COLORADO TUITION PROGRAM DEDUCTION

TAX TYPE Deduction

YEAR ENACTED 2000

REPEAL/EXPIRATION DATE None

REVENUE IMPACT $25.7 million

AX YEAR 2018)

NUMBER OF TAXPAYERS 64,262

WHAT DOES THIS TAX EXPENDITURE

DO?

The Colorado Tuition Program Deduction (529

Deduction) allows individuals, estates, and trusts

to deduct an amount equivalent to their total

contributions to a 529 account from their taxable

income. The deduction is capped at $20,000 and

$30,000 per taxpayer, per beneficiary for single

and joint filers, respectively.

WHAT IS THE PURPOSE OF THIS TAX

EXPENDITURE?

Statute and enacting legislation do not state the

deduction’s purpose; therefore, we could not

definitively determine the General Assembly’s

original intent. Based on our review of research on

tax incentives for saving for higher education,

federal and state regulations, and the current

operation of the expenditure, our evaluation

considered a potential purpose: to encourage and

support individuals to save for higher education.

WHAT POLICY CONSIDERATIONS DID

THE EVALUATION IDENTIFY?

The General Assembly may want to consider:

 Establishing a statutory purpose and

performance measures for the deduction.

 Reviewing the effectiveness of the deduction.

COLORADO TUITION

PROGRAM DEDUCTION

EVALUATION SUMMARY | JANUARY 2022 | 2022-TE6

KEY CONCLUSION: The deduction provides taxpayers with an incentive to encourage and support

saving for higher education; however, other benefits of saving provide a larger financial benefit and

may play a greater role in individuals’ decisions to save. Additionally, only about half of the amount

contributed to 529 accounts was deducted by taxpayers, indicating that the deduction was not a

significant factor for many account contributors who did not claim the deduction.

COLORADO TUITION PROGRAM DEDUCTION

COLORADO TUITION

PROGRAM DEDUCTION

EVALUATION RESULTS

WHAT IS THE TAX EXPENDITURE?

Section 529 of the Internal Revenue Code allows states, state agencies,

and education institutions to sponsor qualified tuition program savings

accounts (529 accounts) that assist individuals in saving funds for

higher education expenses. In Colorado, 529 accounts are administered

by CollegeInvest, a state enterprise within the Department of Higher

Education. 529 accounts are often used by parents to save money for

their childrens’ higher education expenses; however, an individual can

establish a 529 to benefit anyone, including themselves, and any

individual, not just the account holder, can make contributions to a 529

account. Interest earned on contributions to 529 accounts is exempt

from federal taxable income as long as any funds distributed from the

account are used for qualified education expenses, such as tuition, fees,

books, supplies, equipment, and room and board at a qualified

educational institution. Because Colorado uses federal taxable income

as the starting point for determining Colorado taxable income, interest

earned on 529 accounts is effectively exempt for state tax purposes as

well.

The Colorado Tuition Program Deduction (529 Deduction) [Section 39-

22-104(4)(i)(II), C.R.S.] allows individuals, estates, and trusts who

make contributions to beneficiaries’ 529 accounts to deduct from their

Colorado taxable income an amount equal to the total contributions

made. Beginning in Tax Year 2022, the deduction is capped at $20,000

annually per taxpayer, per beneficiary for single filers and $30,000 per

taxpayer, per beneficiary for joint filers. For example, a single filer with

two children could deduct $20,000 per child’s account, resulting in a

total of $40,000 in a given tax year. The cap is also adjusted annually

TAX EXPENDITURES REPORT

for an amount equivalent to the increase in tuition, room, and board at

state institutions of higher education.

The 529 Deduction was created in Calendar Year 2000 by House Bill

00-1274 and was first available to taxpayers beginning in Tax Year

2001. House Bill 21-1311, which was passed during the 2021

Legislative Session, amended the 529 Deduction to establish the annual

deduction cap.

