As things are nowadays, one cannot help but get the impression that the middle class will soon be a thing of the past. And not because the segment has levelled up. It is more like the reverse, with the pandemic dragging down the economy, and the middle class along with it. The same goes for private schools catering particularly to the middle class, given new tax rules.
It is obvious that any increase in income tax on schools will eventually result in higher tuition. And this can make education less accessible to people. In the same way that more government funding for the poor now, including free education, can result in more debt, which can eventually become more taxes in the future. A budget deficit today is a debt tomorrow, and a new or higher tax the day after. No free lunches.
To me, rightly or wrongly, whether for-profit or otherwise, schools’ income should be taxed at a rate lower than other industries for the simple reason that we need more quality schools that can devote sufficient resources to deliver quality service. There are not enough quality public schools in the country to accommodate all those of school age. And, the government has barely enough resources to level up the entire public school system. We need good private schools to help out.
But schools cannot always be non-profit. They need to be sufficiently prosperous to continue pursuing their mandate. Unlike the government, they cannot survive on budget deficits. Having just enough to cover annual expenses does not leave much for investing in improving faculty and facilities. It takes money to provide quality service.
So, to increase their income tax rate just because they are making money appears to be contrary to the philosophy of encouraging and supporting educational institutions in pursuing their social mandate. Yes, the government needs money. However, the government burden to finance public education can also be eased by allowing private schools to thrive. Free public schooling for the have-nots, while those who have a little more can opt to go elsewhere.
It is in this line that I support the petition of for-profit private schools to be allowed to also avail themselves of tax relief in the next three years. Many private schools have been struggling, not only because of the pandemic since 2020 but also because of free tuition in public schools and state colleges and universities since 2018.
The Bureau of Internal Revenue (BIR), under Revenue Regulation 5-2021, reportedly bars for-profit private schools from applying the 1% income tax rate from July 2020 until July 2023, as a form of economic relief. This relief was supposedly reserved only for non-profit schools. Instead, for-profit schools should be taxed at 25%, according to the BIR, from the present 10%.
Bills have been filed both at the House of Representatives and the Senate to clarify the matter, and to allow private schools tax relief. However, it will take time before either of these bills actually get through. Congress is now in recess and will not reopen until late July. And, it remains unclear whether the bills on taxes on schools will be prioritized in the legislative calendar.
A tax on school income should go down and not up, to help make quality education even more accessible to a greater number of people. Given the stiff competition among private schools for enrollment, I am inclined to think that any tax savings can be passed on to students in the form of lower tuition. Even if only from now until July 2023, as a form of economic relief. Otherwise, to insist on raising the tax now will just make the middle-class dream of a better life even harder to achieve.
Three years ago, I took a position against completely removing tuition payments in state colleges and universities. I believed in the argument that this could do more harm than good, as it would make the entry to state colleges more competitive. And that this competitiveness would benefit more the rich and better-educated students from cities rather than poorer graduates of rural schools.
I also noted that without any tuition, states colleges and universities would have limited funding to improve faculty and facilities. Schools would also have to rely more on grants and donations to maintain service quality. But such funding has become even more difficult to come by now given the pandemic. More money is going to healthcare support now than education.
And then there would be increasing pressure on the National Government to subsidize public education through higher taxes and fees, at the expense of other public services. And the pressure would continue as the population grew. The cost of education will be borne by all taxpayers through new taxes or higher taxes, such as the higher tax on private schools themselves.
The burden of education, and financing education, will shift primarily to the government. But, is it in a position to shoulder this burden long-term? The sustainability of the “free” education program will depend on fiscal balance. And any adverse implications on state finances, such as those brought about by the ongoing pandemic, will have adverse consequences on state-sponsored education. A situation can arise where a number of state colleges will eventually have to limit enrollment if not shut down because the government lacks the money for them.
Many smaller private schools have reportedly closed in the last three years, after having lost students and teachers to the public school system. With the pandemic, and the economy in the doldrums, expect even more students to quit private schools and move to local public schools. Dwindling enrollment, a cap on tuition increase, and higher taxes can result in more private school closures.
In the future, one will have to go to either an expensive, highly taxed school that only the rich can afford, or go to a public school to get an education. Affordable private schools for the middle class will no longer exist. Only private schools for the wealthy are going to survive. While the over-extended public-school system will have to take in more than it can accommodate. Expect a tragic outcome from this.
Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippine Press Council