Maryland provides tax benefits and incentives to encourage families to save for their children's higher education.[1] The state operates two college savings vehicles: a Prepaid College Trust and a College Investment Plan. Under state law, families can claim a tax deduction worth up to $2,500 per beneficiary for contributions made into either savings plan for their children. Families with more than one child can claim a state tax deduction worth up to $2,500 for each child's contribution. Under federal law, interest earned in either account is not subject to tax if spent on eligible expenditures for higher education.

In all, Maryland's Prepaid College Trust and College Investment Plan had combined assets of nearly $2 billion for more than 110,000 beneficiaries in 2007.[2] The plans received $352 million in contributions in FY 2007.[3] The popularity of these plans demonstrates Maryland families' commitment to saving for their children's postsecondary education.

However, Maryland families should question why similar benefits and incentives are not provided for expenses related to a child's primary and secondary education. Often, during the K-12 education years many children most need, but cannot afford, the quality educational opportunities that will put them on the track to graduate high school and pursue higher education.

Maryland could become the first state in the country to offer a state tax benefit for contributions made to Coverdell Education Savings Accounts (ESAs).[4] Under federal law, families can contribute after-tax dollars to Coverdell ESA, where invested funds earn interest tax-free if they are spent on eligible K-12 or higher education savings accounts. Annual contributions are limited to $2,000 per account.

Offering Maryland taxpayers a $2,000 state income tax deduction for contributions made into a child's Coverdell ESA would give families more flexibility, helping to ensure that their children receive a quality education. To help low-income children participate, the tax benefit could be structured to encourage individuals and businesses to make charitable contributions into disadvantaged children's Coverdell ESAs.

A state tax deduction for contributions into Coverdell ESAs for K-12 and higher education saving would be a step toward giving families greater power in education. Families could use funds saved in their children's Coverdell ESAs for a range of education expenses, including: private school tuition, academic tutoring, supplemental services, transportation, books and educational supplies, special needs services, and computer technology. [5] This reform should be complemented with other educational options to give families greater ability to secure for their children a quality primary, secondary, and postsecondary education.

[1] For information on the College Savings Plans of Maryland, visit: www.collegesavingsmd.org.

[2] College Savings Plans of Maryland, "2007 Summary Annual Report," June 30, 2007, at: http://65.36.246.229/cspmd/documents/CSPMD_current_annual_report_summary.pdf (September 7, 2008).

[3] Ibid.

[4] The author has written about this policy recommendation in 2008 in a paper for the Goldwater Institute, see: Dan Lips, "Saving for School: How Arizona Could Help Families Save for Their Children's K-12 and College Educations," April 15, 2008.

[5] For more information, see: Internal Revenue Service, "Tax Benefits for Education: Coverdell Education Savings Accounts," U.S. Department of the Treasury, Publication 970, 2007, at: http://www.irs.gov/publications/p970/ch07.html#d0e7049 (September 7, 2008).