Avrum D. Lank
Spreading educational tax break a fine idea
By AVRUM D. LANK of the Journal Sentinel staff
Sunday, November 16, 2003
Support is building in Madison for a simple idea — extending the state tax advantage of Wisconsin’s Ed-Vest 529 program to all other plans.
Doing so is long overdue and has been given impetus by the troubles surrounding Strong Capital Management Inc. in Menomonee Falls.
Strong finds itself in the cross-hairs of Eliot Spitzer, the New York attorney general who has gone on a crusade to clean up the mutual fund industry. Strong was cited, but not charged, by Spitzer for allegedly allowing a hedge fund to market time the firm’s funds.
Strong mutual funds include about $764 million of EdVest money, the result of an exclusive contract with the state. Friday, Strong and the state announced an agreement in principle to allow EdVest investments in other than Strong mutual funds.
Much of the EdVest money flows into Strong funds because the state provides an income tax deduction of up to $3,000 a year for such investments. That is in addition to the other, big advantages 529s provide: Dividends, interest and capital gains accumulate on a tax-deferred basis, and no taxes — state or federal — are due at all if the accounts are used to pay for a college education.
Every state has set up 529s, and Wisconsinites are free to invest in any of them. But the $3,000 tax deduction comes only if they put their money into EdVest.
Strong, in turn, pays the state a small commission — 5 or 15 cents a year for every $100 in the accounts, depending on the type of investment. The state collects nothing for investments made by Wisconsinites in 529s in other states.
Wisconsin uses the money collected from Strong to defray its costs of running EdVest. Last fiscal year, it brought in about 10 times more than needed for the purpose. Even before the Strong investigation hit the headlines, there were serious discussions about reducing the state commission.
Now, however, the state is working to make sure that EdVest account holders lose nothing because of the actions Strong may have taken.
Meanwhile, a concerted effort is being made to extend the $3,000 state tax break to investments in any 529.
“The idea is to level the playing field and to respond in a small way to concerns that nobody is quite sure how the situation with Strong is going to play out,” said state Rep. Dan Schooff (D- Beloit). He is a co-sponsor of a bill, AB 667, to extend the tax break. The measure was drafted by Rep. Steve Nass (R-Palmyra) and formally introduced Thursday.
Even Strong likes the idea. The company is “open to discussing initiatives that meet the best interests of Wisconsin families saving for college,” according to spokeswoman Stephanie Truog’s statement. That includes “supporting the expansion of the state tax deduction to make it available for any 529 plan,” she said.
There is a problem, however. No one knows how much AB 667 would cost the state. The losses would come from two places: fewer commissions from Strong and more deductions for money invested in other 529s. State officials are working on an estimate, but an estimate is all it will be. Predicting human behavior is difficult, especially so in this case, as that behavior will be influenced by the outcome of the Strong investigation.
A way to avoid that problem would be to eliminate the $3,000 deduction for all 529 investments, including EdVest. That would increase state revenue but run counter to the tax-cutting spirit of the times.
Certainly, encouraging saving for college is as important as cutting taxes for businesses, something the Legislature has been happy to do recently. So here’s hoping AB 667 has a smooth ride.
The time was always right for it. Strong’s troubles just make them righter.
Contact Avrum D. Lank at (414) 223-5333 or [email protected].
