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Final Tax Bill Expands 529 College Savings Plans at a Cost to Public Schools

The new 529 expansion ostensibly allows the richest among us to avoid taxes on private primary and secondary education, a fact that comes at a major cost to state-funded public schools.

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Now that Congress and the Senate and Congress again have passed the Tax Cuts and Jobs Act, which will be better known as the Trump tax bill, all the last-minute provisions the new legislation contains are coming to light. One such addition, apparently authored by Ted Cruz during a midnight session and added after a tie-breaking vote by Vice President Mike Pence, allows people to take money from their 529 savings accounts to pay for tuition at private or religious K-12 schools and to defray homeschooling costs rather than just to pay for higher education. While this may help some afford private primary and secondary education by allowing them to sidestep state taxes, it will significantly affect the amount of money states can raise through income taxes to fund public schools.

A 529 plan is a state- or state-agency-sponsored college savings account that, prior to the passage of this new legislation, allowed parents to save for college. Money placed into the account (which can be a pre-paid tuition plan or savings plans) is not subject to federal taxes, which makes it the most viable option for many families because they can grow tax-free for a long duration. While eligible expenses vary from plan to plan, a 529 can be used for everything from tuition to books and computer costs at accredited two- and four-year colleges as well as vocational and foreign institutions.

Senator Cruz’s amendment now allows people to use up to $10,000 a year from 529 savings accounts to pay for private and religious K-12 education and homeschool. This is, depending on one’s perspective, a way to cheat or opt out of paying for the public school system. As Nat Malkus, deputy director of education policy at the American Enterprise Institute, writes in a New York Times op-ed, this new expansion of 529 accounts “opens these state incentives to an entirely new area of expenditures, allowing private school families to funnel their tuition payments through 529s as a way to avoid state taxes.”

Think about it: The point of a 529 college savings account was to grow money over time for future expenses. These accounts can now be used to do something very different, move money immediately toward private or religious education. Essentially, it makes a type of savings account into a conduit through which cash can pass without being taxed. This 529 plan gives those who currently make enough money to put $10,000 away at a time a means of doing so.

This was expressly not the point of 529 accounts when they received initial support from states. The point was to help make college more affordable, not significantly defund public institutions. And the money is real. Someone who places $10,000 in a 529 account to pay for their child’s private schooling avoids $600 in taxes on that money. There are roughly 465,000 private school students in New York. Basic math puts the total lost in tax dollars at $279,000,000.

“With this law, the Republican Congress would be nullifying the intent of state legislatures by creating tax breaks for private school parents that are paid for by reducing state tax bases that pay, in part, for public schools,” Malkus writes. “States did not choose to create tax-free private school tuitions, Congress did.”

If the fundamental shift in the point of 529s was the only thing in the tax bill threatening public school budgets, that would be one thing. It is not. The new tax legislation dictates that the state and local tax deductions many taxpayers used to use to reduce their overall tax burden will no longer perform that function. Decreased tax revenues are a likely result.

In short, the 529 expansion is just the latest addition to the Republican tax bill that allows wealthy Americans to pursue their interests without contributing to the institutions that many American parents rely on. By allowing the accounts to pay for private schooling, the tax plan not only lets wealthier parents duck taxes but also contributes to the crumbling of the poorest public schools.

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