Student debt is on the rise in the U.S.
Saving money won’t have to be its own reward if the California Legislature passes a bill offering a state tax deduction to families who put away cash for college.
The proposal, Assembly Bill 211, would give families a deduction of up to $10,000 if they contribute money to a state-managed college savings plan known as ScholarShare. Today, 34 other states that levy income tax offer that kind of deduction for contributions to tax-advantaged 529 college savings plans.
California lawmakers have raised the idea in the past, but shot it down over concerns that it would mostly benefit families who already are well off and able to save money.
It’s getting new life this year with support from Treasurer Fiona Ma, who argues it would help middle-income Californians who lost IRS deductions in the 2017 federal tax overhaul.
That law capped an IRS deduction for state and local taxes that primarily benefited people in states with a high cost of living, like California, New York and Washington.
The Franchise Tax Board last year studied how the loss of that deduction would affect California households, and found that based on 2016 returns about 1 million Californians would pay the IRS an extra $12 billion. That caused some state leaders to fret that well-off residents might move to other states.
“We’re going to have to pay a lot of tax right now,” Ma said. “This is No. 1 giving an incentive for single folks and working couples to invest in the next generation, and also get a tax deduction.”
She testified this week at a hearing with the bill’s author, Assemblyman Ian Calderon, D-Whittier. Again, the bill met resistance from lawmakers who say it seeks to help comfortable Californians while taking tax revenue from other programs.
“This rewards the people with the most money the most, and the people with the least money the least,” said Assemblyman Bill Quirk, D-Hayward.
Former state Sen. Ted Gaines, R-El Dorado Hills, proposed a similar but smaller state tax deduction of up to $6,000 last year. His bill failed, and the Franchise Tax Board estimated it would consistently reduce annual state tax revenue by $100 million to $150 million.
The Government Accountability Office issued a report in 2012 that said few American households had so-called 529 college savings plans like California’s ScholarShare. It said families with the savings accounts had a median net worth of $413,500, which was 25 times the holdings of families without college savings accounts.
At the time, households with 529 college savings plans had a median income of $142,400 compared to $45,100 for other families.
The report noted that the plans were growing in popularity because of rising tuition costs. Contributions to 529 plans are not deductible on federal tax returns. They help families save because earnings on the investment accounts are not subject to federal income taxes as long as the money is used for education.
Samantha Corbin, a lobbyist for the California Tax Reform Association, this week reiterated the arguments that led lawmakers to table Gaines’ bill.
“This type of incentive really does favor people who can afford to save,” she said.
Calderon and Ma countered that the deduction would be worthwhile to motivate middle-class families to prepare for expensive education expenses.
Recent reports from financial research firm Strategic Insight suggest that 75 percent of households with college savings plans have incomes under $150,000. That’s a comfortable income and well within the top quintile of American households, but it doesn’t go as far in the Golden State.
Meanwhile, the Institute for College Access and Success estimates that California college students graduate with an average debt of $22,875.
“Higher education expenses continue to grow for families across the state,” Calderon said in a written statement. “At community coffees and town halls, I often hear from frustrated constituents who do not qualify for financial aid but are struggling to save money for college.”
California’s ScholarShare 529 has some incentives to help lower- and middle-income families decide to open accounts, including a matching grant of up to $200 for households with income up to $75,000 a year. Some lawmakers at the hearing on Calderon’s bill this week suggested they’d rather give out more grants than offer a new tax deduction.
The College Savings Plan Network estimates that Americans have 13.6 million 529 college savings plan accounts that are worth almost $329 billion.
People can invest money in 529 plans sponsored by other states. The largest plan is Virginia’s CollegeAmerica, which has 2.3 million accounts worth $64.2 billion.
California’s ScholarShare has about 310,000 accounts worth $8.5 billion. Ma says that offering a state tax deduction for that plan would encourage financial planners to recommend ScholarShare over plans in other states, which could support the California program and potentially lower its investment costs.
“It’s going to keep jobs and money here in California,” she said.