New Tax Bill Extends 529 Plans to Cover K-12 Education

By Bryce Wachtell (PO ’21)

Last December, Congress passed the Tax Cuts and Jobs Act—the first major piece of legislation under the Republican-controlled 115th congress.

The bill will have a major impact on the lives of all Americans in a variety of ways, but—in the most general of terms—it will work to substantially lower and somewhat simplify taxes for most citizens. Consequently, the Joint Committee on Taxation estimates it will add a few trillion dollars to the federal deficit over the next decade.

Notably, Section 11032 of the bill extends the use of tax-deductible savings accounts for education (known colloquially as “529s”) from covering just college costs to private primary and secondary school tuition as well. The move is major, especially considering current 529 policy—which has thus-far only covered higher education—will cost the federal government about $30 billion in revenue over the next decade.

This landmark policy change has gone largely unreported because it accompanied other wide sweeping measures in the tax bill. But don’t be fooled: the alteration of 529s is highly controversial, and will have many implications in the future.

First, the beneficiaries of 529 tax advantages are disproportionately highly affluent families—those with six digit incomes or above. In fact, about 47% of those who take advantage of 529 plans earn more than $150,000. This puts most 529 holders squarely in the upper-middle and upper class. This isn’t to say low-income families aren’t ever 529 holders; it’s just far less common, and for good reason—saving for private school requires disposable income and confidence in the chance that your child pursues a college degree (both of which are in short supply among low-income families.)

This means the extension of 529s for K-12 education under the new tax bill substantially grows the benefits for these more affluent families. In other words, though 529s are available to all, in practice they advantage very few, which brings into question their overall fairness. From that has come concerns that the existence of the tax break exacerbates the already-wide socio- economic education gap.

Some argue that instead of indirectly rewarding already well-off families for sending their kids to private school, the federal government should use the tax that would otherwise be collected to fund voucher and school-choice programs that make private education more accessible to marginalized groups. Most Republicans (and some noteworthy Democrats) disagree, citing a fear of dissuasion from private education as their justification. (Perhaps coincidentally, those against tend to have more affluent, private-school attending constituents.)

Notably, there is no evidence that 529 accounts do anything to encourage saving for private education; in other words, most of the wealthy families who save for private education would do so with or without a tax advantage on those savings.

This new trajectory of 529 tax policy is a sharp turn from a short time ago. In 2015, then- President Obama attempted to get rid of the tax benefit altogether. As the New York Times reported, “The idea was to end one tax break tilted toward the wealthy and plow that billion- dollar savings over 10 years into a far larger expansion of another tuition tax credit aimed more squarely at the middle class.” Obama’s initiative, first mentioned in his 2015 State of the Union Speech, was very quickly scrapped after intense backlash.

In short, many believe the current 529 tax break serves to exacerbate the education gap by subsidizing private education for the wealthy (who would enroll in private schools anyway) and reaffirming the inaccessibility of such institutions for middle and lower-class families for whom saving in general—let alone saving enough for a private education that may not be ultimately be realized—seems impossible.

For many years, education has been seen as the great American equalizer. The recent extension of 529 benefits for K-12 education might seem to further this principle, but in practice, it does indeed serve the most affluent echelons of American society. This, opponents insist, reaffirms instead of erodes the education gap. As Brookings Institute Senior Fellow David Wessel wrote, “If we’re going to use the tax code to encourage saving for college, then there’s a good case for targeting tax breaks at lower- and (truly) middle-class families.”

Ted Cruz (R-Texas), who introduced the amendment initially, proved ultimately convincing to his colleagues in congress, saying, “This reasonable expansion will enable hard working parents to better save for the educational future of their kids.”

Now, the greater impact of the 529 clause—working in tandem with the effects of the tax bill at large—will be closely scrutinized.

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