When Free College Benefits Go To Those Who Need It Least

Liz Farmer | Senior Contributor
This story was originally published on Forbes.com

Free tuition at public colleges and universities was a popular topic during the 2020 presidential campaign and President Biden has proposed making community college tuition free as part of his American Families Plan. But depending on how the program is designed, it could end up helping the students who need it the least.

A number of states and some localities already provide this benefit — most notably the state of Tennessee and Kalamzoo, Michigan, which have some of the oldest programs. All told, about 15 states and an estimated 350 localities now have some version of a free college program while many others are considering one.

The Georgetown University Center on Education and the Workforce (CEW) looked at these models and analyzed how the benefits could play out on a national level. It found that a “last-dollar in” program, where the government pays any remaining tuition after the student’s grant aid is applied, would be the least expensive — but most of the money would go to students from upper-middle-quartile and upper-quartile households in the first year. Students from lower-income households would get just 13% of funds.

The Peter G. Peterson Foundation notes that this imbalance is because lower-income students generally receive more grant aid than other income groups — which means the government would have lower tuition costs to cover. “However, because last-dollar programs require students to use their financial aid first before the government pays the remaining tuition cost,” it wrote, “some students could still struggle to cover their remaining college costs like room and board.”

Conversely, an income-restricted, first-dollar program benefits lower-income students the most. A “first-dollar” program means the government would pay for tuition before any grant aid is applied and the student can use that aid to cover other costs of attendance. For its model, the CEW limited eligibility at four-year schools to families making less than $125,000 per year.

In that scenario, half of the money would go to students from bottom-quartile and lower-middle quartile households. Just 11% of the funds would go to students from upper-quartile households. However it would cost the government nearly twice as much — $50 billion — in the first year compared to a last-dollar program.

However, there are long term economic benefits to free college that play into this and are difficult to measure. Free college has been shown to increase college enrollment, degree attainment, and earnings for program recipients. One analysis of the Kalamazoo Promise program by the Upjohn Institute found that for every $1 paid in benefits, the average eligible student can expect to earn more than an additional $4.

The data shows that program design plays a pivotal role in cost and who benefits. In short, directing more money to those who need it costs the government more. No small consideration given the current state of the national debt. But the societal benefits and increased economic output could end up being worth it. But there’s no guarantee.

“As the national conversation continues over how much the United States wants to invest in higher education,” the Peterson Foundation noted, “policymakers should recognize the costs, benefits, and distributional impacts of free college programs when considering such policies.”

How States Are Letting Small Businesses Avoid The SALT Cap On Their Tax Returns

Liz Farmer | Senior Contributor

This story was originally published on Forbes.com

A growing number of states are using a workaround to help their taxpayers avoid a Trump-era cap on a critical income tax break. Whether it will influence the ongoing push in Congress to repeal the cap altogether remains to be seen.

Colorado recently became the 14th state to enact the new workaround, which allows (or in Connecticut’s case, requires) pass-through businesses to pay state income taxes at the entity level rather than on their personal income tax returns. For small businesses like partnerships, declaring that income as a business instead of passing it through to their individual tax returns means the state taxes paid on that business income don’t count toward their SALT cap.

The new mechanism is called a pass-through entity (PTE) tax, which is exempt from the $10,000 cap on the state and local tax (SALT) deduction that was part of President Trump’s 2017 tax reform. For business owners in high property tax states like New Jersey and Connecticut, it’s a critical change because it allows those taxpayers to deduct more of their local taxes from their other personal income.

But it’s not just blue states that are employing the tactic — red states make up half of the states that have adopted it.

A total of 14 states now have a SALT workaround for pass through businesses and four more are considering it.

THE URBAN INSTITUTE TAX POLICY CENTER

“This is going to be another three months of negotiation,” Suozzi said. “It's not going to happen tomorrow or the next day. But we are continually getting more people the House floor to say, ‘No SALT, no deal.”

On that call, Rep. Young Kim (R-Calif.) pointed out that setting a limit on the deductibility of state and local taxes across 50 states with very diverse economies and tax policy puts states like hers at a disadvantage. In coastal California, median incomes top six figures and the cost of housing is much higher than the rest of the United States. It means that by default, Californians pay nominally more in state income and local property taxes than many other places.

“You can't compare the median $800,000 home price here to the median home price in Oklahoma, for example,” she said. “Comparing California to others...and saying a $10,000 cap is good for everyone doesn’t work.”

California is one of four states considering the new SALT tax workaround.

Meanwhile, observers note that creating the workaround may help even the playing field for some taxpayers compared with their counterparts in other states — but it adds to inequities within a state by favoring-pass through income over wages.

For example, notes the Tax Policy Center’s Kim Rueben, a partner in a law firm can be effectively exempt from the SALT cap while an executive assistant or associate in the same firm remains subject to the deduction limitation.

But she predicts the workaround will continue to catch on.

