By Michelle Hackman
State officials across the country are increasingly worried that
a provision in the new tax law extending college savings accounts
to K-12 expenses will blow an unexpected hole in their budgets.
At least 30 states provide their own tax breaks to people who
put money into 529 savings plans, which allow families to save
money for education tax-free and whose scope is defined by the
federal government.
In December, as part of a broad tax overhaul, Congress expanded
the accounts to cover up to $10,000 a year in expenses for
kindergarten through 12th grade.
State budget officials are now concerned that a large number of
parents will use 529 accounts to pay private-school tuition, giving
them a new write-off for their state taxes.
That could result in potentially millions of dollars in lost tax
revenue at a time when most states are struggling to close budget
deficits.
"I'm worried that families could use these accounts to avoid
paying state taxes," said Illinois state treasurer Mike Frerichs, a
Democrat. "This is only going to put a deeper hole in the
budget."
The dispute is in part between state and federal officials, but
it also often breaks down along party lines. Many Republicans favor
tax breaks for families who send children to private or religious
schools, which they see as a way to help parents, while Democrats
worry that such breaks subsidize wealthy people and exclusive
schools.
The expansion of 529 savings accounts, added to the tax bill at
the last moment through an amendment from Sen. Ted Cruz (R.,
Texas), was a victory for advocates of private-school choice, who
have struggled to push through other priorities such as a national
voucher program.
Fifty senators voted against Mr. Cruz's amendment, including two
Republicans, forcing Vice President Mike Pence to break the tie in
favor of the measure. Opponents of the policy view the expansion as
a backdoor way of creating a voucher system, as it directs public
resources toward private, often religious schools.
The Cruz provision is projected to cost the federal government
$500 million over nearly a decade, but it could cost the states
much more, research suggests. Across the country, about 6.3 million
children attended private elementary or secondary schools in 2017,
compared with 52 million children enrolled in public schools.
Some critics say the GOP-led Congress is essentially imposing a
social policy on the states--a criticism Republicans have
frequently directed at Democrats.
"It's not federalist at all," said Nat Malkus, deputy director
of education policy at the American Enterprise Institute, a
center-right think tank. "I don't think that the federal government
should be cavalierly making problems for states by messing with
state taxes."
Some proponents of expanding tax benefits to private schools,
including Education Secretary Betsy DeVos, also say the Cruz
approach isn't the most efficient, since it will primarily benefit
wealthier families who can already afford to send their children to
private schools.
"It's a step in the right direction," Mrs. DeVos told reporters
in December. "But it doesn't address the needs of parents who are
from lower incomes, and does not empower them in significant
ways."
Some red states have embraced the change. In Missouri, state
officials have launched a social-media campaign to tell residents
they can use 529 accounts, and the state's $8,000-a-person tax
deduction, for primary and secondary school expenses.
"Anything we can do to make education more affordable and let
people save more of their own money is a good thing in my book,"
said Missouri's state treasurer, Eric Schmitt, a Republican.
Other states are expressing concern, some more publicly than
others. In Indiana, where the state offers a $1,000 tax credit to
anyone putting money in a 529 account, the state could lose $117
million a year, according to an estimate from Mr. Malkus.
Pennsylvania could stand to lose $92 million.
New York is one of eight to specify that its education tax
breaks go solely for college expenses. But pressure is growing on
state officials from some parents and lawmakers to open up the
state's $10,000 tax deduction to private K-12 expenses.
Some state officials fear that they take that step, parents of
the 465,000 New York children enrolled in private schools could
simply deposit money intended for tuition into a 529 account and
withdraw the money days later, rather than letting the money accrue
over time to use for college expenses. The change could cost New
York $120 million a year, according to Mr. Malkus's estimate.
The New York State Division of the Budget didn't respond to a
request for comment.
Some states contend Mr. Malkus's estimates of their potential
tax losses are high, but he stands by his work.
In several other states that don't automatically extend tax
benefits in accordance with the new federal law, state lawmakers
have proposed legislation to do so. So far this year, bills have
been proposed in Wisconsin, Alabama, Illinois and Iowa, among
others.
Iowa's state treasurer, Mike Fitzgerald, a Democrat, said he has
concerns about his state's bill, but added that publicity around
the federal changes is creating political pressure. "The press is
telling everyone, 'Look at this sweetheart deal you've got now,' "
he said.
(END) Dow Jones Newswires
February 17, 2018 11:01 ET (16:01 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.