[Congressional Record Volume 143, Number 14 (Thursday, February 6, 1997)]
[Senate]
[Pages S1106-S1107]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SHELBY (for himself, Mr. Sessions, Mr. DeWine, Mr. 
        Hutchinson, Mr. Cochran, and Mr. Smith):
  S. 285. A bill to amend the Internal Revenue Code of 1986 to exclude 
from gross income any distribution from a qualified State tuition 
program used exclusively to pay qualified higher education expenses 
incurred by the designated beneficiary, and for other purposes; to the 
Committee on Finance.


                    THE TUITION TAX ELIMINATION ACT

  Mr. SHELBY. Mr. President, today I am introducing 
legislation, the Tuition Tax Elimination Act, which will help make 
college more affordable for thousands of young people all across 
America. I am pleased that Senators Sessions, DeWine, Hutchinson, 
Faircloth, Cochran, and Smith of New Hampshire have joined me as 
original cosponsors. This bill will eliminate a new Federal tax on the 
tuition expenses of students participating in State prepaid tuition 
programs. Here is how the tax came about.
  It is no secret that many families in our Nation are struggling to 
finance their childrens' education. College tuition costs have 
skyrocketed in the past decade increasing 95 percent at private 
institutions and 82 percent at public institutions. Newsweek magazine 
reported last year that some families will spend more than $100,000 
just to send one child to college.
  To combat the high cost of a college education, many States, 
including Alabama, have set up prepaid tuition funds. These funds allow 
parents to make a tax-free investment, years in advance of their 
child's enrollment in college, with the guarantee that the child's 
tuition will be paid for by the State when he or she enrolls in 
college.
  Last year, the IRS attempted to impose taxes on States operating 
prepaid tuition funds by claiming that the funds were not legitimate 
functions of the State and thus not exempt from Federal taxation. If 
the IRS had been successful in their attempt, many States would have 
been forced to terminate their prepaid tuition programs.
  Fortunately, Senators McConnell, Graham, and I were able to get a 
provision in the Small Business Job Protection Act which clarified that 
prepaid tuition programs should not be subject to Federal taxes, since 
they are a legitimate function of State governments.
  At the same time, the IRS was also attempting to impose a tax on the 
parents' contributions to these State prepaid tuition programs. What 
the IRS wanted to do was to count the annual increased value of the 
parents' contribution as income and tax it. Again, Senators McConnell, 
Graham, and I put a provision in the minimum wage bill last year to 
prevent the IRS from taking those actions.
  However, there was a provision of that bill which I did not support. 
It provided that when a student enrolls in college under a prepaid 
tuition plan, the student must pay taxes on the difference between the 
value of the tuition costs, which are paid by the State, and the amount 
his or her parent paid for the contract. Essentially, this provision is 
a new tax on students. I attempted to offer an amendment to strike this 
provision, but unfortunately, no amendments were in order.
  Mr. President, prepaid tuition programs are a creative way many 
States all across the country have developed to help more young people 
afford a college education. We need to do everything we can at the 
Federal level to encourage these types of programs.
  The Tuition Tax Elimination Act will do that by relieving students 
from Federal taxes on their tuition expenses. This legislation will 
provide

[[Page S1107]]

that distributions from qualified prepaid tuition funds are not to be 
counted as taxable income for the student, as long as the money is 
spent for the designated purpose.
  This legislation is fully paid for with a provision which would 
suspend the automatic inflation adjustments used to award the earned 
income tax credit to individuals without children. President Clinton's 
1993 tax bill expanded the EITC to cover individuals without children, 
and currently, a childless individual earning between $4,220 and $5,280 
is eligible for a maximum EITC amount of $323. Each year, these income 
levels are adjusted upward for inflation. Many people have questioned 
whether we should even be providing the EITC to individuals without 
children. However, that is a question which can be addressed in other 
legislation. This offset does not eliminate the EITC for individuals 
without children; it simply eliminates the annual increase in the EITC 
calculation for individuals who have no dependents. This provision 
passed the Senate last year as a part of welfare reform, but it was 
dropped in conference.
  Mr. President, the cost of going to college is now more expensive 
than ever, and is growing much faster than inflation. Eliminating the 
tax students will face on their tuition expenses is a real step toward 
making college more affordable for thousands of young people all across 
America, and I hope my colleagues join me in support of this 
legislation.
                                 ______