“While it makes state taxes more complicated, it helps residents reduce federal taxes at no cost to the states themselves,” she wrote. “What a deal.”

Why Managing Billions in Federal Aid for Small Towns Will be a Huge Lift

Some localities are even foregoing the cash because it's too challenging to deal with.

By Liz Farmer

This story was originally published by Route Fifty

The shot clock to distribute more than $19 billion in American Rescue Plan Act funding to small towns and counties has started and states and municipal organizations are working to ensure these localities gets their share and understand the rules for spending the funds. 

But not every town wants the money.

“When I ask, it’s generally they just don’t have the infrastructure to support the reporting requirements required under the law,” said Emily Brock, director for the Government Finance Officers Association’s Federal Liaison Center. “Which is understandable. They don’t want to be in a position where they [spend it and then] have to give it back.”

Unprecedented Funding and Reporting

While many “entitlement” governments began receiving their ARPA funding directly from the U.S. Treasury Department last month, states are responsible for distributing funding to the more than 19,000 “non-entitlement units,” or NEUs, with populations smaller than 50,000. Most states didn’t receive that money until this month and are just now pushing it out to their small towns. 

“I’ve been here for 20 years and we’ve never seen anything like this before,” said Tom Reynolds, Maryland Municipal League’s director of education services. “This is a really important moment...and we don’t want anyone to be left out.”

But the unprecedented nature of the funding is a double-edged sword: Many small municipalities have never dealt with this level of federal funding. In some cases, the total funding equals 75% of a town’s annual operating budget. 

At least one municipality in Maryland has declined its distribution, according to Marc Nicole, deputy secretary at the Maryland Department of Budget and Management. Brock said she has also received emails from a few members who said they want to decline the money. 

The level of accounting required for how the money is spent is a big administrative lift for many places not used to dealing with federal funds. Small governments have to send annual reports to the federal government, with the first one due in October.

Nicole said the town in Maryland that declined funding has a population of 500. “A lot of towns that size only have one or two full-time staff,” he said. “They and the elected officials have to make a decision about whether they have the capacity to deal with that.”

What’s more, the federal Single Audit Act requires that any government spending $750,000 or more of federal awards in a year must commission and submit an external audit to verify it spent the money according to the statutory guidelines. Although the act has been around for nearly 40 years, it’s a new concept for communities that have never broken that threshold before, said Brock.

“It’s a cost-benefit question for some of these folks,” she said. “‘Have I had a sufficient loss of revenue where I can really use these proceeds, and do I have another $10,000 to spend on the audit?’” 

In California, the state municipal league’s executive director said she hasn’t yet heard of any town refusing the money but that the accounting requirements are “top of mind” for a lot of members. The League of California Cities and other state leagues are talking with the National League of Cities about creating tools to help smaller governments, including a revenue loss calculator and a grant tracking tool. 

“We’re having some good conversations about what reporting tools might look like that would mirror the guidance, be easy to access and not only give individual cities some important data about the use of dollars but also provide aggregate data from across the country,” said Carolyn Coleman, executive director of the California league.

Meanwhile, the detailed reporting that’s required of grant recipients is giving some states pause. About one-third of states have yet to certify to receive their NEU distribution in part because of lingering questions about who is ultimately responsible for making sure small government recipients know all the spending rules. 

“Treasury has sent out a lot of dispatches about this and finance officers for these smaller towns aren’t reading all of them,” Brock said. “So, they don’t know all the rules and the state kind of owns that a bit in the sense that they don’t want their towns to get in audit trouble.”

The NLC and other municipal associations are producing webinars and posting guidance on their websites about the ARPA requirements and other relevant information for their members.

Some states want more clarification on whether they have to return money to the federal government that is declined or whether they can redistribute that among the rest of their small government recipients.

As of the latest Treasury update, Arkansas, Hawaii, Illinois, Indiana, Iowa, Missouri, New Mexico, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah and Vermont had not begun distributing money to their NEUs.

In other states, small governments that have submitted the necessary documentation can expect to receive their money sometime in July. States have 30 days to distribute the money once they receive their NEU allocation and only can apply for a 30-day extension. Many are likely to do that, given the amount of time it will take to contact all the NEUs and line up paperwork. That means most small governments can expect to receive their money by September.

Word of Caution

Although many local leaders are asking lots of questions about how they can spend the money, municipal organizations are cautioning them not to move too quickly -- just concentrate on getting the money first. Cities have until Dec. 31, 2024 to allocate the money and up to the end of 2026 to spend it and for all projects to be completed. 

“Take your time, be deliberate,” said Reynolds, noting that community feedback can also help officials determine where their greatest needs are. “There are elements in the ARPA that encourage partnerships and collaboration. Look to see where you can allocate to nonprofits that do work in the community or to [county] projects within your community.”

