U.S. Senate Republican Policy Committee - Larry E. Craig, Chairman - Jade West, Staff Director

No. 44 October 29, 1997

H.R. 2646 -- Education Savings Act
for Public and Private Schools

Calendar No. 227

H.R. 2646 was not referred to committee but is being held at the desk as passed by the House.

NOTEWORTHY

HIGHLIGHTS

Coverdell A+ Education Savings Accounts

As passed by the House, H.R. 2646 expands section 530 of the Internal Revenue Code (the Education Individual Retirement Accounts provision of the Taxpayer Relief Act) by increasing the annual limit on contributions to education savings accounts (education IRAs) from $500 to $2,500, and by broadening its scope to include elementary and secondary school expenses in addition to college expenses.

Current law -- Section 530 of the Internal Revenue Code -- now allows taxpayers beginning January 1, 1998, to set up education savings accounts for children under the age of 18 and to contribute up to $500 in after-tax dollars to the account to pay for higher education expenses. Any interest accrued in the account would be tax-free as long as the funds were used for eligible higher education expenses.

Specifically, this bill amends current law in these areas:

BACKGROUND

As noted, the Coverdell A+ Education Savings Accounts amendment was adopted during consideration of S. 949, the Senate version of the Taxpayer Relief Act and included in the final budget agreement reached between Congress and the Administration on July 29, 1997.

However, just hours after President Clinton had announced that he had reached an agreement with Congress on balanced budget and tax relief legislation, a letter from the President was sent to Speaker Gingrich and Majority Leader Lott stating that he would veto the Taxpayer Relief Act unless the Coverdell language was stricken from the bill. The body of the letter, in its entirety, read:

"I want to again thank you for working in a productive, bipartisan manner to develop this bipartisan budget agreement. I feel particularly good about the strong education package that is included in the tax bill. As you know, in working out the final agreement, I strongly opposed the Coverdell amendment. I would veto any tax package that would undermine public education by providing tax benefits for private and parochial school expenses." [emphasis added]

In order to avert a presidential veto of the Taxpayer Relief Act, the Coverdell language was deleted from the conference agreement. H.R. 2646 reflects Speaker Gingrich's and Majority Leader Lott's assurance that the Coverdell provision would be considered as separate legislation prior to Congress's adjournment for the year.

COST

The Joint Committee on Taxation estimates that the bill will cost $2.58 billion over five years (FYs 1998-2002): $115 million in FY98, $485 million in FY99, $644 million in FY 2000, $700 million in FY 2001; and $636 million in FY 2002. Its 10-year estimate is $4.0 billion.

The bill provides an offset of $2.65 billion to come from additional revenue associated with clarification of rules governing the employer tax deduction for accrued vacation and severance pay. The offset will result in a net gain of $66 million over five years.

ADMINISTRATION POSITION

On October 21, 1997, the Administration issued a "Statement of Administration Policy" for H.R. 2646. It stated:

"If H.R. 2646 were presented to the President, the Secretaries of Education and the Treasury would recommend that he veto the bill because it is bad policy and bad tax policy.

"Every American child deserves a high-quality elementary and secondary education. Targeting limited Federal resources to build stronger public schools will help ensure that all our Nation's children receive the education they need to become productive citizens. H.R. 2646 would divert needed resources from these schools.

"H.R. 2646 would disproportionately benefit the most affluent families and provide little benefit to lower- and middle-income families. Families in the highest income bracket that saved the maximum amount permitted by H.R. 2646 would receive more than twice the benefit of families in the lowest tax bracket that saved the same amount. Moreover, the bill would not create a significant incentive for families to increase their savings for educational purposes; it would instead reward families, particularly those with substantial incomes, for what they already do."

POSSIBLE AMENDMENTS

During House consideration of the bill on October 23, one amendment was debated and voted on. The House rejected a Rangel (D-NY) substitute amendment by a vote of 199 to 224 (Roll Call Vote No. 522). The Rangel substitute would have eliminated the Education Savings Account provisions of H.R. 2646 and provided instead for an increase to $8 billion in funding for the Education Zones program that was included in the Taxpayer Relief Act.

However, at press time, consideration of this bill was continuing to be threatened by a Democrat-led filibuster over campaign finance reform. Thus, a cloture vote was anticipated on Friday. TOP