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Could the federal tax bill hurt the state’s budget?

Wednesday, Dec 20, 2017

* Sun-Times on the congressional tax bill

The shave in rates, and doubling of the standard deduction, and an increase in the child tax credit and some other new breaks may not counterbalance the new $10,000 cap on deductions for state and local taxes. At present, all income and property taxes are deductible. […]

Rep. John Shimkus, R-Ill., who represents the 15th Congressional District in southern Illinois, asked about the state and local tax deduction cap said, “Maybe Illinois should cut their taxes.”

* New York Times on the “one-two punch” to state tax systems

The first blow would come from expanding 529 college savings accounts, which offer tax advantages to encourage families to save money for college, to cover K-12 expenses, such as private school tuition and home schooling costs.

This amendment by Senator Ted Cruz passed only because of a midnight tiebreaking vote cast by Vice President Mike Pence. Under current law, earnings on contributions to 529 plans are not subject to federal taxes. These investment vehicles work well for college savings because deposits grow tax-free over a long time. Using 529 accounts for elementary or high school tuition, however, substantially shortens that period, making these accounts a minimal boost to school choice.

While this change would have only a small effect on the federal Treasury, it creates outsize impacts on the state income tax bases in the 33 states that instituted state tax deductions and tax credits to encourage 529 college savings. The federal expansion opens these state incentives to an entirely new area of expenditures, allowing private school families to funnel their tuition payments through 529s as a way to avoid state taxes. […]

Illinois, for instance, allows deductions for $20,000 in contributions a year per beneficiary to 529 plans […]

Expanding 529 plans to deliver state deductions to private school families will erode the tax base that funds public schools, affecting high-poverty schools the most. By limiting state and local tax deductions at the same time, Republicans would make it harder for states and cities to raise taxes to make up for those shortfalls.

The piece estimates this could cost New York’s state budget as much as $3 billion a year. It likely won’t be that much, but, yikes. New York has a $10,000 state income tax deduction for 529 contributions and there are 465,000 New York private school students. Illinois has a $20,000 deduction and has 279,432 private school students.

*** UPDATE *** With a big hat tip to a commenter, the 529 plan apparently got the boot under the Byrd Rule It turns out, only the home-schooling aspect of the 529 plan was dropped. So, carry on…

- Posted by Rich Miller        

37 Comments
  1. - RNUG - Wednesday, Dec 20, 17 @ 10:49 am:

    From what I can see, this will primarily hit the areas with high house prices / high earners; in other words, mostly Cook and the collars.

    It’s not going to mean anything to the people downstate making $50k or $60k a year that don’t have anything left over to save for their kid’s college education.


  2. - Norseman - Wednesday, Dec 20, 17 @ 10:49 am:

    John Shimkus - always a great thinker.

    It would be nice if a wave let him retire since he’s long past his self-imposed term limit.


  3. - Bigtwich - Wednesday, Dec 20, 17 @ 10:54 am:

    The 529 stuff got axed.

    http://thehill.com/policy/finance/365691-senate-parliamentarian-rules-against-gop-tax-bills-name


  4. - Hamlet's Ghost - Wednesday, Dec 20, 17 @ 10:56 am:

    == Illinois has a $20,000 deduction and has 279,432 private school students. ==

    Under current Illinois tax law, if 280,000 families with private K-12 students pay $20,000 in tuition through a 529 that represents ~$275 million in reduced Illinois income tax receipts

    $20,000 x .0495 x 280,000


  5. - Anon221 - Wednesday, Dec 20, 17 @ 10:56 am:

    Shimkus, R-Ill., “Maybe Illinois should cut their taxes.”

    Is that his take on “Let them eat cake”???


  6. - hisgirlfriday - Wednesday, Dec 20, 17 @ 10:57 am:

    Every Republican Congresscritter in IL should be voted out. They voted yes to benefit the interests of GOP big money donors and DC lobbyist friends from outside Illinois and said to hell with the local interests back home.

    Wonder if people like Peter Roskam even bother coming back to IL when they lose next November.


