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State Treasurer seeks to postpone tax benefit for private K-12 tuition

December 30, 2017 GMT

LINCOLN — Families wishing to fully cash in on the recently approved federal tax benefit on K-12 private and parochial school tuition might need to hold their horses.

And they may be holding those horses for a while.

State Treasurer Don Stenberg, whose office administers the 529 savings plans, said the Nebraska Legislature must enact enabling legislation before taxpayers can take advantage of any state tax breaks made available by Congress for private K-12 education.

While federal tax benefits for K-12 education are now available, Stenberg said he wants to put off implementation of the new state tax break until 2020 to avoid any adverse fiscal impact on the state budget.

“We all know we’re in a revenue crunch,” Stenberg said. “I think it will make some sense to push that out beyond the current biennium.”

That might not be good news for families of parochial and private school students wishing to take immediate advantage of the federal change, which allows them to use funds in a tax-advantaged 529 savings plan for tuition at private and parochial K-12 schools.

Right now, the 529 plans can be used only for higher education expenses, at a college or technical school.

Putting off the state tax change for two years will raise questions among families seeking to use the new tax break, said Tom Venzor of the Nebraska Catholic Conference.

“When someone sees a tax change at the federal level, there’s going to be that general disappointment and curiosity, ‘Why can’t we do this?’ ” Venzor said.

Of the roughly 38,460 students in private and parochial schools in Nebraska this school year, the vast majority, about 29,225 students, are in Catholic schools, he said.

The new K-12 tax break, because it will reduce the amount of taxes paid, promises to reduce state revenue, but whether it will be a major or minor impact on the state budget is as yet unclear.

Numbers crunchers with the Nebraska Department of Revenue are now conducting a fiscal analysis, but that estimate is not expected for a couple of weeks.

But a hint of the potential fiscal impact was given in a bill introduced this year that would allow up to $2,000 a year to be invested in an educational savings account for private K-12 school expenses. Legislative Bill 118, which did not advance to debate by the full Legislature, was estimated to reduce state tax collections by between $7.9 million and $8.7 million a year.

State Sen. Jim Smith of Papillion, who heads the Legislature’s Revenue Committee, which sets state tax policy, said that he appreciated Stenberg’s approach but that he wants to see what the predicted fiscal impact might be before making any decisions on when the new tax breaks should be implemented.

“We do have a very strained state budget, and we have to be careful about what we do,” the senator said.

State lawmakers, when they convene for a 60-day session on Wednesday, will be looking to close a $200 million budget gap created by lower-than-expected tax collections and an unexpected request for an additional $50 million over two years to pay for higher-than-anticipated child welfare costs and lower-than-expected federal funding of Medicaid.

Several senators have already said they see tough sledding ahead for any proposal — like a broader tax break on 529 plan expenditures — that would add to that budget shortfall.

The new federal law expands state-sponsored 529 plans to include tax-free distributions of up to $10,000 per year to pay for tuition at K-12 private and parochial schools.

But Stenberg, in a post on his office’s website, warns families that until Nebraska passes authorizing legislation they won’t qualify for any state tax breaks, and “will be subject to recapture of any state income tax deduction previously claimed,” if they withdraw 529 funds to pay for K-12 expenses.

The treasurer said that his office has drafted enacting legislation and would be looking for a state senator to introduce the bill during the upcoming legislative session.

paul.hammel@owh.com, 402-473-9584