The federal tax overhaul may have triggered an automatic state tax break that would allow parents to avoid paying state taxes on some of the money they put aside to send their children to private K-12 schools.
The new tax break would be an expansion of the tax break provided when parents save for college.
The state currently allows parents to avoid paying state income taxes on up to $10,000 each year that they put into a college savings account. In addition they do not have to pay taxes on the money when it is withdrawn to pay for college. These accounts, known as 529s, also are eligible for a less generous federal tax benefit. Parents and relatives can put after-tax money into these accounts and earn investment returns tax free.
The new federal tax law now allows parents to use the existing program to help pay for private K-12 tuition.
State Treasurer Denise Nappier’s office is working to determine whether the federal change means an automatic expansion of the state break for those who want to use these accounts for K-12 tuition, or whether that would require the legislature to change state law. Her office – which oversees the Connecticut 529 program, known as CHET – declined to estimate when it might have an answer.
The governor’s budget and policy office also said it is possible the federal change could trigger an automatic extension of the tax break.
Brenden Healy, who until Jan. 1 served as the chairman of the Connecticut Society of Certified Public Accountants’ State Taxation Committee, said he is certain the federal change has triggered an automatic expansion of the state tax break, though he believes the state could undo it.
Healy, a Hartford-based accountant, said it should be an easy fix to decouple the state and federal tax benefits by requiring residents who want to use the state tax credit to report where the withdrawals are being used.
Providing a new state tax break for private school tuition will have major implications – and forces already are lining up to back or resist the change.
Proponents welcome the help paying for private school and expanding school choices in Connecticut, where 10 percent of school-aged children attend private schools, according to census estimates. Critics say state and federal funding shouldn’t be going to help private schools, some of which may limit who they let work there or who may attend as students, and that the benefit will go predominantly to the most affluent families.
And then there is the question of whether the state can afford the price tag. State finances are projected to be under extreme pressure over the next decade and a half.
Waiting for the state to decide
If it is determined the new tax law automatically expands the 529 plans to cover private school tuition, some legislators may try to block the change.
The House chairman of the legislature’s Education Committee said he opposes having these accounts cover private elementary and high schools and has asked the General Assembly’s research staff to explore the state’s options for preventing it.
“If we have the lattitude as the state to say, ‘You can get the tax break for college, but not private school [K-12] tuition,’ I would support that approach,” said Rep. Andy Fleischmann, D-West Hartford. “This is not why the the 529s were established.”
But state Republicans may support expansion of the tax break. Democrats hold a very slim majority in the state House of Representatives, and are split 18-18 in the Senate, though the Democratic lieutenant governor has the ability to cast her vote in a tie.
State Sen. Toni Boucher, R-Wilton, the co-chair of the Education Committee, said she favors an expanded state and federal tax break.
“What we should want is to provide as many opportunities as possible,” said Boucher. “I don’t think we should be limiting parents’ options.”
Who benefits?
About 60,000, or 10 percent, of school-aged children attend private schools in Connecticut, according to 2016 census estimates.
As a whole, that rate is middle-of-the-pack compared to other states. However, families in many of Connecticut’s wealthiest communities tend to send their children to private schools at higher rates.
For example, between 28 and 35 percent of children in well-to-do Greenwich attend private schools compared to 9 to 12 percent in impoverished Bridgeport.
In affluent Fairfield County, an estimated 14 percent of children attend private schools. That means school-aged children in Fairfield County attended private school at higher rates than 74 to 95 percent of other counties in the country, depending the margin of error in the estimates.
A look at which families take advantage of the existing tax breaks for college costs could provide some insight into which families might take advantage of a new K-12 benefit.
Nationwide, less than 3 percent of families had a college savings account in 2010, according to the most recent national survey by the Federal Reserve. Families with these savings accounts had about 25 times the median financial assets and three times the median income of those without one.
In Connecticut, the state treasure’s office does not collect such information from its account holders. However, marketing experts who analyze the accounts for the office estimate that about 60 percent have incomes above $100,000 and 92 percent are white.
