Big tax break angers officials

Law misreading gives higher Md. deductions to college-plan donors

Revenue loss irks legislators

January 19, 2002|By Alec MacGillis | Alec MacGillis,SUN STAFF

Using its own interpretation of a new state law, the board that oversees Maryland's new college savings program has given hundreds of wealthy taxpayers a $25,000 income tax deduction instead of the $2,500 they were supposed to receive.

The board's action - which cost state and local governments more than $2 million in lost revenue for last year - drew an angry reaction yesterday from state lawmakers, who vowed to close the loophole retroactive to Jan. 1.

"We've been had," Sen. Patrick J. Hogan, a co-sponsor of the law, said at a hearing in Annapolis. "We set this up to encourage people to save for college, not as a tax shelter, and that's what this has turned into."

Sen. Robert R. Neall warned that future funding of state college savings programs was in peril because of the board's interpretation.

"I'm not going to vote for any more of this stuff until we get an explanation," said Neall, an Anne Arundel Democrat. "I'm embarrassed, and I'm angry."

The law creating the Maryland College Investment Plan, which took effect last year, allows residents to contribute to any of 10 funds offered by the state Higher Education Investment Board. The legislation provides for state income tax deductions of up to $2,500 for contributions to "each investment account" in the year the contribution was made.

The investment board, on an assistant attorney general's advice, took that to mean taxpayers who contributed at least $2,500 to any of the 10 investment options could receive the deduction for each one, for a total tax break of $25,000. The board trumpeted the plan's tax advantages in marketing the plan.

But legislators said yesterday that they never intended such a generous deduction. The law, they said, gave taxpayers a break of only up to $2,500 for their overall investment in the various funds.

Lawmakers rebuked leaders of the investment board, saying they could have asked the General Assembly for clarification of its intent. They also noted that residents have apparently taken full advantage of the interpretation.

Between Dec. 10, when the plan started accepting contributions, and Dec. 31, about 13,000 accounts worth more than $100 million were created for college-bound children. Of those, 784 accounts included contributions to all 10 funds, making the investors eligible for tax breaks for every fund.

More than 3,000 other accounts were opened in more than one fund, also allowing those investors to qualify for more than the intended $2,500 deduction.

In theory, said Sen. Barbara Hoffman, a Baltimore Democrat and chairman of the Senate Budget and Taxation Committee, two parents and two grandparents could each contribute to 10 different accounts for one child and gain $100,000 in tax breaks.

Said Sen. Edward J. Kasemeyer, a Howard County Democrat and the law's other sponsor, "The purpose of this whole thing was to provide a vehicle for the average Joe for his kid to go to college. Look at the numbers of those who bought 10 funds for their kid. It would suggest this has become a tax shelter vehicle. ... "

Lawmakers excoriated the investment board's leaders for not consulting them. "I'm looking for one scintilla of evidence that this legislature ever interpreted this" as a $25,000 tax break, said Neall.

Ambiguous language

Edwin Crawford, the chairman of the investment board, and Joan Marshall, executive director of the state's college savings plans, said they did their best to make sense of what they called ambiguous language in the law.

They said they considered that Virginia allows a $2,000 deduction for each college savings fund. They also considered that Maryland's other college savings plan, the PrePaid College Trust, technically allows $2,500 deductions for more than one account in one year - though only a handful of the plan's thousands of participants have taken advantage of that.

Crawford and Marshall said they asked Maryann O'Donnell, the assistant attorney general assigned to the investment board, for an opinion, and she interpreted the maximum tax break as $25,000. After the hearing, O'Donnell defended the board's decision not to ask the law's sponsors what they meant in the law.

`This was not pillage'

The board has calculated that its interpretation of the law cost state and local governments about $2.7 million in lost tax revenue for 2001. Its officials noted that some of that revenue would have been lost eventually if taxpayers deducted some of their excess investments in a subsequent tax year, as the law allows. "This was not pillage," Crawford said. "Did some people prevail in taking more than was hoped for? Yes. Was it a massive amount of money? No."

Lawmakers were alerted to the board's interpretation in a Dec. 17 letter from Comptroller William Donald Schaefer. In the letter, he said he would comply with the board's interpretation in assessing 2001 state taxes because the $25,000 deduction was being "actively marketed," and retracting it would cause confusion.

At the same time, Schaefer urged the legislature to "clarify its intention" for 2002 and later years.

Hoffman promised that the lawmakers would do so. "You can be sure there will be legislation on this," she said.

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