The 529 Plan Expansion

Recall that the tax reform enacted last December expanded the usability of 529 Plans to include expenses for K-12 education.  Now some are worried that this will harm State tax collections.  It’s a bogus beef on a number of fronts.

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.

School choice—the horror.  How terrible it is that parents have a way to help their children escape failing public schools or simply to transfer them to schools of their choice rather than be faced with the often poor choice of public school or home school.

There’s this bit of disingenuosity, too:

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.”

This is especially rich coming from nearly bankrupt Illinois and that State’s Treasurer.  What’s actually blowing a hole in Illinois’ budget is its profligate spending, in Illinois’ case wastrel spending on public union pensions and teachers union pensions in Chicago.  Beyond that, using 529s to defray the costs of educating a child in Illinois isn’t tax avoidance, it’s parents seeing to the welfare of their children.

Then there’s this bit.

The Cruz provision [the amendment that inserted the 529 expansion into the tax reform bill] is projected to cost the federal government $500 million over nearly a decade, but it could cost the states much more, research suggests.

This is nonsense. Aside from the fact that it doesn’t cost the Federal government anything to not get what doesn’t belong to it, it’s also not costing the States anything for the same reason: the money isn’t the States’; the money belongs to the citizens of the States.

Furthermore, instead of worrying about deficits caused by not getting revenue that isn’t theirs, the States should worry about deficits caused by their profligate spending—and that’s not just Illinois.

This misunderstanding by American Enterprise Institute‘s Deputy Director of Education Policy, Nat Malkus, is surprising.

It’s not federalist at all.  I don’t think that the federal government should be cavalierly making problems for states by messing with state taxes.

Federalism isn’t touched by the 529 expansion.  That expansion doesn’t impact State taxes in the slightest; those remain the sole decision of the State governments.  All that’s “messed with” is tax collections, collections of OPM.

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