Richard V. Reeves
John C. and Nancy D. Whitehead Chair
Senior Fellow - Economic Studies
Former Research Analyst - Center on Children and Families
The House GOP’s Tax Cuts and Jobs Act has provisions to please and to provoke almost everybody. There are welcome ideas: reducing the mortgage interest deduction, boosting the child tax credit, and taxing the large endowments of large colleges. Not so much: eliminating the estate tax, lowering the student loan interest deduction, and slashing corporate taxes.
But one small provision could turn out to be the most radical of all, and not in a good way.
The Act would expand 529 college savings plans in two big ways: first, by allowing an unborn child (or “fetus”) to be a beneficiary; second, by allowing funds to be used for private education at the K-12 level, rather than just for post-secondary education.
tax breaks on 529 plans are already deeply regressive
I’ve written about the regressivity of the 529 plans before: indeed, Barack Obama’s thwarted attempt to get rid of them was one of the reasons I wrote my book Dream Hoarders (you can read the story here in Chapter 1, or watch me attempt to re-enact it here). But just as a reminder: the federal tax benefits of 529 plans go almost entirely to affluent families:
The same basic pattern holds in those states offering income tax benefits to 529 savers, as we showed in an earlier paper, “A Tax Break for Dream Hoarders: What to do about 529 college savings plans”. In states where there is data allowing for a distributional analysis, six-figure households claim at least three-quarters of the tax benefits.
Fetuses as beneficiaries: a troubling precedent
Section 1202 allows parents, or other contributors, to start saving money tax-free in 529 plans for a child who has yet to be born. Specifically, the Bill reads:
To maximize their tax benefits, parents with money should open a 529 account just as soon as they see that little blue line on the pregnancy test. Perhaps 529 providers will start advertising on the side of the pregnancy test boxes?
Giving a fetus legal status in the tax code would be an extraordinary and unprecedented move. Leaving aside some tricky questions on implementation (what date could a 529 be established?), what matters here are the broader implications of giving fetuses this new official status. There is clearly a much deeper motive behind this proposal than a merely technocratic change one small part of the tax code.
This is not an economic reform, it is an existential one. As Jeanne Mancini of March for Life told Politico:
“A child in the womb is just as human as you or I yet, until now, the U.S. tax code has failed to acknowledge the unborn child—all while granting tax breaks for those seeking an abortion under the pretense of ‘healthcare.’… The proposed tax plan is a huge leap forward for an antiquated tax code, and we hope this is the first step in expanding the child tax credit to include unborn children as well.”
You can see the logic here. If a fetus counts as a beneficiary for 529 plans, why not for the Child Tax Credit or Earned Income Tax Credit?
Mark my words: if the Bill passes as it stands, the phrase “Section 1202” will pass into everyday usage.
Digging a hole deeper: 529 funds for k-12 private schooling
The second change is to allow 529 funds to be used for educational expenses at K-12 institutions, rather than being restricted, as at present, to spending at post-secondary institutions. In policy terms, this is a big change. Few parents will be able to save enough in the short time frame before the start of school, as opposed to college, to get a big capital gains tax break. But those few will by definition be among the most affluent.
Perhaps we will see more grandparents contributing, especially as the wealthier boomers retire. Some red states will make their income tax deductions on 529 plans more generous, if there are more ways to spend the money. One thing is for sure: the result of expanding 529 spending to the K-12 years will do little or nothing to help the bottom 80 percent of American families.
The GOP proposals on 529 plans can then be argued against on standard policy grounds, by weighing costs, benefits and distributional consequences. But bringing unborn children into the tax code? Well, that’s a different kind of argument altogether.