Congress Approves K-12 Education Savings Accounts

Published August 1, 2001

Senator Paul Coverdell, the education-conscious gentleman from Georgia, had to be smiling down on the proceedings when President George W. Bush signed the tax-relief bill into law on June 7.

Tucked away in that bill, like a fresh slice of peach in a creamy cobbler, was a delicious victory for the principle that parents should be able to direct their money to the kind of schooling they–not the government–choose for their children.

Lawmakers in Washington, DC have generally looked favorably on providing tax breaks for child care and for paying costly tuition at public or private colleges, including religiously affiliated ones. But protectors of monopoly interests in K-12 schooling had always batted down every attempt to ease the burden on parents of elementary and secondary schoolchildren.

Until now.

Bush’s tax reform expands tax-advantaged Education Savings Accounts to cover not just the expenses of higher education, but also those associated with public, private, or home schooling of children in kindergarten through grade 12. Moreover, the new law increases the annual limit on contributions to an ESA­sometimes called an education IRA–from $500 to $2,000.

The build-up of interest within such accounts is tax-free, and neither principal nor interest will be taxable upon withdrawal if parents use the money for legitimate educational expenses, such as tuition, tutoring, books, or computer hardware or software. For individual taxpayers, the contribution level phases out for annual incomes between $95,000 and $110,000; for married couples, the benefit fades for incomes between $190,000 and $220,000.

Big Education’s lobbyists had rolled out their heavy artillery to gun down the extremely modest voucher in Bush’s “No Child Left Behind” legislation. Even a voluntary voucher pilot project advocated by Senator Judd Gregg (R-New Hampshire) was killed by a 58-41 vote in the Senate. But the Education Savings Account attracted little fire as a very small morsel in a very large general tax package.

The tactics of the Bush White House had something to do with safe passage for the ESAs, and the support of such senators as Robert Torricelli (D-New Jersey), Tim Hutchinson (R-Arkansas), and Trent Lott (R-Mississippi) also was important. But over the long haul, Senator Coverdell, who died as a result of a stroke in June 2000, fought the protracted battles that laid the groundwork for eventual passage.

“Against impossible odds,” recalled Joe McTighe, executive director of the Council for American Private Education, “[Coverdell] waged a successful series of battles–fighting filibusters, managing floor debates, masterminding strategies, and negotiating agreements–to get an ESA bill approved in the Senate several times since 1997.” He never gave up hope, and he constantly urged other supporters of parental choice to hang tough.

In 1997, a Senate majority supported the Coverdell ESAs, but they got pulled out of the Taxpayer Relief Act of 1997 because President Bill Clinton threatened to veto the entire tax package if they remained. In 1998, the Senate passed ESAs . . . and Clinton exercised his veto on the grounds that letting families direct their own money would “undermine” government schools. The Joint Committee on Taxation had estimated that patrons of public schools would use 75 percent of ESA proceeds.

An 11th-hour snafu delayed the senators’ plans to name the new program “Coverdell Education Savings Accounts” in honor of its champion. But the name change is expected to pass routinely later in the session.

A Substantial Financial Resource

While claiming on the one hand that ESAs drain money somehow belonging to the government schools, critics contend on the other hand that the benefits are meager and only rich people could afford to buy into the program. Coverdell patiently explained in 1999 how the miracle of compound interest demolishes such arguments:

Were a parent to start in a child’s first year and place $2,000 each year–about the cost of a daily burger, fries, and soda–into an ESA yielding 7.5 percent a year, there would be $14,488 available by the first grade, $36,847 by the time the child started middle school, and $46,732 when the child reached high school. Moreover, a family in which each parent earned $35,000 a year could reduce its tax obligation by some $5,000 by the time the child turned 14.

In addition, as enacted, the Coverdell ESA permits corporations, charities, relatives, and friends to donate money to a child’s tax-sheltered account. That provision could prove to be a major stimulus to the growth of private scholarships for needy children. Such philanthropy is spreading across the country through the efforts of such business-led groups as Children First America.

Bolstering Choice

The advent of K-12 ESAs does not preclude the use of vouchers, or direct grants, to assist parents in transferring their children out of unsatisfactory schools. Indeed, by honoring the principle that parents can best choose where and how to educate their children, the new tax law could foster many school choice initiatives at the local, state, and federal levels.

Even in the House and Senate education bills, where vouchers took a battering, there was a small victory for portability–the concept that a government subsidy should follow a child out of a failing school to a better educational opportunity. The closely divided Congress was not ready to buy into vouchers, but it did approve letting poor families stuck in chronically failing Title I schools use a portion of their subsidy to purchase private tutorial services.

“From education savings accounts to private tutoring to public and charter school choice, we’ve made some important breakthroughs in recent weeks on the road to parental empowerment,” said Rep. John Boehner (R-Ohio), chairman of the House Education and the Workforce Committee.

While advocates impatient for universal school choice may deride ESAs and tutoring portability as baby steps, every parent knows that the child who took a few tentative steps yesterday is running family-room obstacle courses today.

Robert Holland is a senior fellow at the Lexington Institute, a public policy think tank in Arlington, Virginia. His e-mail address is [email protected].