If S. 1134 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 S. 1134. At that time, the President described the bill's
modifications to Education IRAs as bad education policy and bad tax policy.
S. 1134 is equally flawed.
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. S. 1134 fails to advance
education reform and distracts from the need to invest in public schools,
where the vast majority of our 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. S. 1134
would divert needed resources away from public schools.
S. 1134 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, S. 1134 would reward many families,
particularly those with substantial incomes, for what they may already do.
S. 1134 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.
S. 1134 would affect receipts; therefore, it is subject to the
pay-as-you-go requirement of the Omnibus Budget Reconciliation Act of 1990.
Although last year's proposal was paid for with tax offsets, S. 1134 would
likely reduce federal revenues because many of last year's offsets have
been used to pay for other legislation. We are concerned that piecemeal
enactment of tax cuts such as S. 1134 outside of an overall fiscal
framework will threaten to undermine debt reduction and impair our ability
to address other important national priorities.