To claim the deduction, taxpayers must create a 529 account through

CollegeInvest, which is responsible for tracking taxpayers’

contributions to 529 accounts and reporting contribution amounts to

the Department of Revenue (Department) [Section 39-22-104(i)(V),

C.R.S.]. Taxpayers report their contribution amounts on Line 8 and

calculate their total subtractions on Line 20 of their 2020 Subtractions

from Income Schedule (Form DR 0104AD). Taxpayers then report and

deduct the sum of their total subtractions on Line 8 of their 2020

Colorado Individual Income Tax Return (Form DR 0104). The

deduction is applied to taxpayers’ taxable income and is not refundable,

so taxpayers can only use it to the extent that they have taxable income.

If the available deduction exceeds a taxpayers’ taxable income,

taxpayers cannot carry the excess amount forward to future tax years.

WHO ARE THE INTENDED BENEFICIARIES OF THE TAX

EXPENDITURE?

Statute does not state the intended beneficiaries of the 529 Deduction.

Based on the operation of the deduction, we inferred that the intended

beneficiaries are taxpayers who make eligible contributions to 529

accounts and individuals whose educational expenses are paid through

529 accounts. The deduction benefits contributors by reducing their

taxable income by the amount contributed, up to the cap. Account

beneficiaries may also benefit to the extent that the deduction

encourages individuals to contribute funds towards their educational

expenses. As of Fiscal Year 2021, there were 384,160 accounts

COLORADO TUITION PROGRAM DEDUCTION

established through CollegeInvest’s 529 program and about $1.2 billion

in annual contributions were made to these accounts.

WHAT IS THE PURPOSE OF THE TAX EXPENDITURE?

Statute and the enacting legislation for the 529 Deduction do not

explicitly state its purpose; therefore, we could not definitively

determine the General Assembly’s original intent. Based on the

operation of the deduction; conversations with stakeholders and our

review of literature on tax incentives for saving for higher education;

and IRS and Department regulations; we considered a potential

purpose: to encourage and support individuals to save for higher

education.

IS THE TAX EXPENDITURE MEETING ITS PURPOSE AND

WHAT PERFORMANCE MEASURES WERE USED TO MAKE

THIS DETERMINATION?

We could not definitively determine whether the 529 Deduction is

meeting its purpose because no purpose is provided for it in statute or

its enacting legislation. However, we found that it is likely meeting the

purpose we considered in order to conduct this evaluation to a limited

extent. Specifically, the deduction provides some financial support to

individuals saving for higher education expenses and helps

CollegeInvest market 529 accounts, but other financial benefits of

saving are larger and may be more influential to individuals considering

whether to save for higher education expenses. Further, we found that

most individuals who contribute to CollegeInvest 529 accounts do not

claim the deduction, indicating that the deduction may not be important

to many individuals who contribute to 529 accounts.

Statute does not provide quantifiable performance measures for this tax

expenditure. Therefore, we created and applied the following

performance measure to determine the extent to which the deduction is

meeting its potential purpose:

TAX EXPENDITURES REPORT

PERFORMANCE MEASURE:

To what extent does the 529 Deduction

encourage individuals to save for higher education?

RESULT: We found that the 529 Deduction likely acts as a modest

additional incentive to encourage individuals to save for higher

education, but other benefits of saving may play a larger role in

individuals’ savings decisions. The deduction is frequently used by

taxpayers, with 64,262 taxpayers claiming deductions for about $554

million in 529 account contributions in Tax Year 2018. As discussed,

the deduction generally decreases a taxpayer’s Colorado taxable income

by the amount they contribute to a 529 account during the year.

Therefore, based on the state income tax rate of 4.55 percent in Tax

Year 2021, the deduction can lower a taxpayer’s tax liability by $4.55

for every $100 they contribute to a 529 account, assuming the taxpayer

has sufficient tax liability to offset. While this provides some financial

support to individuals saving for higher education and may have

encouraged some individuals to save, there are several additional

benefits that likely also serve as an incentive to save for higher

education.

 Investment earnings—Individuals saving money for higher education

have a range of options to invest their savings, including 529

accounts, which allows them to earn interest and capital gains on

their contributions.

