Will a $10,000 tax de­duc­tion in­spire Cal­i­for­ni­ans to save for col­lege?

The Fresno Bee (Sunday) - - Obituaries - BY ADAM ASH­TON aash­[email protected] Adam Ash­ton: 916-321-1063, @Adam_Ash­ton

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 state­m­an­aged 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.

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