If H.R. 7 were presented to the President, the Secretaries of the Treasury
and Education would recommend that he veto the bill. In 1998, the
President vetoed legislation -- H.R. 2646, the "Education Savings and
School Excellence Act of 1998" -- that included provisions similar to those
contained in H.R. 7. At that time, the President described the bill's
modifications to Education IRAs as bad education policy and bad tax policy.
H.R. 7 is equally flawed.
Both the Senate and the House have already passed other costly tax cut
legislation this year. The Administration is concerned that piecemeal
enactment of significant unpaid-for tax cut bills outside of an overall
fiscal framework will threaten to undermine Social Security, Medicare and
debt reduction, and impair the Federal Government?s ability to address
other important national priorities.
Every American child deserves a high-quality elementary and secondary
education. The President's FY 2001 Budget contains a series of education
tax initiatives, including a College Opportunity tax cut to defray the cost
of higher education for families, and tax-credit bonds to assist State and
local governments in meeting the cost of financing construction,
rehabilitation, or repair of public schools.
H.R. 7 fails to advance education reform and distracts from the need to
invest in public schools, where the vast majority of the Nation?s students
learn. It does nothing to reduce class size, improve teacher quality, or
help students meet high academic standards. In addition, the provisions to
repair or modernize schools are woefully inadequate. Targeting limited
Federal resources toward building stronger public schools will help ensure
that all our Nation's children receive the education they need to become
productive citizens. H.R. 7 would divert needed resources away from public
H.R. 7 would disproportionately benefit the most affluent families and
provide little benefit to lower- and middle-income families. Moreover,
given the expansion of tax-preferred savings vehicles in the Taxpayer
Relief Act of 1997, which the Administration supported, further increasing
the contribution limits for Education IRAs is unlikely to provide
significant additional incentives for families to increase their savings
for educational purposes. Instead, H.R. 7 would reward many families,
particularly those with substantial incomes, for what they may already do.
H.R. 7 would also create significant compliance problems. The bill permits
tax-free withdrawals from Education IRAs for, among other things, tuition,
fees, academic tutoring, special needs services, books, room and board, and
supplies and equipment expenses incurred in connection with enrollment or
attendance in public or private elementary or secondary schools.
Distinguishing between withdrawals that should not be subject to tax and
those that should will add significant record-keeping requirements for
families and schools and will lead to frequent disputes about the use of
the withdrawals for discretionary purchases.
H.R. 7 also would liberalize the tax-exempt bond arbitrage rebate
exceptions for public school construction bonds. Increasing the
current-law two-year expenditure exception to the arbitrage rebate
requirement to four years would not address the needs for the construction,
rehabilitation, or repair of public schools. This proposal would only
encourage delayed construction and riskier investment strategies for a
minimal gain in construction. The Administration strongly supports the
school modernization tax credit proposal that was included in the
alternative offered by Representatives Johnson and Rangel which would
provide for the issuance of $25 billion in tax credit bonds for school
construction. The Administration would ask that the House Rules Committee
make in order the Johnson-Rangel amendment for floor consideration.
H.R. 7 would reduce Federal receipts; therefore, it is subject to the
pay-as-you-go requirement of the Omnibus Budget Reconciliation Act of 1990.
In addition, without any further action to provide offsets, H.R. 7 could
contribute to a sequester of mandatory spending.