Lawmakers should keep the Coverdell tax break alive

When first proposed, the Coverdell Education Savings Account(ESA) generated the familiar bombast characteristic of public policies that offset private-school tuition. The late Teddy Kennedy declared, in 1998, that the accounts would “privatize education” because families who saved for private or parochial K-12 schooling could enjoy tax-free gains on their investment. Then-President Clinton argued that only wealthy families would reap the rewards, which would cost the federal government billions, and later made good on his promise to veto the measure when it passed.

From its inception, the Coverdell ESA encouraged families to save.

George W. Bush resurrected the bill when he took the Oval Office, but the late Georgia Senator Paul Coverdell died before he could see his effort enacted into law. A decade has passed and the tax break is scheduled to expire on December 31, 2012. Lawmakers should extend the program’s benefits.

From its inception, the Coverdell ESA encouraged families to save. It never really was a voucher, as Kennedy had claimed. Unlike a tax-credit scholarship, contributions to the Coverdell aren’t tax-deductible. Rather, families enjoy tax-free earnings on their investments so long as they use the money to cover qualified education expenses (which can include religious schooling).

Additionally, the program’s cost has barely amounted to a rounding error to the federal government. The New York Times reported last week that the Coverdell tax breaks would likely deprive the United States Treasury of just $17 million this year.

But that number tells another truth: The costs are so low because relatively few families are opting for the benefits.

While the Times reported that we presently don’t know how many have used the accounts to pay for primary or secondary education, we know that contributions to the Coverdell have declined over time. The Congressional Joint Committee on Taxation says about 644,000 tax returns in 2009 mentioned Coverdell, down from 985,000 in 2005.

The joint committee attributes that lack of interest to the fact that the program caps annual contributions at $2,000. But there are likely other reasons even more fundamental: A lot of people just don’t know about it or don’t see much use for it.

If school-choice advocates saw any promise in these savings accounts, they’ve done a poor job of talking about them (there are exceptions, including Lindsey Burke and Rachel Sheffield of the Heritage Foundation, who this year urged lawmakers to lift the cap on the program). The Coverdell hasn’t had a good spokesperson since its namesake died in 2000; neither parents nor financial planners know much about the program.

It’s true that, in this economy, it’s less appealing to save money for private education, especially when households are struggling to manage investments for higher education and their investments for retirement. But the program becomes more attractive to the family who doesn’t like the middle schools or high schools in their neighborhood. Their investment in the Coverdell now could yield sizable returns. And that family might want to manage the tradeoffs in their investment decisions.

If it’s a good idea to let savings grow tax-free for college (like the University of Notre Dame) then we should allow parents and grandparents to let savings grow tax-free for secondary schools (including Catholic schools). Besides, families can use the funds for college if they don’t use them in grades K-12.

Two mid-Atlantic Republicans, Ann Marie Buerkle and Mike Kelly, want to keep the Coverdell alive and raise its annual contribution cap to $10,000. That may spur more interest from those who can sock away that much money for K-12 expenses, but it will also reopen old debates about “voucherizing” public education at a time when the deficit looms large. If lawmakers simply extended the benefits at the current contribution level and encouraged school-choice advocates, tax professionals, and Catholic schools (just to name a few interested parties) to promote the program’s existence, they could generate more interest among working-class and middle-class families unaware of the opportunity and keep any cost increases modest.

The worst predictions from folks like Kennedy and Clinton never came to pass. But neither has the program’s full potential. It deserves more attention, and a longer life.

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