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Will the Tax Bill Benefit Private Schools at the Expense of Poor Students in Public Education?

By Andrew Ujifusa — December 20, 2017 5 min read
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Are private schools poised to benefit at the expense of low-income students, thanks to the GOP tax bill? A prominent supporter of school choice says yes.

The issue at hand is a provision in the bill that would allow 529 savings plans—which currently allow parents to set aside money for postsecondary education on a tax-advantaged basis—to be used for K-12 costs as well, including private school tuition. The provision would cap the amount of 529 savings that could be used for elementary and secondary schools at $10,000 annually. But that’s just the federal tax code. What about state taxes?

Nat Malkus, the deputy director of education policy at the American Enterprise Institute who supports parental choice in K-12, said that according to his research, 33 states allow money in state-sponsored 529 plans to be deducted from taxpayers’ state income taxes, or for taxpayers to receive a tax credit for those savings. Different states have different limits on these tax savings.

How much lost tax revenue would this new federal provision mean for states? In the grand scheme of states’ overall tax revenues, it’s a very small percentage, even if everyone who sends their children to private schools takes advantage of this new feature of 529 plans. But in the context of how much state education budgets tend to shift from year to year, the figures become somewhat more significant.

In all but four states, the estimated tax revenue lost from all 529 users deducting their private school tuition is less than 1 percent of state school aid, according to Malkus’ research. Let’s take Colorado as an example. It’s a relatively easy state to highlight, because money put in 529 plans is fully deductible from state income taxes in Colorado. There’s also no statewide voucher or tax-credit scholarship program there. Malkus found reported average annual private school tuition in Colorado at $10,600, and total private school tuition costs of $507,000,000.

Here’s how that breaks down for Colorado’s fiscal system, with Malkus’ assumption that each filer has 1.5 students in private school.

Malkus estimated that Colorado’s lost income tax revenue would reach a maximum of $23 million, or the equivalent of .6 percent of that aid. That last figure might be why it’s kind of hard to see that bottom bar in the chart.

Keep this in mind: As the title of the chart indicates, the calculations assume everyone takes advantage of the new 529 savings plans for private school costs. Many might, but some likely will not.

In bigger states like New York and Illinois, Malkus calculates that the maximum impact would see reductions of $198 million and $90 million in tax revenues, or .8 and 1.3 percent of state spending on schools, respectively.

A .6 percent cut in state K-12 aid—based on the chart above—probably wouldn’t send shockwaves through a school system. On the other hand, many state education advocates would be happy if they got such an increase for public schools in a single fiscal year, depending on which state you’re talking about.

Regardless, Malkus is unhappy with the 529 plan change, for these reasons:

  • If Washington tried to directly force states to cut their tax revenue—or their state school funding, for that matter—states would tell Uncle Sam to go pound sand. But that’s effectively what’s happening, Malkus said.
  • Malkus pointed out that state K-12 aid is designed at least in part to correct for inequities in local spending on public schools. That means ultimately, the tax bill will result in aid normally earmarked to help poor children being taken out of public schools and given instead to private schools, with private school parents saving a bunch on their taxes in the process.

(Malkus also wrote about these issues in the New York Times Tuesday evening.)

“This is a federal action that changes state tax bases that directly fund public education, and disproportionately go to poor schools,” Malkus said. “As it takes funds out of those tax bases, it gives them directly, in a dollar-to-dollar transfer, to families paying private school tuition.”

And Malkus pointed out that given how the tax bill caps state and local deductions on federal tax returns, it might be hard for many states to raise taxes to make up for any lost revenue.

Not everyone’s convinced this change would hurt poor students. On the contrary, Robert Enlow, the president and CEO of EdChoice, a school choice advocacy group, said it might allow more flexibility for private schools when it comes to scholarships and financial aid they offer.

“As the middle-income families begin to save over time, they could put money away and are able to cover the cost of private school tuition. Because they’re able to save, it’s possible that some scholarships for low-income families could be opened up at private schools,” Enlow said.

U.S. Secretary of Education Betsy DeVos, among others, has argued that the change to 529s is a win for school choice. In part, the move satisfies the desire among some conservatives to expand the playing field for school choice without instituting a new federally backed school choice program.

“It’s important to remember that this is allowing people to keep more of their own money,” said Lindsey Burke, the director of the Center for Education Policy at the Heritage Foundation, a conservative think tank that backs the impending shift for 529s. “The federal change will have zero impact on state tax policy.”

Malkus countered that private schools could just as easily raise their tuition and other prices, instead of distributing more aid to poor students, given the new subsidy they’re poised to receive. Federal lawmakers could have decided to create an entirely new savings vehicle for K-12 costs, he said, without any existing state tax advantages attached. But in their haste to get a bill done, lawmakers neglected to do so, Malkus added.

Here’s one big question for states going forward: Will they change their rules for 529 savings plans to make them less tax-advantaged?

On one side, public school advocates and others will lobby lawmakers to make sure the tax base doesn’t shrink. On the other side, private schools and choice advocates will argue they shouldn’t blunt the new power 529 plans have to make school choice more attractive, at least for relatively wealthy parents.

As with changes to state and local tax deductions in the tax bill, and as Burke noted above, the change to 529 plans doesn’t force state officials to change their tax systems or how much they spend on education. But it might put new pressure on them when it comes to decisions about school funding.

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Arianna Prothero, Assistant Editor contributed to this article.