 Tax-free distributions—When taxpayers take funds out of a 529

account to pay for eligible educational expenses, they are not subject

to federal or state income taxes on the account earnings that are

typically owed on non-529 account investments.

 Avoidance of college loan financing costs—To the extent individuals

are able to save for higher education expenses, they are able to reduce

the amount of college loan debt that they or their beneficiaries will

have to repay, thereby saving the interest that they would otherwise

owe. Individuals utilizing other vehicles for saving, such as a regular

COLORADO TUITION PROGRAM DEDUCTION

savings account, benefit from finance cost savings, not just those that

save within 529 accounts.

To assess the relative importance of each of these factors to taxpayers’

decisions to save for higher education, we calculated the value of the

deduction and the value of each of the incentives to save listed above

that a hypothetical individual saving for higher education might

consider. We made the following assumptions for our analysis:

 The individual saves $100.

 The individual can earn 5 percent annually on the amount saved by

investing in an interest bearing account, either using a 529 account

or other investment vehicle.

 If not using a 529 account for saving, the individual would be subject

to a 15 percent federal capital gains tax and 4.55 percent state

income tax on any investment earnings at the time the funds are

withdrawn for educational expenses.

 The individual or their beneficiary would otherwise incur student

loan debt equivalent to the amount saved that would be repaid over

10 years at a 3.73 percent interest rate, which was the published rate

for Federal Direct student loans as of Academic Year 2021-2022.

 To calculate the potential value of the 529 Deduction, we assumed

the individual increases the amount saved in their 529 account

equivalent to the $4.55 tax benefit associated with the deduction.

To account for the time value of savings, we calculated the value

provided by saving for several time intervals. We calculated these values

using “net present value,” which provides the current value of benefits

that will be realized in future years by discounting the future benefits to

account for the time value of money. For the purposes of our analysis,

we used a 2 percent discount rate for our net present value calculations,

to approximate the inflation rate in recent years. Exhibit 1 compares

the value of the 529 Deduction to the value of other available benefits,

TAX EXPENDITURES REPORT

which the saver could receive depending on the type of account they

choose to use.

EXHIBIT 1. VALUE OF AVAILABLE BENEFITS

FROM SAVING $100 FOR A HYPOTHETICAL TAXAPAYER,

BY NUMBER OF YEARS SAVED

SOURCE: Office of the State Auditor analysis based on the operation of the 529 Deduction.

As shown, the 529 Deduction provides a relatively small additional

incentive compared to the other benefits offered by saving. For example,

an individual who contributes $100 to a 529 account that earns 5

percent interest and saves for 18 years before withdrawing it for higher

education expenses would see a $137 benefit, of which, about $9 would

come from the deduction. If the same individual saved the same amount

in a non-interest bearing account, meaning that they would be ineligible

for the deduction, this decision would still have a value of about $12

based on avoiding the cost of student loan interest. However, the

deduction may be a more significant incentive for individuals who plan

to save for a shorter period of time since most of the other benefits of

saving are relatively smaller when the funds are saved for less time. For

example, the deduction makes up about 16 percent of the total value of

$10

$20

$30

$40

$50

$60

$70

$80

$90

2 5 10 15 18

Value of 529 Deduction

Value of 529 Tax Free Distributions

Value of Finance Cost Savings (Using a Non-interest Bearing Account)

Value of Finance Cost Savings (Using Interest Bearing 529)

Value of Interest Earnings

Years Saved

COLORADO TUITION PROGRAM DEDUCTION

saving if the funds are withdrawn after 2 years, but only about 6 percent

of the value if the funds are saved for 18 years. Although the relative

benefit of the deduction would vary from this example based on the

specific performance of individuals’ investments and tax liability,

generally, for most taxpayers the other potential benefits of saving

significantly outweigh the benefit provided by the deduction.

