advocated by Senator Snowe and Senator Schumer. It allows taxpayers to take a deduction in lieu of a credit, in those cases where the result would be more favorable to them. Families subject to the Alternative Minimum Tax, those with medical deductions or childcare credits subject to AGI limitations, and some families in states which allow federal deductions but not credits may prefer to use the deduction.

Adoption of these proposals will provide significant tax relief to families that are burdened by the cost of post-secondary education. It will help make lifetime learning a reality. It will also help Americans acquire the skills they will need in this fast changing world if we are to continue our leadership in innovation and achieve the kind of productivity gains that underlie continued high performance by our economy. We believe the cost of this proposal - $11.1 billion over five years and $29.8 billion over ten years is amply justified by the potential benefits.

Other Education Tax Proposals

In addition to the measures described above, the Administration proposes to reinstate the exclusion from gross income for graduate courses paid for by an employer, whether or not those courses are directly related to a taxpayer's current job. This provision was eliminated for graduate courses in 1996. Restoring it will encourage retraining of current and former employees to reflect the changing needs of the workplace. This will cost $400 million over five years.

Millions of students now depend on direct loans and federally guaranteed bank loans to help finance college and graduate school, and they will continue to do so even with the College Opportunity Tax Cut in effect. Currently, our tax laws allow a deduction for interest payments on such loans, but only for 60 months. This limit has caused significant administrative complexity, including in the calculation of the 60-month period in cases where students have more than one loan or when loans are deferred or refinanced. We propose to eliminate the 60-month limit. We appreciate the leadership Senator Grassley has shown on this issue and hope to work with him and the Members of the Committee on this proposal. This will provide longer-term relief to students with significant educational debt, and reduce burdens for taxpayers, lenders, loan servicing agencies, and the IRS. The cost will be $400 million over five years and $900 million over ten years.

We are also proposing an exclusion from gross income in certain situations: First, when the recipient has elected to base the size of repayment installments on the amount of his or her income, and the loan is still not fully paid after 25 years; Second, when scholarships are granted under the National health Services Corporation Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program. A third would exclude repayment or cancellation of a student loan under those two programs, as well as the Americorps program, all of which provide important health, education and other services to underserved areas and the military.

In conclusion, Mr. Chairman, this nation could not have turned in the economic performance it has, and could not be the world economic leader it is, had we not made a massive commitment to the education of our people in the last half century, beginning with the G.I. Bill and continuing through the Pell Grants, Hope Scholarships and Lifetime Learning credits, on to the Budget the President submitted yesterday. We strongly intend to continue this progress, for the benefit of our entire country. Secretary Riley and I strongly commend these new provisions to you as you begin your work on this year's Budget Resolution.

Thank you.