July 13, 2011
As the drama of ongoing negotiations between the president and Republican Congressional leaders to raise the debt ceiling and cut the deficit wears on, one arcane idea seems to come up over and over again: Revising the government’s measure of price inflation—the Consumer Price Index—to use a more sensitive and arguably more accurate formula, known as the chained Consumer Price Index. That change could reduce spending by $300 billion over ten years. (The New America Foundation’s Committee for a Responsible Federal Budget and the Moment of Truth Project have made the case for this change in a 2011 paper.) What exactly is this proposal, and would it affect any education programs?
The Consumer Price Index (CPI) influences a plethora of government benefits, as well as many provisions in the tax code. It is used to calculate Social Security benefits, veterans’ benefits, annual increases in tax brackets, the size of tax deductions, the phase-out levels for tax credits, and other aspects of fiscal and social policy. Two forms of the CPI are currently used for these purposes. Replacing those versions with the “chained CPI” (C-CPI) would more precisely evaluate how consumers spend money by using a more careful calculation of how consumers fill the “market basket of goods” used to calculate inflation. According to economists, this provides a more accurate measure of inflation, but also a lower one than the CPI. The upshot is that any federal spending that increases with inflation wouldn’t rise as fast under the C-CPI.
So what does this mean for education programs? If the federal government switched its inflation gauge to C-CPI it would reduce eligibility and the maximum award for the Pell grant program; and over time, fewer people would qualify for education tax benefits, and tax benefits would shrink for those who still qualify.
As a result, middle-class taxpayers and low-income students, in particular, could find it more difficult to put themselves or their children through college—but they probably won’t know it. That’s what makes a switch to the C-CPI a sort of stealth spending cut. Moreover, the reform’s effects, which would save a total of about $3 billion government-wide in 2012 if implemented now, will build slowly overtime, producing more dramatic effects over the long term as the savings amount to about $300 billion over a decade and as much as $63 billion in fiscal year 2021 alone.
The change would have a more pronounced effect on the Pell program than on education tax benefits. The Student Aid and Fiscal Responsibility Act of 2010 (SAFRA) reformed Pell funding calculations to raise the maximum award to $5,550 in fiscal year 2011, but also tied annual increases in the maximum award to the CPI beginning in 2014. If the maximum grant is indexed to the C-CPI instead of the regular CPI, it will increase at a slower rate. As a result, the lowest-income students will receive smaller federal financial aid packages than they otherwise would.
Given the premium the president placed on Pell grants and other affordability measures since taking office, reforming the Consumer Price Index would be a step backwards from his stated goals of making higher education affordable for the neediest students.
Estimates from the Congressional Budget Office indicate that the impact on education programs (namely, Pell grants) from using the C-CPI would total a loss of more than $4 billion in Pell grants between 2012 and 2021.
Education tax credits would also take a hit from the CPI reform. Many of the education-related credits are linked to the CPI in calculating the size of the credit a taxpayer is eligible to receive. Switching to the chained CPI would increase the size of the credit at a slower rate than taxpayers would see using the current CPI formulas. Other credits, like the Student Loan Interest Deduction, specify a phase-out level at which the credit is available only at a reduced rate. In these cases, the income level at which the phase-out begins is adjusted upward each year to match inflation, but under C-CPI those adjustments will likely be smaller every year. This means that students claiming the tax credit within the current phase-out level may be closed out of the credit entirely under the new formula.
A switch to the C-CPI would also revise eligibility criteria for the American Opportunity Tax Credit and the Lifetime Learning Tax Credit. The American Opportunity Tax Credit is currently available to those making $80,000 annually or less ($160,000 annually if filing jointly), and is phased out for those with income over $80,000. It is a modification of the Hope tax credit (which returns in 2013 after the American Opportunity Tax Credit expires), designed to expand the reach of the program to more taxpayers and to cover more expenses. The Lifetime Learning Tax Credit has a lower maximum income for eligibility; phase-out credits apply to taxpayers with annual incomes between $50,000 and $60,000 ($100,000 - $120,000 if filing jointly). The income thresholds used to determine eligibility for both credits are indexed to inflation, but would increase at a slower rate under the chained CPI than under the current CPI.
As the United States faces down an August 2 deadline to raise the debt ceiling and with lawmakers demanding policies to reduce the federal deficit, both sides will have to make bold and politically-contentious compromises. Implementation of the chained CPI may become a serious line on the agenda in the deficit and debt negotiations because of its potential for savings and its economic merits. Additionally, it may be more likely to gain political traction because its effects will not be immediately felt, providing political cover to legislators. Further down the road, though, the lowest-income students and middle-class families could shoulder much of the burden if federal education assistance is trimmed through use of the C-CPI. That makes it even more important for lawmakers to work to strengthen federal student aid programs and balance out the effects of a change to the government’s inflation gauge. U.S. rankings are slipping in global educational attainment and reducing affordability will likely only entrench that trend.