As part of the deal to avoid the fiscal cliff, the expiring American Opportunity Tax Credit (AOTC) was extended through 2017. This is unfortunate for three reasons.
First, while the AOTC is too new to have an academic literature yet, its close cousins, the Hope and Lifetime Learning Tax Credits have been studied, and have been found to be ineffective. As Bridget Terry Long found
“although the tax credits were promoted as a means of increasing college access, this analysis found no enrollment response.”
In other words, the tax credits did not accomplish their goal of increasing the number the students enrolled in college.
Second, the tax credits did not lower net price at all schools. In fact, Long also found “some evidence to support that public two-year colleges responded to incentives created by the tax credits by raising tuition price.”
While these first two results are for the Hope and Lifetime Learning tax credits, not the AOTC, there is no reason to expect the AOTC to have different effects (the main differences between AOTC and Hope/Lifetime Learning are refundability and income cutoffs, neither of which are realistically driving Long’s findings). This means that just like for the Hope and Lifetime Learning tax credits, the AOTC is unlikely to increase college enrollment and probably encourages some schools to raise their tuition.
Third, due to higher income cutoffs, the AOTC is not as targeted as the Hope and Lifetime Learning credits were. The result is that much more of the tax credits are now being claimed by the relatively affluent. As former Education Sector analyst Stephen Burd wrote,
“The introduction of the Obama administration’s American Opportunity Tax Credit (AOTC) in 2009 has proven to be a bonanza for the highest income group.”
At a time when the country is running huge deficits, it seems strange to devote $67 billion over the next 10 years (see Clare McCann’s table) to keep a program that does not achieve its intended goal of increasing college enrollment, may actually be counterproductive in regards to college affordability, and results in a windfall for the relatively affluent.
Photo Credit: Time Out New York