T. Rowe seeks veto of college tax break

Firm says deduction for out-of-state plans a detriment to Md.'s

May 10, 2002|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

T. Rowe Price Associates, which manages Maryland's college savings plan, has asked the governor to veto legislation that would grant residents income tax deductions if they invest in other states' plans.

In a letter to the governor, Price said the tax break would "be detrimental" and "jeopardize" the state plan by removing an important incentive for residents to invest in it over other plans.

Maryland would be the only state to give a tax break for residents investing in out-of-state plans.

But Sen. Barbara Hoffman, a Baltimore Democrat and a sponsor of the legislation, said Price and the board that oversees Maryland's plan "don't want the competition."

Gov. Parris N. Glendening hasn't decided whether to veto the legislation, an aide said. His last bill-signing session is set for Thursday.

The legislation was created to tighten a loophole that allowed Marylanders investing in the state's plan to get a tax deduction 10 times the amount that legislators intended.

College savings plans allow people to invest money in managed accounts for a student's education, and the money can be withdrawn free of federal taxes if used for college.

Twenty-three states, including Maryland, give residents a tax deduction for contributions made to their home-state plan.

Maryland launched its plan in December, giving investors a choice of investing in 10 portfolios managed by Price. Plan officials interpreted the law creating the plan as allowing one investor to put up to $2,500 in each of the 10 portfolio accounts for one student and get a $25,000 income tax deduction for the year.

Outraged legislators said the intention was to give an investor no more than a $2,500 deduction per child, and set about clarifying the law's language. Besides limiting the deduction's size, though, legislators expanded it to include a tax break for residents investing in out-of-state plans.

Price supports attempts to limit the size of the deduction, but that can be done without legislation by changing the plan's governing documents, said Regina Pizzonia, vice president and associate counsel.

Hoffman said that only through legislation can the deduction be clarified.

Price said it is concerned that the expanded tax break will decrease contributions and diminish the plan's economies of scale. At the end of April, the plan had $142.7 million in assets. Price estimates Marylanders will invest $60 million in outside plans the first year of the tax break.

Hoffman, though, said the purpose of the legislation is to help Marylanders save for their children's education. "The truth is it will make the Maryland plan more competitive," she said. "What's wrong with that?"

"It's certainly opens up more options for Maryland residents, which makes it consumer friendly," said Joseph Hurley, founder of Savingforcollege.com and a plan expert.

But the tax break can mean a "substantial" loss of contributions for Maryland's plan, which may later hurt consumers if Price must raise its fees because there are fewer investors to spread the costs among, he said.

"Some states are going in the opposite direction" and are using tax breaks to keep residents from investing elsewhere, Hurley added. New York, for instance, will recoup past tax deductions given to a resident who takes money out of its plan to invest out-of-state, he said.

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