Private School Vouchers: Diversion of Public Funds Through Expanded 529 Plans
This is the fifth and final part in our series, Private School Vouchers: Analysis of 2020 Legislative Sessions. This annual PFPS analysis provides an overview of proposed voucher legislation nationwide and deeper dives on key states and issues. Read the first, second, third, and fourth parts.
The 2017 Tax Cuts and Jobs Act included changes to a popular provision in the federal tax code that encourages tax-advantaged savings for education. Those changes expanded the permissible uses of 529 savings accounts—previously limited to higher education costs—to pay for K-12 private education.
This expansion of 529 accounts well beyond their traditional uses diverts public funds, in this case in the form of lost tax revenue, to subsidize private education expenses. Like other private school vouchers, such 529 expansions result in government subsidization of private schools that often discriminate against students and families based on characteristics such as disability, LGBTQ status, and religion. Furthermore, this expansion disproportionately benefits wealthy families, who are more likely to have sufficient funds in 529 accounts to cover elementary and secondary education expenses as well as college tuition expenses.
In some states, the allowable uses of 529 accounts expanded automatically with the federal statute, but other states had to pass affirmative legislation to align their tax codes with this change and offer additional state tax benefits. Much of the state legislation expanding the uses of 529 accounts was passed in 2018, immediately following implementation of the new federal tax law. Since the federal change, qualified uses of 529 funds have been extended to private K-12 tuition in 37 states and the District of Columbia (Source: AKF Consulting Group, College Savings Nation 2020: States Fostering Growth in Challenging Times with updates as of April 20, 2021).
During 2019 and 2020 legislative sessions, 529 expansion legislation was introduced in several additional states across the country. But this expansion legislation failed in states including Colorado, Hawaii, Michigan, and Oregon.
Several states have seen the introduction of legislation prohibiting the use of 529 funds for elementary or secondary education expenses. In 2019, California passed two bills barring the use of 529 funds for tuition at K-12 public, private, or religious schools. Also in 2019, Nebraska passed legislation affirming that K-12 education expenses were not qualified uses of 529 funds under state law. Similar legislation prohibiting the use of 529 funds for K-12 education was proposed in Colorado and Massachusetts in 2020, but did not pass.
Little information is currently available regarding the number of households using 529 funds for K-12 private education expenses or the fiscal impact of 529 expansion legislation on state funds for public education. As states continue to debate the use of 529 funds for K-12 private education, this data is essential. The expansion of 529 accounts to private education diverts needed funds from the public treasury, and like other private school vouchers must be resisted and rolled back.