The Tax Cuts and Jobs Act is working its way through both chambers in an attempt to make it onto President Trump’s desk before Christmas. One amendment added by Senator Ted Cruz (R-TX) has some advocates of the school choice movement very enthusiastic while critics say it’s a symbolic gesture unlikely to have much of an impact.
The amendment will expand the use of 529 plans that currently allow families to save money using after tax dollars without having to pay taxes on the accumulated amount (principal and interest) when the savings are used to pay for qualified higher education expenses. Specifically, 529s allow savers and investors to save for education purposes because income gained through these accounts are subject to less taxation. Specifically, 529’s help investors better avoid dividend and capital gains taxes which can be as high as 28 percent. The plans also help taxpayers avoid income taxes on interest earned through the accounts.
So far, 529s have only been legal for use in higher education expenses. Cruz’s amendment, however, would expand the accounts to include k-12 expenses such as private and religious schools, homeschooling materials, online education courses, as well as tutoring for students with developmental disabilities for amounts up to $10,000 per year.
In addition to expanding the use of the savings account, the amendment also includes language allowing families to open the 529 plans at the moment of the child’s conception as opposed to their birth, thus expanding the time during which funds can be accumulated.
Critic Nora Gordon, an economist and associate professor at Georgetown University is not supportive: “I think the only taxpayers who will be in a position to benefit from the 529 change are very rich people," she goes on to explain that to reap the benefits of this expansion families will be required to save a lot of money very early on.
While it may be true that more affluent families can afford to put more money into these accounts it doesn’t change the fact that this will potentially allow all families to gain more control over their own savings.
If a family sends its children to a private school k-12 school instead of a failing public school, that family should be free to make that decision on their own — and be taxed less to do so. Since attending a failing public school might prevent the child from aspiring to higher education at all, using the money for a better k-12 education might lead to scholarships and other forms of college funding in the long run anyway.
Conservative think tank American Enterprise Institute pointed out the benefit of the extra time the money would have to earn compounding interest if the 529 account was opened at the child’s conception instead of their birthdate. The example cited an additional $4,200 being available for college in an account that was funded at a rate of $200 per month from conception in comparison to the account started at the child’s birthdate. I can’t see much downside in allowing families to participate in such an activity if that’s what they wanted to do.
Nevertheless, the AEI article goes on to criticize the amendment stating that it’s an empty gesture because families will have to sacrifice one type of education for another, i.e. higher education for k-12 education. The argument is made that families would be better off paying for k-12 out of pocket and maintaining the 529 plans as a vehicle for college funding.
I would argue that this should be up to the individual and the new provision wouldn’t prevent anyone from taking that path should they feel it’s a better financial decision for their family. Education decisions, like healthcare decisions and decisions about what restaurant to eat at on Saturday night should be left to the individual in a free market. Preston Cooper, the articles author seems to think he knows best what each family should do. But, everyone’s situation is unique and shouldn’t be dictated by elitists in D.C. whether they are politicians or fellows at think tanks.
Senator Cruz’s amendment does not take away anyone’s ability to do anything they are currently able to do. it simply expands what government will allow them to do with their own money. Anytime the individual gains more autonomy and the state relinquishes control over their economic or personal decisions it is a win for individual freedom and liberty.
