School Choice Tax Break Is Yet Another Gift to the Wealthy
According to Edweek, Congress's proposed tax plan would allow families to pull up to $10,000 a year out of their 529 college savings account and spend it on K-12 private school tuition (as well as other educational expenses). The proposal appears to be more an act of desperation than rationality in pursuing public support for private choice in K-12 education. The Trump administration's earlier proposal to take federal funding for public schools and drive it toward vouchers and charters never got any serious traction. If anything, DeVos's support for privatizing education made that proposal less popular with the public.
This new tax provision looks like a pointless attempt to save face or give a very small tax break to a subset of wealthy families. By design, College savings accounts/529s are a mechanism for saving money in advance to pay for something else later that might otherwise be affordable. The assumption is that families might not be able to afford college later, particularly since college costs are incurred during a balloon period of just a few years. Not even a regular savings plan is enough for most families. The 529 tries to close some of the college cost gap by allowing families to save over the course of their kids' entire pre-college lifetimes, invest that money, grow that money, and be exempt from taxes on that growth. Most states sweeten that pot a little bit by giving families a small deduction for their initial contributions, which typically caps out at a tax savings of a few hundred dollars each year.
In comparison to the shielded growth, this state tax benefit is small. Consider a family that contributed $10,000 a year for 18 years to a 529. Depending on the state, the family would save around $5000 to $10,000 in total taxes total over the collective period. No small sum, but spread across that many years, no life changer either--at least for families who can afford to contribute $10,000 a year.
That $180,000 investment, however, with compound growth, should rise to a value of somewhere between $320,000 to $500,000 (assuming a growth rate of 5 to 9 percent). That growth is tax-exempt.
So if 529s are such a good deal for college, why do they signal desperation in the context of K-12. First, for many people, using 529s for K-12 would be equivalent to robbing Peter to pay Paul. If a family is already contributing as much as it can to a 529, this new measure is not going to expand their financial capacity. Instead, it allows them to spend college money on K-12. That flexibility may be meaningful for some families, but on the averages makes very little sense, which leads to point two.
Second, if 529s are funding K-12 education, families are necessarily getting less financial benefit out of the 529s. Families will be putting money in one year (or one month) just to take it out the very next. The amount of growth they see will be small at best and there will be no compounded growth (the real benefit of the 529s). The only families that this new plan would likely benefit would be those who can contribute $20,000 a year to a 529 just as easily as they can contribute $10,000. And unless states raise their deduction caps, this additional investment in 529s would not produce a change in state tax liability.
These high wealth families do not sound like those the Administration has been talking so much about when it discusses choice--those who are trapped in failing public schools and need help exploring other options. So, at worst, this is just another measure to hand out tax breaks to those who need to the least, but done so under the guise of some noble object. At best, this is a face saving attempt to get any type of victory the Administration can. This just so happens to be one of the few school choice policies that can plausibly get through Congress.
This post appeared originally on the Education Law Prof Blog.