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Wednesday, March 21, 2018

What recent 529 legislation says about the Arkansas Legislature

Last week in special session, the Republican-led Legislature speedily approved changes to Arkansas law to grant a tax break to people who send their children to private school, proving that they care more about their fanatical devotion to "free market" education than to their constitutionally mandated duty to "ever maintain a general, suitable, and efficient system of free public schools" (Arkansas Constitution, emphasis added).

The private school need not meet any standards. You may send your kids to one of the prestigious Little Rock academies where, they say, 100% of their graduates go on to college, or you may send them to a small church school in rural Arkansas with 11 students and not one certified teacher, or any of the range of possibilities in between.

These schools may not have student diversity, offer a challenging curriculum, boast highly qualified teachers, provide enrichment or extracurricular activities, or serve special needs children. Despite this roundabout subsidy from the state, these schools are not required to take or pass any tests, provide adequate facilities, or show student progress. Under the new law if you send your children to a private school, good or bad, you will be eligible to write off up to $10,000 of income for each child, potentially saving yourself $2,000-$3,000 in taxes.

How did this happen? Arkansas lawmakers were aligning Arkansas tax code to recent changes in the federal tax code with respect to so-called 529 Savings Plans.

These 529 Savings Plans were created in 1996 as an incentive for people to save for their children's college education. As created, an individual could set up an account and put as much as $14,000 a year in it tax-free, with no penalty unless the money was withdrawn early or for some purpose other than the beneficiary's qualified post-secondary education. The idea was that over an 18-year period, a family could save up enough for college at most four-year institutions.

However, as part of the Trump administration's drive to elevate "school choice" and the "free-market competition" model for education, in the January 2018 tax code overhaul 529 plans were given a new purpose and much broader scope.

Now instead of being a college savings instrument, 529 plans can be a means of funneling K-12 private school tuition costs through an account that makes them tax-free. Where before an early withdrawal meant paying income tax and penalties on the deposits, now the funds can be deposited and withdrawn after only 30 days (or sooner if allowed by the three-person regulating committee), with the deposited amount--up to $10,000--being deducted from the account holder's adjusted gross income, therefore, non-taxable.

It is worth observing here that not all legislators were eager to endorse this "tax break for the wealthy," as some have called it. Many resisted through several votes on the measure at the end of the fiscal session before giving in to the bill sponsors' persuasions that they "must align Arkansas tax policy to federal tax policy." This is clearly a fallacious argument, however, as there are numerous instances where Arkansas tax policy differs from federal tax policy. One example is the Earned Income Tax Credit, which is available for the working poor at the federal level but not at the state level.

Governor Asa Hutchinson supported the measure while expressing mild reservations about its effect on future state revenues.

The 529 bill (or Act 8 of the Second Extraordinary Session of the 91st General Assembly), being purely a tax break for families that send their children to private schools, is not by any means as pernicious as the hard-fought SB746 from last year's regular legislative session, which ultimately failed. That bill set up tax-free "education savings accounts" that were eligible for use in K-12 private schools, virtual schools, and home schooling. It even included extra incentives for moving students from public schools to private schools. Some lawmakers have vowed to bring this bill back in the 2019 session, making Act 8 just the "foot in the door" to eventually achieving a full-out voucher system.

So why are the new 529 accounts bad for Arkansas and what do they say about the Arkansas Legislature?

1. While not qualifying as a true voucher program, the director of advancement of a prestigious private school admits that "it's an option that mostly affects affluent families" (cnbc.com). It's not a benefit that would be available to the nearly 24% of Arkansas children who are below poverty level.

2. It is expected to cost more than $5 million in state revenue in just the first year, in addition to setting up additional bureaucracy to run the program.

3. They turn what has been a savings program into what looks like a glorified money laundering scheme to create large chunks of tax-free income for wealthy families.

4. They promote and validate unregulated private-school choices that may not be serving children well. Some legislators never met a "choice" they didn't like except the state's highly regulated and accountable public education system.

5. Act 8 shows that the Republican-led Legislature, which since they became the majority in 2013 have been increasingly reluctant to fund public education to the level deemed necessary by its own Joint Adequacy Committee, will bend over backwards to encourage any kind of "choice," including tax breaks for private school tuition, virtually removing the cap on charter schools, reassigning supposedly "unused or underused" public school facilities to charter schools, and funding the state's virtual charter school at the same level as brick and mortar schools.

6. The Legislature has money to give tax breaks for private school tuition but none for additional pre-K slots, teacher raises or affordable health care for teachers, or full funding for the special education catastrophic fund. They have established and generously added to charter school facilities funding while the public school facilities fund is woefully underfunded, even though public schools are held to a high standard that makes building new facilities very expensive.

The new 529 legislation is not the worst thing that could have happened to public education in Arkansas, but it is a sign that many Arkansas lawmakers are willing to follow the lead of ideologues who would like to change our education system from a highly accountable public model that serves all children with adequacy and equity as its guide to an entrepreneurial model where the "free market" decides winners and losers. All too often in such a case, the entrepreneurs win and the kids--and eventually the taxpayers--
lose.

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