Despite its smaller monetary value compared to other benefits of saving,

the 529 Deduction may be more effective, for every dollar benefit

received, at encouraging individuals to save than the other incentives in

our analysis. Based on our review of economic research, tax benefits

that are available to taxpayers sooner generally have a stronger impact

on taxpayer decision-making than benefits that are not realized for

several years. Additionally, benefits that are more certain tend to be

more influential. CollegeInvest also reported that the deduction is a

helpful marketing tool that it has found to be influential in its efforts to

encourage individuals to save for higher education. According to its

marketing survey, 93 percent of individuals indicated that the deduction

was very important in their decision to open a 529 account with

CollegeInvest. Therefore, the deduction may be more influential to

taxpayers, relative to its monetary value, than other benefits because it

provides a benefit in the same tax year that the money is saved and its

value is relatively easy for taxpayers to determine.

In comparison, other benefits of saving may not be realized for years or

decades after the money is saved. Further, the amount of some of the

benefits may be less certain and more difficult for taxpayers to

determine and consider in their decision-making. In particular, earnings

received by investing the funds saved in the 529 account are uncertain

because they are subject to the performance of the investments, with a

risk of the investments losing value.

Additionally, we found that 529 account contributors did not claim a

deduction for a substantial portion of their contributions, indicating

that the 529 Deduction is likely not providing any additional incentive

for some contributors. Specifically, there were about $988 million in

TAX EXPENDITURES REPORT

contributions made to CollegeInvest 529 accounts in Fiscal Year 2018,

but taxpayers only claimed the deduction for $554 million in Tax Year

2018, about 56 percent, of the total contributions. It is likely that some

of the contributors were not able to use the deduction because they are

residents of other states. For example, CollegeInvest reported that about

9 percent of account owners were out-of-state, which would likely make

them unable to use the deduction unless they file income taxes in

Colorado. In addition, some non-account holders who contributed to

529 accounts were also likely non-residents, though we lacked data

necessary to determine the location of these individuals. It is also

possible that some contributors lacked sufficient taxable income to use

the deduction, which could be the case for contributors with lower-

incomes. Other contributors may not have been aware of the deduction,

or may have been aware of it at the time of their contribution but later

forgot to claim it, although we could not quantify the extent to which

this occurred.

WHAT ARE THE ECONOMIC COSTS AND BENEFITS OF THE

TAX EXPENDITURE?

Based on our review of Department data, we found that 64,262

taxpayers claimed the 529 Deduction in Tax Year 2018, resulting in

about $25.7 million in foregone revenue to the State and an average

benefit of about $400 per taxpayer. Additionally, we found that

taxpayers with higher incomes, who likely have more income available

for saving, tend to contribute more and receive a larger tax benefit from

the exemption than those with lower incomes. Specifically, taxpayers

with annual incomes at or above $200,000, claimed about 58 percent

of the total tax benefit of the deduction, nearly $15 million, while

making up about 31 percent of claimants. In contrast, taxpayers with

incomes below $50,000 claimed about 5 percent of the benefits, about

$1.3 million, and made up about 11 percent of all claimants. EXHIBIT 2

provides the total amount deducted in Tax Year 2018, by income level.

COLORADO TUITION PROGRAM DEDUCTION

EXHIBIT 2. TOTAL AMOUNT DEDUCTED

IN TAX YEAR 2018

SOURCE: Office of the State Auditor’s analysis of Department of Revenue data.

Excludes claimants with negative federal taxable income.

Similarly, taxpayers with higher incomes tended to claim much larger

average annual deductions. Specifically, those earning over $500,000

(roughly the top 1 percent of earners in Colorado) claimed an average

deduction amount of about $30,000. In comparison, taxpayers who

had less than $50,000 in federal taxable income deducted on average

about $3,700. EXHIBIT 3 shows the average 529 deduction by income

level.

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

Low income ($0 -

$49,000)

Middle income

($50,000 -

$199,000)

High income

($200,000 -

$499,000)

Highest income

($500,000 +)

Total Amount deducted

TAX EXPENDITURES REPORT

EXHIBIT 3. AVERAGE DEDUCTION AMOUNTS BASED ON

INCOME LEVELS IN TAX YEAR 2018

SOURCE: Office of the State Auditor’s analysis of Department of Revenue data.