These data have prompted complaints that the recent changes to the 529 accounts are a tax cut for the rich.
U.S. Rep. Rosa DeLauro, D-3rd District, the minority leader on the U.S. House Appropriations Committee’s education subcommittee, calls the federal change to 529s a “scam.”
This tax benefit “is just another giveaway to the wealthy at the expense of the middle class. Education should be the great equalizer in our nation – accessible to all students, not just those from wealthy families,” DeLauro said.
The state’s largest teachers union agrees.
“It will only benefit the wealthiest at the expense of our students, communities, and taxpayers,” said Sheila Cohen, president of the Connecticut Education Association. “This voucher scheme further promotes segregation and inequitable educational opportunities especially for minority children and those living in high-poverty districts.”
How many parents will be enticed by the new federal benefit to send their children to private schools in unknown. For parents capable of only modest savings, investment earnings would not grow fast enough to pay for early grades. Families capable of dropping large sums into these accounts as soon as their children are born, however, could expect larger gains quickly.
Simply allowing families to avoid paying state taxes on up to $10,000 in tuition would help middle-class families more, advocates say.
Doug Lyons, the executive director of the Connecticut Association of Independent Schools, said such a benefit would be “enormously helpful” in putting private schools within reach for families who could not otherwise afford them.
“How could this be a bad thing?” he asked during an interview. “The most important years are the formative years, and I think any help parents can get with making a [school] choice is highly valuable… A great deal of the private schools have closed because there are fewer parents that can afford the tuition.”
Lyons says the typical non-religious private school in Connecticut is able to provide some financial support to about one-quarter of its students.
It also may help parents of children who attend private Catholic schools in Connecticut, where officials say enrollment is close to mirroring the state’s population. Students attending the schools are 69 percent white, 11 percent black and 8 percent Hispanic.
Anne LaMonica, the associate director for education at the Connecticut Catholic Conference, that there is a misperception that by-and-large children from Irish, Polish and Italian families and from high-income families are those attending religious schools. Rather, she said, many schools in urban settings provide financial aid to most of the students attending, many of whom are minorities.
A state tax break could help make enrollment possible for more students whose families are seeking an alternative to the local public school.
“We are hopeful this will help our schools,” said LaMonica. “It’s a good first step, but whether it is enough of a benefit for families, we will have to see.”
How much will they benefit?
The federal taxes well-off families could avoid are substantial, according to figures compiled for The Connecticut Mirror by the financial services company Vanguard.
Take, for example, a family that is capable of putting $200,000 into a 529 account as soon as a child is born. Assuming a 6 percent annual return, that family would be able to withdraw $10,000 a year to pay for their child’s K-12 private school tuition – the maximum amount that qualifies for the new federal tax deduction – and avoid $49,800 in federal taxes over those 13 years. The family also would still have $382,000 in the account to pay for their child’s college.
A family capable of putting $66,000 into an account when a child is born would avoid $18,200 in federal taxes but have no money left in the account after high school to pay for college.
In Connecticut, just over 136,000 people have a 529 CHET account. The median amount in these accounts is $8,400 to $9,700, depending on the type of account. There are 1,455 accounts that have more than $200,000 in savings.
If Connecticut parents with 529 plans get a state income tax deduction on private K-12 tuition savings, the governor’s budget office estimates that would save joint tax filers at most $1,400 a year. If an estimated 19,000 state taxpayers begin using this as a vehicle to pay for private K-12 schooling, and deduct the maximum $10,000 currently allowed for college costs, the governor’s Office of Policy and Management estimates it would cost the state $39 million a year.
Healy, the accountant, said while it’s impossible to know how many people would take advantage of a state deduction, he anticipates he will get questions about it.
“It probably will spur on more interest for a private school,” he said. “When there is a tax deduction or a tax benefit for something, it typically draws interest.”
But would a $700 state tax benefit for each tax filer be enough to entice people?
