Testimony Archives
Testimony before the
Senate Financial, Governmental Organizations and Elections Committee
Monday, February 21, 2005
Good afternoon. My name is Kim Chamberlain, and I am Vice President and Counsel, State Government Affairs, for the Securities Industry Association1. SIA brings together the shared interests of nearly 600 large, medium, and small securities firms to accomplish common goals. We support state legislation across the country that extends equal tax treatment to all qualified 529 plans. It is therefore a pleasure to be here today to express SIA's strong support for Senator Delbert Scott's SB 324.
Saving for your children's college education can be a daunting task. According to the College Board, the average cost for one year of a public college in 2004-2005 was $11,354, while the cost for one year of a private college or university was $27,516. Multiply that number by four years, and parents and students are facing total college costs that currently range between $45,000 and approximately $110,000. Moreover, college costs are only going up. Over the last decade, after adjusting for inflation, total costs have increased 36% at four year public colleges and 32% at four year private colleges and universities.
How does the average family even begin trying to save for such an important expense? Kiplinger, Savingforcollege.com, and a host of other entities currently consider 529 plans to be the best place to invest college savings.
What makes 529 plans so attractive? Earnings on most college investment options, such as stocks, CDs, or mutual funds, are taxed at the investor's rate. If a Missouri resident puts money away for college in one of these vehicles, he or she would have to give up to 30% of his or her earnings back to the federal government in taxes. If the resident instead puts the money into a 529 plan, earnings accrue free from federal tax so long as they are used for qualified education expenses2. This is a huge benefit, which effectively and dramatically increases the rate of return on the resident's investment. This benefit was further improved upon when most states conformed their tax laws to ensure that 529 earnings were likewise not taxed at the state level.
SIA strongly supports SB 324 because it makes 529 plans an even more attractive savings option for Missouri residents. Currently, approximately 22 states give their residents a state tax deduction for contributions made to a specific, state sponsored 529 plan. Missouri is one of these states, as it allows residents who contribute to the Missouri Saving for Tuition Program (MOST) to deduct contributions of up to $8,000 per year from their state taxable income. Recognizing that encouraging college savings is good public policy, SB 324 extends this tax benefit to Missouri residents who contribute to any qualified 529 plan.
There are several reasons why it is important to extend the current up front tax incentive beyond the MOST Program to all qualified 529 plans.
First, limiting a state tax deduction to a single state sponsored plan effectively limits consumer choice. We want people to pick the 529 plan that is best suited for them. We want them to look at factors such as investment options, risk, manager reputation, expense ratio, and sales load. We do not want the preferential tax status (valued at up to approximately $480 for an $8,000 contribution) to be the sole or primary reason people select a particular 529 plan.
Yet that is what people, including myself up until recently, do. I have two daughters, ages 12 and 10, and, as a New York resident, I participated in the NY College Savings Program managed by Upromise Investments and Vanguard. I picked the plan not because it necessarily best suited my investment objectives but rather because it was the only one that gave me a substantial state tax deduction. We recently moved across the river to New Jersey. I am now looking closely at a number of different 529 options.
Second, SB 324 encourages competition among plans. Increased competition generally translates into better customer service, lower fees, greater efficiency, and better product innovation. It is important to understand that when we lobby for tax parity legislation, we are not saying that the state sponsored program is a bad option. What we are saying is that competition is good, and it will result in even better options for consumers.
Third, many Missouri residents rely upon investment professionals to help meet their college savings needs. Because these investment professionals are familiar with the family's entire investment portfolio, they are in a unique position to help Missouri residents select the 529 plan that fits best with their needs and goals. Extending equal tax treatment to all 529 plans allows Missouri residents to continue working with trusted advisers, and allows those advisers to explore a variety of options before making investment recommendations.
Fourth, SB 324 is consistent with the original objectives of 529 plans. Qualified tuition plans are designed to be a flexible and portable investment option as: (1) they can be used equally at any accredited public or private undergraduate, graduate or professional program in the country; (2) they are open to any investor, regardless of state residency; and (3) they can be opened by any investor (whether a parent, grandparent or non-relative) for the benefit of any future student. Proprietary state tax advantages are inconsistent with plan portability.
Finally, encouraging people to go to college is good policy and makes sound economic sense for the state. According to the U.S. Census Bureau, people with bachelor's degrees earn over 70% more on average than those with only a high school diploma, and the earnings gap between a high school and a college graduate is more than $1,000,000 over a lifetime. In addition, a College Board report entitled "Education Pays" concluded that college graduates not only make more but they also have lower levels of unemployment, are less likely to depend on social programs, and have lower smoking and incarceration rates. In short, there are many benefits to having state residents graduate from college.
Once again, thank you for the opportunity to appear before this committee. Please let me know if you have any questions.
Footnotes:
1. The Securities Industry Association was established in 1972 through the merger of the Association of Stock Exchange Firms and the Investment Banker's Association. SIA member-firms (including investment banks, broker-dealers, and mutual fund companies) are active in all U.S. and foreign markets and in all phases of corporate and public finance. The U.S. securities industry employs 790,600 individuals, and its personnel manage the accounts of nearly 93-million investors directly and indirectly through corporate, thrift, and pension plans. In 2003, the industry generated $213 billion in domestic revenue and an estimated $283 billion in global revenues.
2. As initially conceived, 529 plan earnings were taxed not at the parent/investor's rate but rather at the presumably lower tax rate of the child/beneficiary. The federal Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 made earnings on 529 plans free from federal tax.