Tuition Fees and Tax Credits: Are the Quebec Students Right?

(This piece was co-authored with Marc-André Gagnon)

The last round of negotiations between striking Québecois students and their provincial government broke off without any agreement at the end of May.

During the negotiations, the students proposed an interesting trade — they would agree to the elimination of Québec’s 20 percent provincial tuition tax credit in return for a two-year freeze on tuition. The elimination of the tax credit would raise the same revenue as the increase in tuition so the province would lose no money by agreeing.  While the students agreed to an increase in their tuition fees in the five years following the two-year freeze, they were counting on a victory by the Parti Quebecois in the next election and a continuation of the freeze after that.

The Québec Liberal Government refused the trade because, even if completely funded by the elimination of the tax credit, it was deemed politically indefensible. It is simply too complicated to explain to the general public how the tax-credits-for-tuition-fees swap would work and why the student proposal therefore made sense. Rather than agreeing to a trade that many mainstream economists would consider worthwhile, the Government balked at backing down to student groups that it views as unreasonably wanting better treatment when they are already treated very well.

Even acknowledging that the “printemps érable” has moved well beyond the nuts and bolts of student aid policy, perhaps the question of the usefulness of the tax credits should now be raised. The issue is simple: would the vast amounts now spent on education tax credits, both in Québec and in the rest of Canada, be better spent on other forms of student aid, perhaps including lower tuition fees?  The idea of trading education tax credits for other forms of student aid is far from new. For example, in the 2011 election, Michael Ignatieff proposed that grants given under his “Learning Passport” be funded in part by eliminating two of the federal education tax credits.

What are these tax credits anyway?

If a government wants to provide money to students, it can do so either by giving them money upfront in the form of grants or subsidized loans or by allowing them to pay lower taxes as a result of their student status.   In Canada, the Canada Student Loan Program (CSLP) provided about $600 million in upfront grants and about $2.2 billion in upfront subsidized student loans in 2009-2010.

In addition, each full-time student is eligible for several different federal tax credits. Here’s how they work. Each student accumulates an “amount” specified by the legislation underlying each tax credit.  The federal tax credit itself then consists of 15 percent of the accumulated total, though Quebecers effectively receive a somewhat smaller percentage because the federal credits interact with the Québec tax abatement that resulted from a long-ago transfer of tax points to Quebec from the federal government . There are three such “amounts” for current students: the education amount, tuition and fees and textbooks.  As an example, a full-time student at an Ontario university is able to use the credits to reduce their taxes by roughly $1,600. Alternatively, they can transfer the credit to their parents or grandparents or they can carry it forward for use in a future tax year. Each province makes additional tax credits available.   Quebec’s tuition tax credit allows full-time students, paying $2,168 in tuition, to reduce their taxes by $434.

Of course, because of the existence of these tax credits, the government collects less tax revenue than it would if the credits did not exist.

According to federal Department of Finance projections for 2011, the above three federal tax credits cost the government about $1.6 billion in lost revenue in 2011. The Ministere des Finances in Québec projects losing $137 million in tax revenue because of the Quebec tuition tax credit.

This brings us back to the “trade” suggested by the Québec students. Essentially they were suggesting giving up the 20 percent Quebec tax credit and using the resultant increase in tax revenues to take the place of the money that would be raised by the first two years of the proposed tuition increase. This is similar to the idea, regularly proposed by the Canadian Federation of Students, to eliminate the federal tax credit programs and use the resulting increases in tax revenues to convert $1.6 billion in CSLP loans into student grants.

While the proposed Québec trade was cost neutral, what about the overall desirability of the trade? Most analysts agree that the tax credits are poorly understood, incompletely utilized and likely to have almost no impact on student decisions about whether or not to enrol in university or college. If so, the underlying rationale for their existence is questionable. To put it bluntly, does anyone seriously believe that teenagers and their families choose post-secondary education over the alternative because of the incremental value of these tax credits?  If their purpose is to encourage access and persistence in post-secondary education, then they should be traded for policies that do a better job. Whatever you think about the turmoil in Québec, the students are right on this issue.

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About Saul Schwartz

Professor School of Public Policy and Administration Carleton University Ottawa, ON K1S 5B6 Canada
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