CO Lawmakers Consider 529 Flexibility (Again)

 

Colorado is once again in the middle of a debate over 529 college-savings account flexibility. This time around, the biggest topic of debate is HB19-1123. That bill, sponsored by Representative Colin Larson and Senator Jim Smallwood, is set for a hearing before the House Education Committee at 1:30 p.m. on Thursday, February 14.

As the sponsors wrote in a recent column for the Denver Post, HB19-1123 would make a simple change to Colorado’s outdated law that would allow parents to utilize their 529 funds for K-12 tuition at public or private schools without fear of heavy tax penalties. If lawmakers fail to act on the issue, parents could begin seeing those penalties as early as this year.

Issue Recap

For those just tuning in, here’s some quick background on the issue. In 2017, Congress expanded the acceptable uses of 529 savings to include K-12 tuition expenses at public and private schools. That new flexibility acknowledged the fact that many families need to access their savings to meet educational needs long before their students go to college. For instance, a student might:

  • Need a more rigorous academic environment
  • Want access to a specialized program or field of study
  • Need a school closer to their parents’ home or work
  • Need a safer environment free from bullying or other issues

The main advantage of 529 accounts has always been that they allow money to grow in a tax-advantaged environment. Colorado has taken those advantages a step further by providing state tax deductions and credits for 529 contributions made individuals and corporations, respectively. Those extra state tax advantages are designed to incentivize increased saving for students’ educational futures.

Here’s where it gets complicated. While federal law now recognizes K-12 tuition as an acceptable withdrawal from 529 accounts, Colorado law has not been brought up to date. As a result, state law considers withdrawals for K-12 tuition to be “unqualified”—a designation that can carry all sorts of consequences for who ignore it.

In practice, this misalignment between state and federal law means that parents who try to utilize 529 funds in accordance with federal law could still be subject to hefty state tax penalties. These penalties will most often take the form of “recaptures,” in which the state forces parents to repay any credits or deductions taken for relevant contributions to the account.

Why Should You Care?

The recaptures mentioned above could amount to hundreds or even thousands of dollars. If a parent were to pull the maximum $10,000 for K-12 tuition, that parent could trigger a state deduction recapture amounting to $463. If a parent’s employer has also taken tax credits for contributions to the account, which can amount to up to $500 per year, the recapture of those credits could result in even higher tax bills.

Considering that the Federal Reserve has found that nearly half of American households would be unable to handle an unexpected expense of $400, these recaptures could be crippling for many families. Is that really how we want to treat parents who save for their children’s futures?

What Can I Do?

You may remember that last year’s legislative debate ended in a partisan stalemate. This legislative session, Colorado lawmakers have a chance to get it right and ensure that parents aren’t treated like tax criminals for accessing their own educational savings.

If you’d like to make your voice heard on this important issue, click on the button below to contact members of the Colorado House Education Committee. If you would like to testify in person or in writing at the February 14 hearing, please email Katrina Yoshida at kyoshida@acescholarships.org no later than Tuesday, February 12.

 

 

2018 Election Day Impacts (Part 2)

 

Last week, we covered the likely federal impacts of the 2018 elections. As promised, we’ll now turn our attention to state-level impacts in a few key ACE states.

ACE Scholarships currently serves about 7,000 students across eight states. We don’t expect the elections to have a major impact on parental choice policy in some states, but others have seen some pretty significant shifts that are worth watching. Below you will find a brief overview of the highlights. Wherever you live, it’s always a good time for your elected officials to hear from you. If you’re a parent, student, or educator, take a few minutes to tell your legislators what school choice means to you using the button below.

Colorado

Colorado has turned from purple to dark blue. The Colorado State Senate changed partisan hands and will now be controlled by Democrats, and Democrats held a strong majority in the already-blue State House of Representatives. With Democrat Jared Polis as governor and every statewide office won by Democrats, conversations about expanded parental choice may be more difficult. That said, the issue of educational opportunity does not and should not fall neatly along partisan battle lines. Support for parental choice policy, and especially for scholarship tax credit programs like those ACE facilitates in two states, remains strong across both political parties nationwide.

Colorado has a very strong public charter sector as well as extensive public school open enrollment, but tens of thousands of students still find themselves unable to access the schools they need. Choice supporters will need to work hard to educate elected officials about why access to private options matters to their communities. A great place to start would be getting familiar with the amazing ACE partner schools in each state legislative district.

Kansas

The defeat of Republican gubernatorial candidate Kris Kobach by Democrat Laura Kelly could complicate conversations about expansions to the Kansas scholarship tax credit program, which ACE helps facilitate. Kobach was a strong supporter of the program, but Kelly’s position remains to be seen. The program is one of the most restrictive in the nation when it comes to student eligibility: Scholarship students must be eligible for free lunch (household income of 130 percent of federal poverty guidelines or less) and attend one of the state’s lowest-performing 100 public schools. Partially as a result of these restrictions, the program served just 292 students as of January 2018.

Revisiting student eligibility requirements to bring the program more in line with other programs nationwide could vastly improve its ability to serve Kansas families. In the meantime, ACE will continue working to serve its hundreds of scholarship families who do not participate in the scholarship tax credit program.

Texas

Texas saw no major partisan shifts statewide or in either state legislative chamber. However, the margins in a number of key races—including the U.S. Senate race between Ted Cruz (R) and Beto O’Rourke (D)—were much closer than many had anticipated. Whether those margins are evidence of a coming political shift or the result of a temporary surge is not immediately clear. In either case, narrower-than-usual margins could cause some Texas Republicans to avoid political risks despite maintaining strong grasps on all areas of the state government. Then again, some Republicans may be feeling confident about having survived the “blue wave” of 2018. We will have to wait and see how these tighter margins will impact efforts to expand parental choice for the state’s roughly 4.7 million public school students heading into the 2019 legislative session.

Wyoming

Wyoming has historically been one of the most politically stable states in the country in terms of state legislative control, and 2018 was no exception. Republicans maintained control of both state legislative chambers this year. The state does, however, have tendency to swap partisan control of the governor’s office regularly. It seems to have broken that pattern this time, electing Republican Mark Gordon to replace term-limited Republican incumbent Matt Mead. Continued Republican control of the governor’s office could factor significantly into future policy conversations in the state.