Learn While You Earn (1998)

Q: What conservative idea advances tax reform, helps families, and counters Clintonian politics? A: Education Savings Accounts Just when conservatives started to believe that serious tax reform was gaining momentum, along came the 1997 budget deal between President Clinton and the Republican Congress. The deal not only overlooked the whole debate over reshaping our complicat-ed and inefficient tax code, but it also created a bewildering array of new tax provisions. Worst of all, Clinton managed to enact his flawed pet proposals for education tax breaks. By effectively marrying tax relief to the issue of education, Clinton advanced a traditionally Democratic issue while making inroads into a core Republican cause. But this need not be the political masterstroke it appears. In fact, the president's tactics have left him open to a counterproposal that benefits education far more while advancing legitimate tax reform. Clinton has essentially endorsed tax deductions or credits to defray expenses for both preschool and higher education. He now has no principled objection to giving similar tax treatment to a family's investment in elementary and secondary education. Conservatives should propose tax deductibility for educational expenses and savings across the board, in the form of an expanded, tax-free educational savings account. This will cut taxes on families with children (a key voting constituency), promote parental choice and competition (a key conservative policy goal), and advance fundamental tax reform by treating education as an investment in human capital. More so than other ideas currently on the table--like eliminating the marriage penalty or expanding capital gains relief--tax-deductible ESAs combine free-market principles with political appeal. Those who seek both to reduce taxation and introduce market competition into education--policies of real value to American families--should seize this opportunity to fight for educational tax relief of their own. Seizing an Opportunity The various educational tax cuts in the 1997 deal are projected to yield nearly $40 billion over five years by 2002. The best known is probably Clinton's proposal to create $1,500 educational tax credits, called HOPE Scholarships. This program was roundly and rightly condemned as poorly drafted and targeted. For one thing, the $1,500 tax credits, available only for college, are likely to fuel tuition inflation. If past experience with tax breaks and federal student loans is any guide, colleges will soon raise tuition fees to capture at least some of the increased buying power of parents. Other aspects of the tax package drew less attention. These included new rules allowing withdrawals from individual retirement accounts (IRAs) for education, medical care, and homebuying, and the creation of educational savings accounts (ESAs), into which parents can deposit up to $500 a year and see earnings compound tax-free until the money is withdrawn for college expenses. None of these proposals saves families much money, and, in the case of IRAs, penalty-free withdrawals for college expenses come at the expense of retirement savings. Recognizing a good opportunity, U.S. Senator Paul Coverdell last summer proposed an amendment to the budget deal that would have allowed withdrawals from these ESAs for K-12 educational expenses as well as for higher education. In June 1997, the Senate approved Coverdell's amendment, but Clinton squelched it by threatening to veto the entire deal. The new A+ Accounts, as these ESAs for K-12 education are called, would have allowed annual deposits of up to $500 per child and exempted earnings from taxes, just like ESAs for college. In October, Representative Bill Archer, the chairman of the House Ways and Means Committee, introduced a similar bill with an annual deposit cap of $2,500. It passed the House but died in the Senate in late 1997. Coverdell has re-introduced the expanded ESA this year, with an annual cap of $2,000 per child. …