The Tax Reform and the Future of Arts Education

Connexeo - 02/21/2018

Funding for arts education has long been a contentious topic. As many school districts battle reduced percentages of state funding and tax-assessment limitations, they are forced to cut many extracurricular and non-core programs. Even though the students involved work just as hard, it seems that the football team will always take precedence over the choir. 

The tax-reform legislation passed by Congress in December could further hinder arts education in public schools. On the other hand, it also could provide positive momentum to private schools specializing in the arts.

Let’s look at the potential positives first. The Tax Cuts and Jobs Act broadens the parameters for 529 education plan savings. Previously, the contributions to these tax-free interest accounts could be used only for college expenses. Beginning this year, however, the funds can be used for elementary and secondary school expenses. 

That could increase the attractiveness and affordability of arts-based private schools, especially high schools, given the time needed to accumulate tax-free compounding. A family with an existing 529 plan earmarked for college costs could now use it for a performing or visual arts secondary school, giving their children a leg up in their arts education. It could also motivate families to begin a 529 program earlier than they would.

But, as Fredrick M. Hess wrote for the American Enterprise Institute, “Using these funds for elementary school leaves little time for compounding to work its magic.” Unless a parent is absolutely sure that their 3-year-old ballerina will want to concentrate on her art for the next 15 years, the better bet is to wait for a child to show interest during elementary and middle school years and start saving for that “Fame” type of high school.

The other positive news for arts education is actually the status quo. Teachers will continue to be able to deduct $500 from their earnings for educational material they buy with their own money. The original House of Representatives version of the bill eliminated that deduction. So educators can still supply paint, sheet music, theater props and save on taxes. 

Public school arts education programs likely won’t be so lucky.  The new tax bill hurts public-school financing in two ways – one well-known, the other not.

The relatively obscure hit comes in the elimination of the exemption of “advanced refunding bonds.” School districts have regularly used these bonds to refinance their debt to lower interest rates and delay some debt payments. The extinguishment of this exemption caused some school districts (and other public agencies) to refinance their bond debts quickly, before 2017 ended, to take advantage of the exemption while it still existed.

The effect of this change likely means that the bonding authorities will have less room to add new debt. New school bond packages – which often include arts-hall construction and arts equipment purchases – are sometimes predicated on lowering payments on existing debt. This could certainly affect future arts initiatives.

More indirect destructive effect could also occur because of the reduction in state and local tax (SALT) deductions to $10,000. The property-tax rate for schools, if they are independent of any municipality or county, often is the highest among taxing authorities, and the cap on the deduction could cause taxpayers to resist tax-rate hikes, whether for maintenance and operations or bond indebtedness (the interest and sinking rate). 

"This bill is going to make it more painful for residents to increase local property taxes to pay for public schools," John Friedman, an associate professor of economics at Brown University, told NPR’s “Morning Edition.”    

While only the most property-rich taxpayers in states with no state or local income tax, such as Texas and Florida, may end up relatively unaffected by the SALT deduction limits, residents of high-taxation states, such as New York and California, could run up against the limit fairly easily. 

School districts wishing to continue offering existing arts programs may be faced with a conundrum: Do they risk cutting programs for financial reasons, or do they continue to offer a full-scope of programs at the risk of higher financial contributions?  

Arts education has undergone difficult times recently. For public schools, the new tax bill doesn’t offer any relief.    

 

 

 

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