Education Savings Accounts Are Getting Another Look

By Erik W. Robelen — April 04, 2001 5 min read
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During his second term, President Clinton twice vetoed tax bills that would have allowed parents to set aside money in tax-free savings accounts to help pay the costs of public or private schooling.

Critics said the idea would lead down a “slippery slope” to publicly funded vouchers. Supporters said it would simply provide an incentive to help families invest in their children’s education.

But with a new president who backs the idea, many observers predict that legislation expanding education savings accounts is now on track to become law.

“I sure think this bill’s day has come,” said Joe McTighe, the executive director of the Council for American Private Education, a Germantown, Md.-based group that supports the legislation.

And it’s not just supporters who feel that way.

“The only thing that prevented this from [becoming] law was the president’s veto,” said David A. Griffith, a spokesman for the National Association of State Boards of Education, which opposes the measure. “Now they’ve got a president who looks very favorably on this ... and the votes are still there.”

In fact, the Senate Finance Committee took the first step last month when it approved a tax bill that contained the savings-account measure.

Current law allows families to place up to $500 annually in after- tax dollars into an education savings account, or ESA, to help with higher education costs, with no tax on the interest. The proposed legislation would raise the ceiling to $2,000, and allow families for the first time to contribute money for K-12 expenses, such as tuition at private or out-of- district public schools, after-school tutoring, books, or computers.

It also would allow third parties, such as relatives or employers, to put money into tax-free accounts for the same purpose.

“My goal is to increase options for parents, and I think this does that,” said Sen. Tim Hutchinson, R-Ark., who is co-sponsoring savings-account legislation this year with Sen. Robert G. Torricelli, D-N.J. "[It provides] more resources and more choices to them.”

Sen. Hutchinson predicted that such accounts would spark an infusion of money into education. He is especially excited, he said, about the provision that would allow third parties to contribute. “That’s a potential floodgate,” he said.

The Hutchinson-Torricelli proposal is called the Coverdell Education Savings Accounts Act, in honor of the late Sen. Paul Coverdell, R-Ga., who was the leading Republican champion of the idea until his death last summer.

Opponents, however, argue that the measure would wrongly divert federal tax revenues to private and religious schools.

“Rather than fund K-12 ESAs, we urge you to invest needed resources in our public schools,” a coalition of education and related groups, including the National PTA and the two national teachers’ unions, the American Federation of Teachers and the National Education Association, wrote in a March 13 letter to the Senate Finance Committee. They contend that the plan would disproportionately benefit wealthy families with extra money to invest, and that the overall financial benefit would be minimal even for those families.

But their concerns did not prevail, as language based on the bill from Sens. Hutchinson and Torricelli was approved by the Finance Committee the same day as part of a package of education-related tax measures.

The bill, as introduced in committee, already contained the $2,000 ceiling, and Sen. Torricelli sponsored an amendment allowing the accounts to also be used for K-12 education. His amendment was approved 12-8, with two other Democrats joining Mr. Torricelli in support; Sen. James M. Jeffords, R-Vt., joined other committee Democrats, including Democratic Leader Tom Daschle of South Dakota, in opposing it.

A ‘Sleeper Issue’

While education and tax policy have been the focus of considerable attention in Washington this year—with President Bush unveiling a $1.6 trillion tax cut over 10 years and a broad plan to overhaul the federal role in schools—ESAs have generated little notice so far.

“This is kind of a sleeper issue, relatively speaking,” said Michael D. Bowman, the vice president for government relations for the Family Research Council, a Washington advocacy group that supports expanded ESAs.

President Bush’s education plan, unveiled just days after he took office in January, emphasizes demanding more accountability from states and school districts in return for greater flexibility. He also has proposed providing educational vouchers to students in persistently failing public schools.(“Democrats, GOP Agree in Principle on Federal Role,” Jan. 31, 2001.)

His plan makes just a brief reference—one sentence in a 28-page document—to ESAS. That said, Mr. Bush proposes to make the tax benefit much more generous, raising the ceiling tenfold to $5,000.

Yet even some supporters say that such savings accounts alone would have a limited impact.

“It’s clear it’s not going to help all families,” Mr. Bowman said. “It’s something to be pleased about, but I’m not sure it’s something to be excited about.”

“This is just one of a menu of ways to help parents finance school choice,” said Chester E. Finn Jr., the president of the Thomas B. Fordham Foundation and a former assistant education secretary in the Reagan administration. “The big drawback is ... that [the] accounts are only useful to people with enough income to set aside the money.”

A recent analysis by the nonpartisan Congressional Research Service, which sought in part to examine the potential benefits, concluded that “education savings accounts would largely benefit families that have the wherewithal to save. Most would be middle income.”

The CRS report estimates that for a married couple earning up to $45,200, the family would generally save about $15 each year on $100 of account earnings—which assumes a 5 percent interest rate on $2,000. Those in the next-highest tax bracket would save $28 on the same amount of earnings. The report notes that if a family’s income was too low to have any tax liability, it would receive no benefit from the plan, though contributions for that family’s children could come from a third party.

The legislation has an income cap for participation. Individuals earning more than $95,000 and couples earning more than $190,000 could not set up accounts.

Given what they view as such limited benefits, opponents suggest that the legislation’s cost in lost tax revenue could be used much more effectively if spent on other education initiatives.

“The budget is a finite entity,” said Dan Maffei, a spokesman for Democrats on the House Ways and Means Committee. “Do you choose to have ESAs, as opposed to something else you could do with the same resources to help the public schools?”

While the prospects appear strong that education savings accounts will become law this year, even some of the most ardent supporters offer a cautionary note.

“I’m very optimistic,” Sen. Hutchinson said. “But there’s going to be an awful lot of competition for all the tax relief funds. There’s a long way to go.”

A version of this article appeared in the April 04, 2001 edition of Education Week as Education Savings Accounts Are Getting Another Look


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