“Seven hundred dollars is $700. I think if someone was on the fence, this might get them over the hurdle,” he said. “I think this would have a small impact… At the end of the day, it’s not a huge tax benefit.”
LaMonica of the Catholic Conference, which lobbies on behalf of the church, also characterizes the benefit as small and questions whether families will be able to navigate what they may see as a complicated approach to save up to $1,400 a year.
“It’s a small amount, but it could be the difference between a child attending and not attending,” she said. “Right now, we are just happy with this small start.”
Regardless of how many take advantage, opinions differ on whether the state should be losing revenue on this.
Lyons, of the private schools organization, says its the least the state could do since the tens of thousands of students attending private schools are saving taxpayers hundreds of millions of dollars each year in public school education costs.
“It’s not as though Connecticut taxpayers don’t receive a financial benefit when students attend private schools,” he said.
The Catholic Conference estimates it saves the state over $400 million each year.
Boucher, the Education Committee co-chair, also points out that private school parents would still have to pay for public schools.
“This change wouldn’t mean they are avoiding taxes altogether. They still have local property taxes,” she said.
Teachers unions aren’t buying it.
“We need real plans that protect and enhance the quality of public schools and benefit all students – not schemes that take scarce funding from students in neighborhood public schools to help wealthy families pay for private school tuition,” said Cohen of the Connecticut Education Assocation.
Discrimination?
Another concern raised over a tax break for private school tuition is that some of these schools may discriminate against certain people.
The Connecticut Supreme Court heard a case in November that will determine whether private religious schools have immunity from suits for discrimination against employees.
The school in that case – Trinity Christian School in Windsor – is accused of firing a teaching assistant who requested maternity leave and wasn’t married.
The school argues state law gives religious institutions the ability, for whatever reason they please, to hire and fire employees who have direct contact with students and are therefore expected to follow the church’s religious beliefs. The law, the school’s lawyer says, is based on the first amendment to the U.S. Constitution that protects the freedom of religion.
“Our position is that it creates immunity,” said Matthew S. Carlone, a Wethersfield-based attorney, for Trinity. “The difference can be huge in practical terms for religious institutions. This case could say we have no liability for these suits.”
The state’s Commission on Human Rights and Opportunities, the defendant in the case, says religious institutions should have to prove the employee they acted against actually was performing religious functions.
The American Civil Liberties Union of Connecticut says providing protection from such discrimination suits would be wrong.
“Religious freedom is not a free pass to discriminate against employees. Firing a pregnant worker for being pregnant is wrong. No school, whether religiously affiliated or secular, can discriminate against an employee on the basis of sex,” said Dan Barrett, the legal director of ACLU-Connecticut.
Trinity Christian School last school year received $21,814 in state funding to help pay for teacher training and nursing services.
There is also concern that some schools discriminate against disabled or homosexual students.
“The idea of the state providing tax benefits for private schools is troubling precisely because there are a variety of parochial schools who don’t have the nondiscrimination and open approach to admissions and employment that are a bedrock of our public schools,” said Fleischmann, the House chairman of the legislature’s Education Committee. “The courts are going to have to give us guidance regarding just how much latitude a private institution has. I know how I would like things to turn out.”
A November report prepared for Congress by the Government Accountability Office investigated 27 private schools across the country that received taxpayer money to see how inclusive they were. That report found those schools failed to provide families with accurate, or any, information about their rights if their student had any special education needs.
Andrew Feinstein, a Mystic-based special education attorney, is concerned.
“As education is increasingly privatized, the protections against discrimination, as well as basic academic standards, will be unavailable to an increasingly large sector of society,” he said. “I fear that we are moving to a situation in which public education is only provided to the poor and the disabled.”
But the officials from private independent and Catholic schools say discrimination is not an issue in their schools and the state should be making it as easy as possible for parents to decide what educational setting is best for their child.
Discrimination against students “is a non-issue for us,” said LaMonica of the Catholic Conference. “We feel it should be a parent’s choice to educate their child how they best see fit.”