With midterm elections quickly approaching, House Republicans have bet on tax cuts as their ticket to remaining in power in November. Now, they’re doubling down on that bet.
On Tuesday, GOP members of the House Ways and Means Committee released a two-page policy outline for a second round of tax cuts to build on and draw attention to what they believe to be the still unnoticed virtues of their landmark tax act passed in December, which has lost popularity with voters in the past few months.
The "tax reform 2.0" would make permanent various (mostly regressive) individual tax breaks included in the Tax Cuts and Jobs Act that were set to expire in 2025 as well as offer a variety of retirement and family saving incentives. The value of one such incentive, the 529 College Savings Accounts, depends entirely on the net worth of the student’s parents. Unsurprisingly, the already-affluent are expected to be the biggest winners from efforts to expand 529 plans.
Here’s how 529 plans work: A family wealthy enough to put money aside places it in a plan for one of their children. That investment grows tax-free, and when it’s time to withdraw funds from their 529, they can do so without paying capital gains. 529 contributions may also receive tax-privileged treatment on the state level on top of federal benefits, so long as the family happens to live in one of 35 states with deductions or credits in place.
Formerly, 529 plans could only be used for higher education-related spending. But the Republicans’ December tax law changed that, adding tuition for students attending private K-12 schools to the list of approved 529 expenses, thereby promoting one of the GOP’s favorite causes: private school choice. Families may withdraw up to $10,000 per year per child from 529 accounts.
Now, in “tax reform 2.0,” House Republicans aim to expand 529 accounts even further to allow families to use them to cover trade apprenticeship fees, pay off student debt, and cover the cost of yet another Republican favorite: home-schooling.
Who can afford to have a 529 plan? A Federal Reserve study found that only 2.5 percent of all families had 529 college savings accounts in 2013, with the distribution of plans heavily skewed toward the wealthy. Because 529 tax-privileged plans lead to a reduction in taxable income, it’s families in higher tax brackets who receive more benefits. Only 30 percent of families with a 529 plan in 2010 had annual incomes of less than $100,000, according to a College Board analysis, while nearly half of all families with a plan made more than $150,000 a year.
Moreover, 529 plans are non-refundable, meaning that low-income families with little tax liability, should they somehow be able to open a 529 account, would miss out entirely on state income tax benefits.
“The evidence is strong that 529 college plans did not really increase educational outcomes or even college attendance,” says Richard Reeves of the Brookings Institution, who co-authored an analysis of the potential impacts of the expansion of 529 plans under the Republican Tax Act. “529s effectively amount to a tax subsidy to mostly affluent families to do probably what they were going to do anyway.”
One of the new additions to the list of approved education expenses—paying off student debt—is a particularly clear example of 529s serving as a vehicle for the affluent to dodge taxes. After all, investing money to accrue interest as a way to pay off school loans already accruing debt seems a counterintuitive strategy.
Until additional details are released, the only way to make sense of the provision is to consider state-level incentives for 529 contributions, according to Nat Malkus of the American Enterprise Institute, who co-authored the study on 529s with Reeves.
“Depositing money in your 529 account gets you a state income tax advantage on that money, which you can then put towards paying off student debt,” says Malkus. “It’s just using student debt payments as an end-run around state income taxes.”
Such tax giveaways can take a toll on state treasuries. Malkus estimates in his study on the original K-12 expansion that the total reduction to state revenues could come to more than $900 million per year, with New York, Indiana, and Pennsylvania among the states taking the biggest hit. Adding in student debt, apprenticeships, and home-schooling, as the Republicans now propose, isn’t likely to open similar floodgates of revenue loss, according to Malkus, but it certainly does nothing to stop the flow.
Many states endeavoring to balance their budgets will now have to decide whether to implement restrictions on 529 plan spending, reduce benefits, or scrap them all together.
The kicker here is that 529 plans are unlikely to provide significant increases in the number of private school students—or trade apprentices, for that matter. In their study, Reeves and Malkus found that current private school families, not new adopters, are the ones most likely to take advantage of the 529 expansion. Similarly, few families with children pursuing apprenticeships are likely to have enough money to invest in a 529 plan to begin with.
In effect, the recent expansion and proposed further expansion of 529 plans is at best a symbolic nod toward apprenticeships, home-schooling, and school choice. At worst, it’s yet another avenue for wealthy taxpayers to fleece the government.
Tax Cuts for the rich. Deregulation for the powerful. Wage suppression for everyone else. These are the tenets of trickle-down economics, the conservatives’ age-old strategy for advantaging the interests of the rich and powerful over those of the middle class and poor. The articles in Trickle-Downers are devoted, first, to exposing and refuting these lies, but equally, to reminding Americans that these claims aren’t made because they are true. Rather, they are made because they are the most effective way elites have found to bully, confuse and intimidate middle- and working-class voters. Trickle-down claims are not real economics. They are negotiating strategies. Here at the Prospect, we hope to help you win that negotiation.