  7. - Hamlet's Ghost - Wednesday, Dec 20, 17 @ 10:57 am:

    @Bigtwich - perhaps that ruling only applies to home schooling

    == The parliamentarian also ruled that two other provisions in the bill violate the Byrd rule. One would allows 529 college savings plans to be expanded to be used for home-schooling expenses. ==


  8. - California Guy - Wednesday, Dec 20, 17 @ 10:59 am:

    The tax bill could indeed hurt the State’s budget as the overall tax burden for upper-middle and high income earners increases. That would put more pressure on those earners to leave the state, which = fewer tax papers. The State income tax will now be “felt more” by those that can no longer take advantage of the SALT deduction.


  9. - Anonymous - Wednesday, Dec 20, 17 @ 11:00 am:

    Maybe Rep. Shimkus and the rest of the Illinois congressional delegation should also work to correct the large imbalance between the amount of money Illinois sends to Washington and what it receives in Federal spending. I live in his district and his repeated refusal to at least even acknowledge Illinois’ status as a donor state is an election issue for me after the current GOP tax reform efforts.


  10. - Fayette County - Wednesday, Dec 20, 17 @ 11:01 am:

    Nice to see my Congressman expressing his thoughtful concern for the people of his district. Its long past time for him to keep his term limit pledge. At least that would be doing a service for his constituents.


  11. - Anonymous - Wednesday, Dec 20, 17 @ 11:02 am:

    This is going to be the Republican mantra: if you don’t like the federal tax law, cut state and local taxes. Make do with less. Go away and let the rich enjoy their money.

    By not having an honest discussion about where to cut, it’s an irresponsible position. But Rauner’s gotten away with it so far, and now Republican congresscritters will try.


  12. - Montrose - Wednesday, Dec 20, 17 @ 11:05 am:

    Shimkus is just voicing the whole reason they put the cap on the SALT deduction. It fits with the whole theme of the bill - reduce government revenue to force reductions in government programs.


  13. - Robert the 1st - Wednesday, Dec 20, 17 @ 11:07 am:

    =Go away and let the rich enjoy their money.=

    Pretty sure the rich didn’t care all that much when AFSCME lobbied to jack taxes in IL a few years ago. Working people sure did.


  14. - Hamlet's Ghost - Wednesday, Dec 20, 17 @ 11:09 am:

    Regarding the update:

    https://www.wsj.com/livecoverage/tax-bill-2017/card/1513748902

    == Sen. Ted Cruz (R., Texas) lost a piece of his expansion of 529 education savings plans–perhaps in part because of his own words. The proposal allowed the use of the tax-advantaged plans for K-12 education and for homeschooling. The homeschooling piece fell out after Democrats challenged it and the parliamentarian ruled in

    * * *

    “The Cruz amendment has a modest budget impact but the impact is vastly outweighed by the profound impact as a matter of social education policy of providing federal support for home schooling for the first time,” said Sen. Ron Wyden (D., Ore.) on the Senate floor, noting Mr. Cruz’s own praise for that expansion. ==

    It appears tuition paid to private schools might still be 529 eligible. Just not home school expenses.


  15. - Honeybear - Wednesday, Dec 20, 17 @ 11:14 am:

    It absolutely effects our state.
    Last night corporations
    Were unleashed
    Restraints are gone
    In restrained/regulated capitalism
    Will quickly cause s financial bubble
    There are any number of them
    Consumer debt
    Speculative investing
    Retail debt
    Student loan debt

    The water is receding fast from the shore
    The tsunami of Depression is just beyond
    The horizon
    Folks
    Illinois is broadside on to the wave
    Propulsion is minimal
    Folks we’re gonna roll over

    And this time we do not have the social/family/community systems in place to cope and survive.
    We don’t know our neighbors


  16. - California Guy - Wednesday, Dec 20, 17 @ 11:14 am:

    How does the 529 savings impact the State of Illinois thought? I thought 529 savings only impacted taxable Federal income - not State income….


  17. - Hit or Miss - Wednesday, Dec 20, 17 @ 11:17 am:

    “Maybe Illinois should cut their taxes.”

