The Congressional Budget Office recently released its cost estimate for H.R 647, Achieving a Better Life Experience Act of 2014. The bill, which has strong bipartisan support, would “allow for the creation of a new type of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. -favored account – an ABLE account for individuals with disabilities.”
These accounts, a form of 529 plan for education savings, allow for the accounts to grow tax free, as long as it is used for qualified disability expenses. An ABEL account can help families of disabled individuals cover the cost of medical procedures and expenses while allowing interest to accrue tax free.
The CBO however has released its report stating that the law will increase direct spending by an estimated $1.2 billion over ten years, and reduce total revenues by $900 million in the same period. All together, the bill will increase the deficits by $2.1 billion over the next 10 years and cost 33 percent more to administrate than it saves in taxes for participants.
Nearly all of the direct spending of the bill is related to the increase in “number of beneficiaries of federal means-tested programs and federal spending for such programs,” according to the report.
Another CBO study found that federal spending on such programs has increased from around $5 billion in 1972 to nearly $600 billion in 2012, with a large portion of this cost determining participant’s eligibility. The administrative cost of this types of programs is, in turn, picked up by more burdensome taxes elsewhere in the code.
Now, like 529 plan, these types of programs can be an excellent way to limit tax code biases against saving and investment. However, the different types of plans are often pitted against one another, selecting who should be able to save and for what. As we have written before, they force individuals and families to separate their savings into different buckets. This limits some of the growth potential from that savings.
Instead of multiple costly new programs, tax reformers should consider consolidating different saving vehicles into a universal savings plan. Canada has created this type of program with positive results.
A universal savings plan would be a positive addition to the tax code and allow all individuals and families to choose how best to direct their saving, without the added cost and complexity.
Follow Josh on TwitterShare