Colorado’s 529 program should help the middle class, not the rich

If you live in Colorado, you’ve probably heard of the 4 /20 holiday, but what about 5/29? I’m talking about National 529 College Savings Plan Day, which this year fell on Memorial Day. There was no parade or fireworks for 5/29, and for too many folks, saving for their children’s college is not something that prompts celebration. That’s why 529 plans, which allow tax benefits at the federal and state level for college savings, are meant to help families save for their kids’ higher education.

The need is certainly there. A recent report estimates that in Colorado, it costs 30 percent of a family’s budget to afford a public, four-year institution full-time. On top of that, the cost of higher education is increasing two to three times the rate of inflation each year.

Subsidized college savings plans are one vehicle to help families save for college. At the federal level, 529 plans work to increase college savings by allowing funds in a 529 account to be withdrawn for educational purposes, tax-free. Colorado provides its own state-level tax incentives for college savings, allowing taxpayers to deduct every dollar they save through a qualified state 529 plan from their Colorado income taxes.

That program is CollegeInvest, a quasigovernmental organization under the Colorado Department of Higher Education that offers several different savings plans to help families put away money for college. As an investment company, CollegeInvest is very successful, managing assets of more than $6 billion and frequently ranking in the top college savings programs in the country. This explains why nearly half of CollegeInvest’s customers come from outside of Colorado.

The stated purpose of CollegeInvest is to “help low- to middle-income Coloradans save for a higher education, and reduce student debt.” However, data shows roughly 85 percent of the money invested in CollegeInvest comes from the top 20 percent of earners in the state.

Why is this? It’s because of a tax code we now have in place that gives the same tax deduction to the wealthiest households in the state as it does to families that have to stretch every dollar they can get their hands on to send their kids to college.

This is upside down. Let’s be clear here: the state’s 529 tax deduction is essentially spending by means of the tax code. And when we spend state tax dollars supporting those who already are well-positioned to pay for college, we have less to spend on making college more affordable for everyone else. In 2013, the state expended $15.8 million on the tax deductions and by 2015 that had climbed to $19.6 million.

Instead, tax incentives in college savings plans could be better targeted at helping those who really need help saving for college — folks in the “doughnut hole,” who make too much to qualify for financial aid but not enough to afford college.

The majority of states cap 529 deductions per taxpayer or don’t provide tax benefits at all. Colorado is one of four states where there is no cap on the amount of deduction a taxpayer may subtract from their taxes. Should millionaires get the same tax break for college savings as a family pulling down $60,000 a year — especially if it means less money to make college more affordable for everyone?

In other words, this is a case where the goal should be equity — doing what’s fair — and not equality — treating everybody exactly the same.

CollegeInvest currently has a matching grant and scholarship program for lowerincome Colorado families. However, these programs have not reached those who need it most or yielded the results needed. It’s time to change the tax policy that creates the incentives for savings.

Maybe it’s time we use our limited state dollars to make college more accessible to families who struggle to provide their kids with the opportunities that come from higher education rather than subsidizing those who have the means to pay for their kids without additional incentives. Ali Mickelson is the director of legislative and tax policy at the Colorado Fiscal Institute.