Tax bill that passed the House would cripple training of scientists

Researchers-in-training would be taxed on any tuition they’re excused from.

John Timmer – Nov 17, 2017 2:33 pm | 425

Whatever you made in that flask, it's going to cost you. Credit: Oak Ridge National Lab

Yesterday, the US House of Representatives passed its version of a tax bill that would drop corporate tax rates and alter various deductions. While most of the arguments about the bill have focused on which tax brackets will end up paying more, an entire class of individuals appears to have been specifically targeted with a measure that could raise their tax liability by 300 percent or more: graduate student researchers. If maintained, the changes could be crippling for research in the US.

Tuition waivers

Many graduate programs in areas like business, medicine, and law can afford to charge high tuitions. That’s in part because these degrees are in high demand and in part because the students know that they’ll have the potential to earn very large salaries after graduation.

PhD programs are nothing like this. Despite typically taking five to six years to complete, a PhD student is only likely to earn in the area of $44,000 after graduation if they’re funded by the National Institutes of Health. Even four years of additional experience doesn’t raise the salary above $50,000. As such, charging them tuition would leave them with no way to possibly pay back their student loans. Doing so would almost certainly discourage anyone but the independently wealthy from attending research-focused graduate programs.

Instead, research institutions have typically operated a system where graduate students have taught classes and performed research in return for having their tuition waived. (Many universities have a more general deal where their employees and their families have tuition waived, as well.) In addition, the university will typically arrange for funding to pay the student a stipend for housing and food—effectively a salary. This system has been sufficient to keep graduate programs filled with students, who perform much of the grunt work for US research endeavors.

This system is enabled in part by a specific section of the US tax code, Section 117(d). That defines tuition reductions for university employees as non-income, and therefore non-taxable. Another part of Section 117(d) defines this as applying to teaching and research assistants even if they are not formally employed by the university.

Treated as income

The house bill would eliminate this section entirely. As a result, the cost of graduate tuition, which is often set by lucrative fields like law and medicine, will count as income if it’s waived. As a result, graduate students would be taxed as if they earned their stipend plus the full cost of their tuition, even though they only saw a fraction of that money. In other words, a grad student living on a $25,000-a-year stipend could suddenly find themselves liable for taxes on a $75,000 income or more. Many grad students are foreign, which could add additional complications.

This could be financially ruinous for current graduate students, and it would provide an immense disincentive for future students to apply for a research-focused degree program—especially since the massive tax bill would apply for all five or six years of a program.

Universities could conceivably have the option of reworking their programs so that each department has its own tuition, allowing research-focused programs to charge a minimal tuition. But many graduate programs aren’t structured to allow that, meaning that the university would have to completely reorganize its departmental structure in order to remedy such a situation. Other options, like naming the students as employees, won’t work because the bill also makes employee exemptions taxable (plus employees would see their undergraduate student loans come due). Paying students a stipend large enough to cover tuition would also leave them liable for taxes on it.

It’s likely that Congress simply intended to target university employees rather than graduate student researchers. But the problem with graduate research was identified pretty quickly—news reports indicating it would affect about 145,000 students were circulating nearly a week ago. Even still, the change has remained in the House version of this bill that was eventually passed.

The Senate version, which is still being considered, does not have this provision, so for now there remains a chance that it will not appear in any final versions of the bill that survive negotiations.