Proponents of tax parity for 529 college savings plans won a hard-fought victory last week when Missouri became the fifth state in the country to offer tax benefits for out-of-state plans.
The "Show-Me State" joined Arizona, Kansas, Maine and Pennsylvania, which already have parity laws.
Under the new law, which takes effect Aug. 28, the state will allow taxpayers to deduct from their income a portion of contributions made not only to the state's Missouri Higher Education Savings Program but also to qualified 529 programs from other states.
Taxpayers filing jointly can deduct up to $16,000 a year and those filing single returns can deduct up to $8,000 a year.
Given the diversity of tax treatment, financial advisers must be aware which states have tax parity for 529 plans and which allow tax deductions only for in-state plans, according to industry expert Joe Hurley, president and chief executive of Pittsford, N.Y.-based Saving forcollege.com LLC.
"Your analysis of 529 plans has to consider [those factors] and you must weight it appropriately in your recommendation of a plan," he wrote in a recent newsletter.
After determining the value of a deduction, he continued, advisers "will see how the age of the beneficiary is especially relevant — the longer the investment horizon, the less important the deduction relative to performance of the underlying investments."
The parity issue has long been a controversial one in the 529 industry, and the new Missouri law represents a win for the financial services industry, which has been lobbying hard to introduce tax parity for 529 plans to as many states as possible.
"The question is, 'who has the right to control the investment decision: the individual or the state?'" Scott Gates, Topeka-based director of Kansas' Learning Quest 529 program, asked at one industry debate on the topic.
"We believe you shouldn't choose a plan just because of the tax deduction; you should be able to choose the best plan," Mr. Gates explained.
The Securities Industry and Financial Markets Association is targeting lobbying efforts in Hawaii and Connecticut for the fall legislative session, according to Travis Larson, chief spokesman for the New York and Washington-based trade and lobbying group.
"We hope they will be the next dominos to fall," he said.
Some state officials fear that if parity takes hold, the industry would be dominated by just a few profit-driven nationally oriented program managers who would be unlikely to market to low- and moderate-income residents of smaller states.
Other state officials cite such concerns as loss of revenues to the state as well as lack of oversight over other 529 programs that the states are in effect subsidizing.
Jacqueline "Jackie" Williams, executive director of the Columbus-based Ohio Tuition Trust Authority and chairwoman of the Lexington, Ky.-based College Savings Plan Network, has called tax parity "problematic," arguing that if one state "has absolutely no input in, and oversight over," another state's 529 plan, the out-of-state plan should not benefit from "valuable tax resources."
And with state coffers shrinking as the economy tumbles, the argument that parity will drain dwindling state cash will only become more pronounced, industry ob-servers say.
Conversely, supporters of parity contend that it serves the best interests of state residents by offering them more choices.
"Anytime our industry can offer our customers a greater choice of products, that certainly is to their advantage, and ours" said Mr. Larson.
However, industry observers said that efforts to expand parity legislation were dealt a blow by the Supreme Court's Davis v. Kentucky decision in May, which affirmed a state's right to give residents a tax break for buying in-state municipal bonds.
Opponents of the decision argued that a state unfairly discourages interstate commerce by not granting similar tax preferences to its residents who purchase bonds from another state.
The case contained some key parallels to Section 529 college savings plans, most of which allow participants to deduct part of their contributions to their own state's 529 plan for state income tax purposes, while not allowing similar deductions when out-of-state plans are purchased.
If the Supreme Court had ruled that the preferential tax treatment was unconstitutional, tax parity for 529 plans would almost surely have spread to every state, according to legal experts.
"States hoping to maintain preferential tax treatment for their own plans would have had a big problem," said Len Weiser-Varon, a partner in Boston-based law firm Mintz Levin Cohn Ferris Glovsky & Popeo PC. "The Supreme Court ruling maintains the status quo."
"The Supreme Court ruling will help to slow down the push for state tax parity," said James "Jamie" Canup, a partner with Troutman Sanders LLP in Richmond, Va. "It won't stop proponents of parity from asking, but it is one less arrow in their quiver."
E-mail Charles Paikert at [email protected].
