Bill to prevent 529 savings from being used for K-12 wins first approval in House
Author: Marianne Goodland - April 16, 2018 - Updated: April 26, 2018
Parents who want to tap into 529 savings accounts to cover K-12 private education — thanks to a change in a federal tax law that would allow it — might face tax headaches in Colorado.
House lawmakers on both sides of the aisle have been trying to work out how Colorado law handles a change in federal tax law that came out of the Tax Cuts and Jobs Act last December. But the two bills approach the problem in diametrically opposite ways.
The first measure attempting to tackle the issue, House Bill 1221, was killed by the House Education Committee last month on a party-line vote. The second, House Bill 1209, won preliminary approval from House Democrats Monday, but faces near-certain defeat when it reaches the Republican-controlled state Senate.
Monday the debate centered on whether the 529 change is about tax policy (so say Republicans) or education policy (so say Democrats).
The Tax Cuts bill included a Senate amendment to open up 529 accounts, which previously were limited only to qualified college expenses, to pay for K-12 school expenses. That can include expenses tied to religious or secular private schools.
Republican Rep. Tim Leonard of Evergreen, the sponsor of House Bill 1221, told Colorado Politics that people who set aside money in those 529 accounts get a $46 tax credit for every $1,000 put into the account, a provision unique to Colorado. Federal law already allows those dollars to accrue tax-free. When withdrawn to pay for qualified expenses, they continue to be tax-free.
Under the federal tax bill, up to $10,000 per child per year can be withdrawn from those accounts to pay for K-12 expenses.
Without a change in law to allow those K-12 expenses, according to a Feb. 27 memo from the Office of Legislative Legal Services, Coloradans could still withdraw those savings, but the contributor would have to pay back the tax credits plus penalties and interest, since Colorado law does not allow those dollars to be spent on K-12 costs. The 529 accounts are managed by CollegeInvest, a non-profit division of the Colorado Department of Higher Education that was set up in 1979.
House Bill 1209 makes it clear that the 529 dollars cannot be used for K-12 expenses. Bill supporters, including Democratic Rep. Britany Pettersen of Lakewood, claimed the change would allow tax dollars to pay for private school tuition, which she called a type of voucher.
House Bill 1209 “slams the door on the Trump administration’s tax giveaway to private education and guarantees Colorado does not open up a new tax haven for the wealthy and well connected,” said Democratic Rep. Alec Garnett of Denver during last month’s education committee hearing.
Leonard disputed those claims. “This is not legislation that has to do with vouchers or keeping money in public schools. This is tax policy, to align our tax policy with the federal tax policy change that came down in December.”
Leonard also claimed that if the bill passes, the state Department of Revenue (DOR) will, for the first time, have to find out how those 529 dollars were spent. If they were spent on a disqualified expense — like K-12 costs — the DOR would have to require the contributor to pay back the $46 plus penalties and interest, a process he said could take up to two years.
“Enforcement will be absurd and shameful,” Leonard said. He also said the bill would require the department to hire four more people to start tracking enforcement, which he called a waste of time and money.
However, the fiscal analysis said those four hires would be necessary only if deductions were taken for every single private school student in Colorado who is also enrolled in a 529 plan. The analysis assumes an overall reduction in workload, not an increase.
“We do not direct public dollars to private schools,” countered Pettersen, who also said the change in tax law is likely unconstitutional in Colorado because it would give tax breaks to families who send their children to private schools.