As shown, taxpayers with higher incomes tended to contribute more to

their 529 accounts and claimed larger average deductions. However,

due to the cap introduced in House Bill 21-1311, going forward, some

taxpayers’ deductions will be limited and the 529 Deduction’s revenue

impact to the State will likely decrease beginning in Tax Year 2022. As

discussed, starting in Tax Year 2022, single-filer taxpayers will be

limited to deducting $20,000 and joint-filers will be limited to deducting

$30,000 annually per taxpayer, per beneficiary. Based on data provided

by the Department, we estimate that in Tax Year 2018 about 3,700

taxpayers deducted amounts greater than the cap that will go into effect

in Tax Year 2022, which resulted in about $5.3 million in forgone state

revenue in Tax Year 2018. Of the 3,700 joint and single filers that

deducted amounts greater than the cap, about 2,600 taxpayers had a

federal taxable income of $200,000 or more. If the number of claimants

and their contributions remain the same, the State would see a

corresponding reduction in the amount of foregone state revenue due to

the 529 Deduction as a result of the cap.

$3,743

$5,546

$12,563

$30,221

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

Low income ($0 -

$49,000)

Middle income

($50,000 - $199,000)

High income

($200,000 -

$499,000)

Highest income

($500,000 +)

COLORADO TUITION PROGRAM DEDUCTION

In addition, we found that although the deduction may help offset the

cost of college for beneficiaries, this benefit is relatively small in

comparison to the typical cost of higher education. Specifically, based

on school tuition, room, and board data for Academic Year 2017-2018

from the National Center for Education Statistics, we estimated the

average cost of attending an in-state public college in Colorado for 4

years starting in Academic Year 2017-2018 would cost about $94,000.

After adjusting for annual tuition inflation of 6 percent, we estimated

the cost of the same hypothetical college in Colorado would cost nearly

$270,000 for 4 years starting in Academic Year 2036-2037. In

comparison, if taxpayers received an annual tax benefit from the

deduction of about $400 per year, the average tax benefit of the

deduction in Tax Year 2018, through 18 years of saving, they would

receive a total benefit of $7,200 or about 3 percent of the total cost of

4 years of tuition, room, and board at an in-state college starting in

Academic Year 2036-2037. Further, it is likely that many individuals

do not save for 18 years and do not save an additional amount

equivalent to the tax benefit they receive from the deduction, so this

example likely overstates the typical benefit it provides.

WHAT IMPACT WOULD ELIMINATING THE TAX

EXPENDITURE HAVE ON BENEFICIARIES?

If the 529 Deduction was eliminated, individuals contributing to 529

accounts that previously claimed the deduction would experience an

annual increase of about $400 in their tax liabilities, based on the

average amount deducted by taxpayers in Tax Year 2018. For a

taxpayer claiming the average deduction amount over 18 years,

eliminating the deduction would result in about $7,200 in lost tax

savings. While taxpayers would still be able to receive the exemption

from federal and state income taxes on interest earned on contributions,

repealing the deduction could result in taxpayers deciding not to save,

making fewer contributions to CollegeInvest 529 accounts, or utilizing

other saving vehicles. Collectively, this could reduce the number of

individuals and families saving for higher education in Colorado,

though we could not quantify this potential impact.

TAX EXPENDITURES REPORT

Although the 529 Deduction provides a smaller financial benefit than

other benefits of saving, it may act as a stronger incentive for Colorado

residents to establish a 529 account through CollegeInvest, an incentive

that would no longer exist if the deduction was eliminated. In a 2015

customer survey conducted by CollegeInvest, about 75 percent of 529

account holders said that if the 529 Deduction were eliminated, they

would “investigate other options” to save for higher education and 63

percent indicated they would “likely close their CollegeInvest

accounts.” Although other states’ 529 accounts offer benefits similar to

those offered by CollegeInvest, without the 529 Deduction, Colorado

residents would no longer have the additional incentive to save through

CollegeInvest. Therefore, eliminating the deduction could have a

negative impact on CollegeInvest.

