ARI SHAPIRO, HOST:
Now we're going to hear about a small piece of the new tax law that could have a big impact. It has to do with 529 plans, which let families save for college. The new tax law expands 529s so that parents will be able to use them to cover tuition at private elementary and high schools, too. NPR's Cory Turner reports that the move caught states off guard and could cost them dearly.
CORY TURNER, BYLINE: Think of the 529 plan as a love child born in the mid-'90s to your federal and state governments. They named it in a flash of creativity after a section of the tax code. States generally manage the investment plans while the feds let the money grow long-term tax-free. Many states also try to encourage savers with a little short-term reward. When families make a contribution, they get a credit or deduction on their state income taxes.
TROY MONTIGNEY: Most often, the state tax credit or deduction is the foot in the door.
TURNER: Troy Montigney oversees Indiana's 529 program, where savers get a tax credit. Thirty-three states do this, putting extra skin in the game. That credit in Indiana or deduction in Oklahoma means less tax revenue coming in. States just figure it's worth it if it gets more people to college. But all of this is why Congress' sudden expansion of the program into K-12 schools has some experts worried.
NAT MALKUS: This change allows private school families to put their money through 529 accounts and avoid state income taxes.
TURNER: Nat Malkus studies ed policy at the American Enterprise Institute. It's a conservative-leaning think tank.
MALKUS: It's a change from the federal level that puts a number of states in a pretty tough position moving forward.
TURNER: Malkus says if lots of new families sign up and current families contribute more, well, then states could end up losing a lot more money in tax breaks.
GREG BERCK: I think it would immediately create a unintended budgetary hit to the states' budget.
TURNER: Greg Berck of the New York State Council of School Superintendents says this expansion surprised states. After all, it came top down from Washington, and states haven't budgeted for it. New York offers savers a $10,000 deduction on their state taxes. In Illinois, where Michael Frerichs is treasurer, it's even more generous - $20,000. He says 529s were meant to save long-term for college, and that letting families use them for kindergarten changes things.
MICHAEL FRERICHS: If they're putting money in one month and taking it out the next, they don't really have that advantage of long-term investing. And it's really just using them to get around state taxes.
TURNER: This point is key. Most Americans send their kids to public schools, and there's little concern that this is going to change that because using a 529 for the early grades, it just doesn't make a lot of sense. Literally, there isn't time for the money to grow. The real benefit, according to the state experts and economists I spoke with, is for affluent families, many of whom already have kids in private K-12 schools. They can now use their old 529 or open a new one to pay that tuition bill and get a nice state tax break. Troy Montigney of Indiana says he's hearing from a lot of curious parents.
MONTIGNEY: We're already fielding - and I'll just be honest - a tremendous amount of calls on a daily basis about can I, you know, take a withdrawal right now to pay for a K through 12 tuition expense?
TURNER: The challenge for state leaders - they've had just days to get their heads around all of this, and it's hard to know how much this expansion of 529's uses will actually expand the pool of people who use them. Nat Malkus at AEI believes states will take a hit and have to make some tough choices.
MALKUS: They're either going to have to accept a loss in their income tax base or do something unpopular to repair the hole.
TURNER: Lots of states could feel the pinch. One that won't is Texas, where the idea began with Republican Senator Ted Cruz. Texas doesn't give savers an income tax break because Texas doesn't have an income tax. Cory Turner, NPR News, Washington.
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