Erosion Of The State

NY Times: How the Republican Tax Plan Uses School Savings to Hurt States By NAT MALKUS

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.

Imagine for instance that a family in New York spends $10,000 on high school tuition but has not yet started saving for college. Congress’s 529 expansion opens New York’s $10,000 state income tax deduction for 529 contributions to private school tuition. This family could now open a 529 savings account, briefly park the $10,000 for private school tuition in it, and avoid about $600 in state income taxes.