Supreme Court Won’t Hear New Hampshire’s Remote Workers Case. But This Tax Fight Is Far From Over

Liz Farmer | Senior Contributor

This story was originally published on Forbes.com

The U.S. Supreme Court said this week it won’t hear a case that could have changed how remote workers’ income is taxed around the country. But with the increase in work-from-home employees thanks in large part to habits formed during the pandemic, the issue of which state gets to tax the incomes of these workers is unlikely to go away.

The case before the court dealt with New Hampshire’s challenge to an emergency law Massachusetts passed at the onset of the pandemic. The temporary legislation allowed the Bay State to tax non-residents who had previously commuted there but were working from home in the pandemic. The result affected some 103,000 former commuters working from home in New Hampshire. 

But Massachusetts’ “convenience rule” allowing out-of-state taxation is an established practice by six other states (Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania) and a broad ruling by the Supreme Court could have impacted more than 2 million Americans in these states who once regularly crossed state lines to get to work.

Jennifer Karpchuk, a state and local tax attorney at the firm Chamberlain Hrdlicka, said the court’s refusal to wade into the spat between the two New England neighbors isn’t the last we’ll hear of the issue.

“One of the big problems with New Hampshire’s case is the question of harm,” she said. The state doesn’t tax income, so it’s not directly losing potential income tax revenue. The state argued that it was indirectly harmed by its residents having to give up income tax to Massachusetts, instead of keeping that money in New Hampshire.

What’s more, Massachusetts this month lifted the emergency order, which “triggers the sunset of the pandemic-related tax regulation New Hampshire seeks to challenge,” lawyers for Massachusetts wrote.

“The court not taking the case, does not means the justices aren’t interested,” Karpchuk said, “but it might be that New Hampshire isn’t the appropriate state to take up the issue.”

Many have speculated that Connecticut and New Jersey would be good candidates to take a case to the high court because many of their commuter residents pay income taxes to New York instead of their home state.

According to an analysis by the Kroll Bond Ratings Agency which looked at what would happen if former commuters worked from home part-time, New Jersey would benefit to the tune of $528 million in income tax revenue gained from New York. Connecticut would also get to clawback nearly $193 million in income tax revenue.

The two states, along with Hawaii and Iowa, filed a joint brief in support of New Hampshire’s case which had higher estimates based on the fact that more workers would be full-time remote. In that case, which used data collected during the pandemic, “New Jersey may credit anywhere from $928.7 million to $1.2 billion to its residents for taxes paid to New York based on income they earned or are projected to earn while working at home in New Jersey.”

Before the pandemic, fewer than half of workers even worked from home on a part-time basis. But with as many as seven in 10 Americans saying they will work from home at least part of the time going forward, this forfeiting of potential revenue isn’t a one-time deal. It would be on an annual basis unless the rules change.

“Remote work today isn’t what it was a year and a half ago,” said Karpchuk. “Tax and tax policy can’t be stagnant and at one point or another, I think the court will have to address this.”

Even With Federal Aid, States Slashed Spending By $4.1 Billion To Avoid Shortfalls

Liz Farmer | Senior Contributor

This story was originally published on Forbes.com

States received billions of dollars from the federal government to help them manage the COVID-19 pandemic in 2020 but one-quarter of them still had to cut spending over the last year to get by.

A total of 12 states had to cut a combined $4.1 billion from their budgets in order to balance out projected shortfalls before the end of their fiscal year, according to a new report released Thursday by the National Association of State Budget Officers (NASBO). (Most state fiscal years end on June 30.) Nevada, New Mexico and Washington state cut the most, accounting for 42% of the total.

Over the last year, 12 states cut $4.1 billion from their budgets to fix a shortfall.

NATIONAL ASSOCIATION OF STATE BUDGET OFFICERS

Many of these states targeted staff for these cuts, including implementing hiring freezes, eliminating open positions, cutting salaries and ordering furloughs. They also turned to Medicaid, which saw more than $1 billion in combined cuts from the 12 shortfall states while higher education cuts totaled more than $500 million from the group. Washington State focused its cuts mainly on K-12 education, slashing more than $1 billion from the budget over the past year.

The budget shortfalls came in spite of the more than $300 billion in direct and indirect aid sent to states and local governments through the CARES Act last year. That aid, however, could not be used to address revenue shortfalls.

Still, these totals are an improvement from a year ago when 22 states made cuts to close out budget gaps.

Other highlights from the NASBO report include:

Total estimated general fund spending across the 50 states is on track to grow 3.0% in fiscal 2021. However that is still 2% below pre-pandemic spending projections for the year.

• Total 2021 general fund revenue is estimated to grow 1.4%, after accounting for the tax deadline shift that occurred in calendar year 2020.

• States are on track to collect 2.8% less over fiscal 2020 and fiscal 2021 compared to what they were expecting before the COVID-19 crisis, with 40 out of 50 states seeing declines compared to pre-pandemic projections over the two-year period.