    I understand how cutting my state taxes will help me as a tax payer. I do not understand how this proposal would help the State of Illinois pay its backlog of bills or fund the states pension plans.


  18. - SaulGoodman - Wednesday, Dec 20, 17 @ 11:18 am:

    **How does the 529 savings impact the State of Illinois thought? I thought 529 savings only impacted taxable Federal income - not State income….**

    Did you read the post?

    “While this change would have only a small effect on the federal Treasury, it creates outsize impacts on the state income tax bases in the 33 states that instituted state tax deductions and tax credits to encourage 529 college savings. The federal expansion opens these state incentives to an entirely new area of expenditures, allowing private school families to funnel their tuition payments through 529s as a way to avoid state taxes. […]”


  19. - illini - Wednesday, Dec 20, 17 @ 11:20 am:

    Oh come on people, you are all being way to hard on my Congressman.

    He must be a “great thinker” because he is a West Point graduate just like Rep. Ives.

    He only broke his self imposed term limit pledge because Pres. Bush asked him to do so - how could he say no?

    And let us not forget some other memorable remarks - “Corporations are my best friends” and he walked out of a State of the Union speech because he was “bored”. All the while this climate change denier and small government stalwart shows his nature by protecting the likes of a Mark Foley.

    He makes me so proud every day.


  20. - Salonica's Backroom - Wednesday, Dec 20, 17 @ 11:23 am:

    @California GUY - IL and a handful of other states offer a state tax deduction for 529 contributions (which is a huge incentive to utilize those plans if you’re a resident of those states).

    Idea here is that by expanding the 529 language the feds are broadening the number or people who will take advantage of 529s, and therefore claim the state deduction.


  21. - notsosure - Wednesday, Dec 20, 17 @ 11:26 am:

    Hamlet’s ghost is right–the 529 for K-12 is still in there ($10,000/year/kid); only for tuition now and not homeschool expenses. And I don’t think College Illinois or the Illinois tax break will be automatic–the GA will have to amend our law if they want to expand the extra state tax break


  22. - Phenomynous - Wednesday, Dec 20, 17 @ 11:30 am:

    http://taxplancalculator.com


  23. - Hamlet's Ghost - Wednesday, Dec 20, 17 @ 11:30 am:

    == And I don’t think College Illinois or the Illinois tax break will be automatic–the GA will have to amend our law if they want to expand the extra state tax break ==

    If this is true then the new 529 rules won’t affect IL income tax receipts directly.


  24. - Anon - Wednesday, Dec 20, 17 @ 11:36 am:

    The 529 language is in the final bill, allowing for tax deductible private elementary & secondary tuition payments, up to $10k/yr. The home school provisions at pg. 69 of Engrossed Senate Amd 1 (12/14/17) were removed, as shown in pg. 74-75 of Engrossed Senate Amd 1 (12/20/17). Bill text is at https://www.congress.gov/bill/115th-congress/house-bill/1/text/eas?.


  25. - California Guy - Wednesday, Dec 20, 17 @ 12:04 pm:

    @Solinica’s Backroom - thanks for clarification. I didn’t know that Illinois’ 529 deduction language applies to any Federal 529 deduction. My assumption (which was incorrect) was that the Illinois 529 had language in it like “college savings.” As such, the Illinois language would need to be changed to match the new Federal language. I guess that does not need to happen though.


  26. - Fax Machine - Wednesday, Dec 20, 17 @ 12:12 pm:

    Rauner’s happy - it’s a win for school choicers.


  27. - Fax Machine - Wednesday, Dec 20, 17 @ 12:16 pm:

    Not a bad campaign issue for Rauner - presumably the Dems for Gov would say they’d repeal what now basically means private school tuition is state tax deductible & Rauner would campaign on keeping it.

    At the very least it’s an issue he’ll feel comfortable campaigning on because school choice/anti-teachers unions is something he is genuinely passionate about.


