What the Tax Reform Legislation Means for Research

The GOP’s move to overhaul the tax system is moving quickly, with the House and Senate working in parallel on tax reform legislation. Before diving into the respective bills’ potential implications for scientific research, let’s first look at where we stand in the legislative process.

On Thursday, November 16, House Republicans passed their tax bill (H.R. 1) along party lines, 227-205, completing the first step in the budget reconciliation process. The bill, which passed with no Democratic support and 13 Republicans in opposition, will now go to the Senate for its consideration. The budget reconciliation instructions are significant because they will allow the Senate to pass the bill without Democratic support, if needed. (If you want to dive deeper, see this article from The New York Times.)

In the other chamber, the Senate is concurrently working on its own bill, one that greatly differs from that of the House. The Senate’s bill, after four days in markup, passed the Senate Finance Committee on Thursday via a party-line vote of 14-12. The full Senate is expected to take up the bill after Thanksgiving. (Read more from POLITICO.)

While the bills vary in terms of their provisions, which will need to be resolved during conference, both have consequences for research:

At the highest level, the first thing to note about both the House and Senate bills is that they are each expected to add roughly $1.5 trillion to the federal debt over the next 10 years. While the provisions within the bills are likely to shift as negotiations continue among and between the two chambers, this figure is unlikely to change. So, what does this have to do with research specifically? Recent history has shown that when there is an increase in the deficit, the subsequent move from Congress is to take steps to cut discretionary spending. Non-defense discretionary spending, which includes health care and health research, would likely take the bulk of that cut. 

U.S. House Tax Bill (H.R. 1)

According to a report from the Congressional Budget Office, the House’s tax package would likely trigger across-the-board cuts, or sequester, due to the statutory pay-as-you-go (“SPAYGO”) requirements set forth in the Budget Control Act. These cuts come into play if the tax cuts add to the deficit without lawmakers first waiving the pay-go law. In addition to the cuts that could be made to important programs, this could eliminate the Prevention and Public Health Fund, which is currently investing $900 million in core public health activities (and accounts for roughly 12 percent of the budget for the Centers for Disease Control and Prevention).

Moving into the specifics of the bill, from a clinical research perspective, the first aspect of H.R. 1 that would affect research is its elimination of the tax credit – known as the “orphan drug credit” – currently provided to drug manufacturers for 50 percent of the costs of clinical testing expenses for treatments for rare diseases and conditions. The bill repeals that credit for “certain drugs for rare diseases or conditions” starting in 2018. Read more.

Another area that researchers and organizations will need to closely monitor is the provision on the unrelated business income tax (UBIT), the tax placed on tax-exempt organizations for unrelated business income (income not substantially related to its ‘exempt’ purpose). As written, section 5002 of the House’s bill applies UBIT to income from fundamental, or basic, research that is not made freely available to the public.

Finally, a significant implication of the House bill is how it could affect both the current and future generations of researchers, first by removing the benefit that allows low- and middle- income students to deduct up to $2,500 a year in student loan interest and second, by treating graduate tuition waivers as taxable income. These waivers often afford students the opportunity to pursue advanced degrees in exchange for teaching or doing research. The students who receive this type of reduction, which the American Council on Education (ACE) cites as being nearly 145,000 graduate students, could be severely impacted by such a change.

Some fear these tuition hikes could result in a nationwide “brain drain.” A letter from ACE to House Ways and Means Committee leadership noted that the qualified tuition reduction provision is critical “to the research endeavor at major universities, particularly in the crucial science, technology, engineering and math (STEM) fields. According to the Department of Education, 57 percent of tuition reductions went to graduate students in STEM programs.”

Beyond its direct effect on students, the House’s legislation would impose a 1.4 percent excise tax on investment income at private schools with endowments worth at least $250,000 per student. This provision was modified from the original version of the bill, which called for the tax on private colleges with 500 or more students and an endowment of at least $100,000 per full-time student. The number of targeted colleges has now been reduced by almost half, which according to The Washington Post, leaves “roughly 60 to 70 schools potentially subject to the tax, from Ivy League universities such as Princeton and Harvard to smaller schools such as Oberlin College and College of the Ozarks.” The concern here, as outlined by ACE President Ted Mitchell in the Washington Post’s piece, is that the proposal would deplete money that institutions count on for student aid, faculty salaries and scientific research.

U.S. Senate Tax Bill

The Senate’s tax reform legislation varies greatly from the House’s bill, though there are areas of alignment.

In terms of parallels, GOP Senators are in favor of the House’s proposal to tax investment income at private schools – and they adhere to the same figures: a 1.4 percent excise tax on investment income at private schools worth at least $250,000 per student.

The two chambers diverge on other higher education provisions. Unlike the House, the Senate Finance Committee wants to keep the student loan interest deduction in place, and its legislation does not include changes to the status of tuition assistance and waivers.

With respect to UBIT, while the Senate bill does not mention exemptions related to freely available research, the language does broaden UBIT in general, and as noted by Inside Higher Education, there is concern about what the extension may mean for colleges and universities:

“[The Senate plan] would apply the tax to royalties generated from a university’s name or logo, income that is currently exempt. And the Senate bill would require colleges with more than one business activity unrelated to their core academic mission to count them separately for tax purposes, a change with serious repercussions for those institutions, higher ed groups say. Those activities could include rental of lab facilities to users not connected to the university…”

Additionally, while the original Senate bill called for limiting what level of expenses would qualify for the orphan drug tax credit (see page 106), during markup, the Senate panel adopted an amendment from Chairman Orrin Hatch, whose changes to the underlying package included setting the orphan drug credit rate at 27.5 percent.

Another key difference in the Senate bill – and perhaps the most notable – is the bill’s provision to eliminate the Affordable Care Act’s (ACA’s) individual mandate requiring that most people have health insurance. While House Republicans did not include the individual mandate in their bill, many are eager to add it, though it does increase political risk to a potential overhaul.

AADR – as part of our mission to support the research enterprise and, within it, oral health research – has created an action alert for its members and others to reach out to their elected officials to express concern about the implications these provisions may have on our field and on research more broadly. Access the action alert to write to your elected officials today. To view AADR’s statement on tax reform, click here.

If you have questions about how to take further action, please contact AADR Assistant Director of Government Affairs Lindsey Horan.

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