ARE THERE SIMILAR TAX EXPENDITURES IN OTHER STATES?

There are 49 states plus the District of Columbia that provide a 529

education savings plan, the exception being Wyoming, which partners

with Colorado to offer 529 accounts to its residents. However, only 42

other states and the District of Columbia have an income tax and can

therefore offer an income tax deduction. Of these states, 31 states and

the District of Columbia provide a deduction for contributions made to

529 accounts, and three states provide a credit for contributions.

Specifically, we found the following:

STATES WITH DEDUCTION CAPS AND CARRYFORWARDS—Of the 31 other

states that offer a deduction, 28 states limit their deductions with a cap.

States that cap the deduction amount typically cap the amount that can

be deducted on a per-taxpayer, per-beneficiary, or a per-taxpayer/per-

beneficiary basis. Per-taxpayer deduction caps limit the amount that can

be deducted from a taxpayer’s taxable income by the total amount

contributed by the taxpayer to one or more 529 accounts. On the other

hand, per-taxpayer/per-beneficiary caps limit the amount that can be

deducted by the amount a taxpayer contributes to only one single 529

account, meaning the taxpayer can deduct contribution amounts up to

COLORADO TUITION PROGRAM DEDUCTION

the cap for every beneficiary’s account they contribute to. For example,

Colorado’s cap allows joint filers to deduct up to $30,000 from their

taxable income for each account they contribute to and, therefore, could

deduct $90,000 if they made $30,000 in contributions to three different

accounts. In contrast to Colorado, most states either limit deduction

amounts based on total contributions made by the taxpayer or

contributions made to a single beneficiary account. Moreover,

Colorado has the highest cap, followed by Pennsylvania’s per

beneficiary cap of $15,000 for single filers and $30,000 for joint filers.

Illinois, Mississippi, and Oklahoma limit their deduction with a per

taxpayer cap of $10,000 for single filers and $20,000 for joint filers.

The average cap among states that limit deduction amounts is $4,974

for single and $8,596 for joint filers. Finally, 11 of the 28 states that

have instituted caps allow unused deduction amounts to be carried

forward to future tax years. Seven states limit the carryforward period

to between 4 and 10 years while the remaining 4 states do not limit the

number of years the deduction can be carried forward.

STATES WITH CREDITS FOR CONTRIBUTIONS TO 529 ACCOUNTS—Three

states provide credits for contributions made to 529 accounts, as

follows:

 Indiana provides a credit of 20 percent of contributions up to $1,000

annually.

 Utah provides a credit for 4.95 percent of contributions up to $2,070

for single and $4,140 for joint beneficiaries, with a max credit

amount of $102 for single filers and $205 for joint filers.

 Vermont provides a credit for 10 percent of the first $2,500 in

contributions for single filers and $5,000 for joint filers, with a max

credit amount of $250 per taxpayer, per beneficiary.

TAX EXPENDITURES REPORT

ARE THERE OTHER TAX EXPENDITURES OR PROGRAMS

WITH A SIMILAR PURPOSE AVAILABLE IN THE STATE?

We identified the following tax expenditures and programs designed to

encourage individuals to save for higher education:

INCOME TAX CREDIT FOR EMPLOYER 529 CONTRIBUTIONS [Section 39-

22-539, C.R.S.]—This provision allows Colorado employers who make

contributions to a qualified tuition plan owned by an employee to take

a credit against their Colorado state income tax liability equal to 20

percent of the total contributions made, up to $500 per employee who

receives a contribution. We conducted an evaluation of the Income Tax

Credit for Employer 529 Contributions, which can be found in the

Office of the State Auditor 2020 Tax Expenditures Compilation Report.

ACHIEVING A BETTER LIFE EXPERIENCE (ABLE)—This program offers

tax-advantaged savings plans for people living with disabilities. Eligible

individuals and families can save up to $100,000 through Colorado

ABLE saving accounts without affecting other public assistance

provided to disabled persons. The earnings gained in Colorado ABLE

accounts are considered nontaxable income on federal tax returns when

spent on qualified expenses such as education; housing; transportation;

employment training and support; personal support services; health

care; and expenses that improve health, independence, and quality of

life.

