FROM THE OFFICE OF PUBLIC AFFAIRS

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DEPUTY SECRETARY, U.S. DEPARTMENT OF TREASURY

REGARDING THE COVERDELL PARENT AND STUDENT

SAVINGS ACCOUNT PLUS ACT

I am sorry I cannot join Secretary Riley and Congressmen Rangel, Clay and Stenholm in person today to speak on this important issue. This Administration is strongly committed to improving the quality of primary and secondary education for every child in our country. However, we do not support the Coverdell proposal which would divert needed attention and resources from our public schools.

As stated recently in a letter from Treasury Secretary Rubin and Education Secretary Riley, this proposal raises the same concerns as the proposal passed by the Senate last summer and opposed by the Administration. At that time, the President stated that he would veto the legislation that contained this measure, and Secretary Rubin and Secretary Riley stated that they would recommend that he veto this bill should it reach his desk.

The Coverdell proposal would disproportionately benefit the most affluent families and provide little benefit to lower and middle-income families. According to a Treasury Department analysis, almost 70 percent of the benefits of this proposal would flow to families in the top 20 percent of income distribution and about 27 percent to families in the top ten percent. Low- and moderate income families are less likely to have assets to contribute to education IRAs and the benefit of the proposal depends on the family’s marginal tax rate, which lessens its value for these families.

In addition, we do not believe that increasing the contribution limits for tax-preferred saving opportunities will generate much additional saving and instead, will reward families, particularly those with significant means, for what they would otherwise do.

We are also concerned the bill could create significant tax compliance problems. The legislation allows tax-free withdrawals from Education IRAs for Asupplementary expenses required for [the child’s] enrollment or attendance at a public, private or sectarian school, but provides no guidance in identifying what these expenses are. Distinguishing between an appropriately tax-free withdrawal and one that should be subject to tax and penalty would lead to significant additional tax complexity for families.

Congressman Rangel’s substitute proposal would instead increase the volume of qualified zone academy bonds to help public schools with a substantial number of low-income students afford improvements in their infrastructure, their equipment and their teacher training. We support this and other proposals that would help the majority of students who are in public schools rather than using federal funds to encourage a shift away from these important community resources.

Report(s):

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