To Upskill Our Economy, It’s Time to Rethink Tax Policy

In a rapidly changing economic landscape, educational assistance programs through tax policy changes can offer employers a competitive advantage.
tax policy

Employers today are grappling with two connected human capital challenges: identifying and cultivating a workforce with the skills to compete, and finding ways to retain those workers to limit the costly cycle of recruiting and retraining their replacements.

At the same time, a confluence of factors — including a tightening labor market and pernicious skills gaps — has led to a seemingly paradoxical narrative. Six-in-10 manufacturing jobs are currently going unfilled. Seven-in-10 employers report that a shortage of workers with the necessary skills limits their ability to compete. Yet droves of Americans struggle to find jobs that put them on a path toward economic mobility. And in some high-growth fields, diversity gaps risk exacerbating wage inequality.

The result is a renewed interest in educational assistance programs, as employers look for a competitive advantage in “upskilled” workers and seek better retention of talent across the enterprise. Educational benefits are also critical to attracting younger workers: half of millennials expect their employers to provide financial support for further education, according to a recent survey from EdAssist. But are our corporate — and public — policies keeping pace?

Education benefits are not a new concept. Companies began offering tuition assistance after seeing the success of the 1944 G.I. Bill, which allowed more than two million veterans to attend college. Today, employers spend an estimated $18 billion to $22 billion on tuition assistance, which means that up to 1 in 4 dollars that companies spend on training goes to tuition reimbursement or other educational assistance programs. During the Great Recession, the share of employers offering tuition reimbursement for undergraduate coursework fell from 71 percent to 56 percent. Today, however, that number is growing and companies are bullish on the value of their programs. About 75 percent report that their programs are successful. The ROI of education benefits is also becoming clearer: a recent analysis of Cigna’s program identified $1.29 in savings for every dollar spent on education reimbursement.

Despite conventional wisdom, Section 127 of the Internal Revenue Code, which enables the majority of tuition assistance programs, doesn’t limit educational assistance benefits to traditional colleges and universities. But extending tuition assistance benefits to non-accredited providers offers both opportunity and risk for employers. On one hand, accreditation reflects traditional views of education quality. But vestigial requirements also risk excluding high-quality providers that are growing in popularity as less expensive, accelerated pathways to a job or promotion.

And the number of nontraditional providers is only growing. Enabled by advances in online and competency-based learning, new approaches are beginning to reduce the time and cost to acquire new skills. Digital credentials increasingly translate nontraditional pathways into labor-market currency — and enable employers to evaluate the potential of both current and prospective employees. Companies like Chipotle have launched educational benefits initiatives that pair accelerated learning and on-the-job training with a cadre of innovative online colleges to develop and retain front-line talent. Most American businesses have, however, been slower to adapt policies to reflect the rise of education models that make the promise of learning and earning more viable. Despite legal flexibility, 1 in 5 employers limit courses taken through tuition assistance programs to traditional, regionally accredited colleges.

Federal policy has, likewise, been slow to evolve. Section 127 of the Internal Revenue Code was made permanent four years ago. But the cap on tax-free benefits (now pegged at $5,250) has not changed since 1986. Indexed to inflation, this benefit would be worth over $11,500 today. This cap has also not kept up with the rising cost of college: In 1986, $5,250 would cover total tuition, room and board at one year at most four-year institutions; today, the benefit would cover only about 50 percent of the average yearly in-state tuition and fees at a public four-year institution.

An improving economy means that more employees are willing to shift jobs — and puts pressure on employers to retain them. More than 33 million people quit their job in 2015 alone — about 1 in 4 American workers. The promise of educational opportunity may help to not only retain them, but also unlock new and accelerated career pathways, particularly those enabled — or necessitated — by rapidly changing technologies. Translating that promise into reality will, however, require rethinking old approaches and crafting programs that are as diverse as the workforce employers hope to develop — and as dynamic as the markets they will be asked to navigate.

Erica Burns is senior vice president and co-director of research for Whiteboard Advisors. Liz Simon is the general counsel and vice president of external affairs for General Assembly. They are co-authors of the new report “Investing In Talent: A Policy Primer and Perspectives on Employer-Provided Educational Assistance.” To comment, email editor@talenteconomy.io.