PHOENIX — A House panel approved legislation Wednesday designed to create a greater college-savings tax break for larger families — if they have the money to set aside in the first place.
Senate Bill 1135 deals with federally recognized college savings plans. Better known as 529s, based on the section of the Internal Revenue Code, they allow savings to grow tax free if used for higher education.
Arizona adds its own incentive, giving individuals a tax deduction of up to $2,000 for those contributions against their state adjusted income used to compute their taxes. For married couples filing jointly, the maximum deduction is $4,000.
SB 1135 would allow those deductions on a per-child basis.
So a couple with two children could set aside — and take a deduction — of up to $8,000 a year. For three kids, the cap would hit $12,000, and so on.
Sen. David Livingston, R-Peoria, who wrote the measure, said it fixes what he called a “discrimination issue.”
“Right now, you could have three or four kids, but you could only donate and write off one,” he said.
Livingston told the House Ways and Means Committee that the change shouldn’t cost the state a lot of lost revenue. He said figures provided by the Revenue Department show that under existing laws, the average deduction for these 529 accounts is only about $1,200.
“So families aren’t even getting to the $2,000 or the $4,000,” Livingston said. “But for the few families that could, I don’t think we should discriminate if they have more than one kid.”
It isn’t just parents who are eligible.
Grandparents can take the same deduction. So a couple that has eight grandchildren could, at least theoretically, get a $32,000 reduction in the amount against which their state income taxes are computed.
All that bothered Rep. Mitzi Epstein, D-Tempe.
She noted that Arizona has a progressive tax rate: The more someone earns, the higher the tax bracket. What that means, she said, is that a $4,000 deduction taken by a person of means creates a bigger dollar break in taxes owed than someone who has less taxable income and gets that same deduction.
“Middle income folks are so tired of this,” Epstein said. “We’re tired of missing out on the benefits.”
That did not concern Rep. Steve Kaiser, R-Phoenix. He said people at the top of the bracket already are paying more.
And Kaiser said he would be happy to support legislation to create a flat tax rate, something Democrats generally oppose.
But Epstein had other problems with the bill.
She pointed out that a 2017 change in federal law now allows people to use 529 plans for tax-free distribution of expenses for private, public or religious schools of up to $10,000 a year.
Epstein said that amounts to another way for parents to get tax benefits for sending their children to private and parochial schools. She said any money the state does not receive in income taxes means less money for students in public schools.
“It’s wrong to hurt the other children. I’m asking you to think about the children whose parents cannot afford private school tuition. This bill takes away from them,” Epstein said, calling the measure “another voucher scheme.”
The measure, which already cleared the Senate, was approved by the House panel on a 6-4 party-line vote and now awaits action by the full House.
