Northwest Arkansas Democrat-Gazette
School-savings measure moves on
Legislation allowing college savings plans to be used to pay for private school tuition sailed through the House Education Committee on Tuesday.
For the past two weeks, Republican lawmakers sought changes to the state’s 529 program — which gives tax breaks to Arkansans who invest for college savings — by arguing the state needs to fall in line with federal policy.
A new federal law allows tax-free withdrawals from the plans to also pay for private school tuition, leading to charges from some Democrats and public education advocates that the proposed changes are a “back-door voucher program.”
On Monday, the last day of this year’s fiscal session, House Speaker Jeremy Gillam, R-Judsonia, said “conjecture” had derailed efforts to pass the state policy change as part of a spending bill. The language had been added to the state treasurer’s office appropriation, which failed to pass until the language was removed.
The 529 plan proposal was included in Gov. Asa Hutchinson’s call for the special session that started Tuesday.
Gillam, in presenting his version of the legislation to the House Education Committee, conceded that the cost estimates for House Bill 1008 remained subject to speculation. He also repeated misinformation cited by others during the fiscal session about how the tax benefits could be used for public school students.
After hearing from Gillam, the Education Committee approved the bill on a voice vote, sending it to the full House for consideration.
“What we are trying to do here is to make compatible our 529 plan with what the federal government has sent down from on high,” the speaker said. “If we do nothing, then we are penalizing the citizens of Arkansas who have taken their lead from Congress.”
Under current state law, Arkansas taxpayers can deduct up to $5,000 ($10,000 per family) each year for investments made into their 529 plans. As the plans grow, taxfree withdrawals can be made to pay for higher education expenses. Withdrawals for kindergarten-through-12th-grade private school tuition are no longer subject to federal taxes, but, without changes at the state level, they are still subject to taxation in Arkansas.
The cost of those changes at the state level, according to a Department of Finance and Administration review, would be $5.2 million in lost revenue. Gillam, however, said those estimates were based on every private school family taking full advantage of the tax break, which he said is “not going to happen.” Critics of the change, pointing to other states, have said the finance department estimate lowballed the cost.
“I’m afraid it’s going to adversely affect our budget that we didn’t count on,” said state Rep. Mark McElroy, I-Tillar, who voted against it. “I also worry about it affecting public schools, and they’re struggling along in the Delta.”
During his presentation, Gillam said the tax-free withdrawals also could be used by public school families to pay for outside tutoring or test prep classes, repeating a point that had been previously made by fellow Republicans and the treasurer’s office, which administers the plans.
The finance department report, however, said that changes made to the federal law — and proposed to state law — would qualify only withdrawals for “tuition at an elementary or secondary public, private or religious school.”
In response to a question about the applicability of the new federal policy, an IRS spokesman pointed to an online handbook that said qualified K-12 expenses include up to $10,000 in tuition “in connection with enrollment or attendance at an eligible elementary or secondary school.”
Asked about the discrepancy, Gillam said he may have “misspoke.”
During the fiscal session, the appropriation for the treasurer’s office failed to get the three-quarters majority it needed to pass. Because it is not an appropriation, HB1008 needs only simple majorities in both chambers to pass. Only a handful of lawmakers voiced opposition to the bill in committee Tuesday.
No members of the public spoke for or against HB1008 at the committee hearing, but the Arkansas Education Association came out with a statement in opposition shortly after the vote.
The proposed bill “provides a huge tax break for private school tuition,” said the association’s executive director, Tracey Ann Nelson, in a statement. “These proposals diminish our state’s ability to meet the Constitutional requirement to provide a free public education for all students.”
In a position statement distributed to lawmakers, Hutchinson said he supported the legislation “as a matter of policy” while advising the lawmakers to monitor the future costs of the changes.