MATCHING GRANT PROGRAM—This program was created in 2004 and

helps low to middle income families save for higher education expenses

by matching up to $1,000 of eligible Colorado residents’ contributions

to a 529 savings account each year for up to 5 years. Applicants must

have income at or below 600 percent of the federal poverty level, which

is equivalent to a family of four with a combined annual income of

$159,000 and below. Additionally, applicants must be Colorado

residents and first apply when the beneficiary is younger than 9 years

old, and the beneficiary must be claimed as a dependent. Over the last

COLORADO TUITION PROGRAM DEDUCTION

5 years, CollegeInvest matched 4,057 families’ contributions resulting

in nearly $1.8 million in grants and about $445 in grants per family.

FIRST STEP PROGRAM—Created by House Bill 19-1280 in 2019, this

program provides every child born or adopted in Colorado on or after

January 1, 2020, a $100 contribution towards their CollegeInvest 529

savings account once the parent or legal guardian opens an account

naming the child as the beneficiary and applies for the program prior to

the child turning 5 years old. Children are eligible for the $100

contribution if they are a U.S. citizen or resident alien with a social

security number or federal tax identification number. CollegeInvest has

provided $13,530 in total contributions to 1,353 families since the

program started.

WHAT DATA CONSTRAINTS IMPACTED OUR ABILITY TO

EVALUATE THE TAX EXPENDITURE?

CollegeInvest could not provide location information on non-account

holders who contributed to 529 accounts. As a result of this data

constraint, we could not assess how many 529 account contributors

were likely ineligible for the deduction because they reside outside of

Colorado.

WHAT POLICY CONSIDERATIONS DID THE EVALUATION

IDENTIFY?

THE GENERAL ASSEMBLY MAY WANT TO CONSIDER AMENDING STATUTE

TO ESTABLISH A STATUTORY PURPOSE AND PERFORMANCE MEASURES FOR

THE

529 DEDUCTION. Statute and the enacting legislation for the

deduction do not state its purpose or provide performance measures for

evaluating its effectiveness. Therefore, for the purposes of our

evaluation, we considered a potential purpose for the deduction: to

encourage and support individuals to save for higher education. We

identified this purpose based on the operation of the deduction,

conversations with stakeholders, research on the topic, and Department

regulations. We also developed a performance measure to assess the

extent to which the deduction is meeting this potential purpose.

TAX EXPENDITURES REPORT

However, the General Assembly may want to clarify its intent for the

deduction by providing a purpose statement and corresponding

performance measure(s) in statute. This would eliminate potential

uncertainty regarding the deduction’s purpose and allow our office to

more definitively assess the extent to which it is accomplishing its

intended goal(s).

THE GENERAL ASSEMBLY MAY WANT TO REVIEW THE EFFECTIVENESS OF

THE DEDUCTION

. As discussed, we found that the deduction provides

financial support to individuals saving for higher education expenses,

with an average tax benefit of about $400 annually to current

beneficiaries. Additionally, the deduction likely acts an as incentive for

Colorado residents to contribute to an account administered by

CollegeInvest, instead of saving through another state’s 529 program.

Further, CollegeInvest reported that the deduction acts as a helpful

marketing tool in its efforts to encourage individuals to save for higher

education and that children with access to a college savings account are

more likely to enroll in higher education institutions. However, we also

found that other benefits of saving through a 529 account, such as

earning tax-free interest on contributions, and avoiding student loan

debt, provide larger financial benefits than the deduction and may,

therefore, be more important to individuals considering saving for

higher education expenses. Further, we found that individuals only

claimed the deduction for about 56 percent of the amount contributed

to CollegeInvest 529 accounts in Fiscal Year 2018, indicating that it is

not a significant factor for many individuals who contribute to 529

accounts and do not claim the deduction.