  28. - Responsa - Wednesday, Dec 20, 17 @ 12:20 pm:

    Both the benefits and detriments to the new plan are not state specific. The way it will affect individuals and families and how much it will lower their taxes, increase their take home pay and make filing easier depends a lot on where geographically they live in the state of IL and especially whether they are renters or homeowners in one of the higher property tax counties. People regularly make trade-offs when they choose where to live. I predict most of IL outside of Lake, and DuPage and parts of Cook is going to be very pleased with the tax changes once they see them in action.


  29. - Hamlet's Ghost - Wednesday, Dec 20, 17 @ 12:25 pm:

    Apparently Illinois law does NOT provide automatic deductibility for K-12 529 contributions.

    https://www.thebalance.com/what-are-my-options-for-a-529-savings-plan-in-illinois-795322

    It appears that to qualify, contributions must be made to one of three specific plans:

    Illinois has three specific 529 savings plans within the state. They are as follows:

    1. Bright Start College Savings (Direct-Sold):

    2. Bright Start College Savings (Advisor-Sold):

    3. Bright Directions College Savings: This plan is sold only by advisors.


  30. - Sir Reel - Wednesday, Dec 20, 17 @ 12:29 pm:

    Shimkus is a piece of work.

    It’s easy for US Congress members to cut taxes and tell States and locals to cut taxes. After all, the federal government has a big credit card. States locals don’t. They have to pay their bills.


  31. - walker - Wednesday, Dec 20, 17 @ 1:09 pm:

    Maybe we should cut our taxes, and greatly increase our short and long term debt, just like the Feds.

    Oh wait, we already did that in Illinois. Where was the promised jobs growth in the last three years?

    Might it be that we also destroyed the trust and predictability in our business environment, by refusing to even propose, much less pass, a state budget? Uncertainty is a great barrier to investment. That’s what Illinois owners and investors are actually telling us.


  32. - Anonymice - Wednesday, Dec 20, 17 @ 1:15 pm:

    Some of the powers that be (cough, cough) are willing to destroy/bleed anything and everything in order to ultimately take power/money away from public sector unions, mainly teacher unions. In turn, the Koch’s and the like gain more power and control across the states - less union money coming into elections, and a big spike of new-found billionaire dollars to fund their own agenda. It’s a win/win for them. See Koch Brother Playbook: Chapter 2.


  33. - City Zen - Wednesday, Dec 20, 17 @ 1:47 pm:

    ==Maybe we should cut our taxes, and greatly increase our short and long term debt, just like the Feds. Oh wait, we already did that in Illinois.==

    So Illinois can now print money?

    Best to leave Federal comparisons on the sidelines.


  34. - Steve - Wednesday, Dec 20, 17 @ 1:56 pm:

    This will make it more difficult to adopt a progressive income tax. Illinois Democrats should have tried the progressive tax years ago. This will make it more difficult…


  35. - Responsa - Wednesday, Dec 20, 17 @ 4:51 pm:

    This should make many people happy, and especially our union friends who work for AT&T in Ilinois and elsewhere:

    According to CNBC, AT&T was “quick to respond” to the passage of the tax bill, which drops the U.S. corporate tax rate from 35 percent to 21:

    The telecom giant said in a press release on Wednesday that it would give more than 200,000 of their U.S. union members a special bonus of $1,000. The company also increased its capital expenditures budget by $1 billion in the U.S.

    “Congress, working closely with the President, took a monumental step to bring taxes paid by U.S. businesses in line with the rest of the industrialized world,” CEO Randall Stephenson said in a statement. “This tax reform will drive economic growth and create good-paying jobs. In fact, we will increase our U.S. investment and pay a special bonus to our U.S. employees.”


  36. - Ron - Wednesday, Dec 20, 17 @ 5:51 pm:

    Wow, if that calculator is correct, my family will save about $13k in federal taxes.


  37. - Texas Red - Wednesday, Dec 20, 17 @ 8:00 pm:

    Of course no one mentioned the possibility that the k-12 529 provisions may Help folks that live in failing districts now afford to send their kids to a better private/parochial school.


Sorry, comments for this post are now closed.


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