Bill Summary – FastDemocracy

SB 779
                      Department of Legislative Services
                             Maryland General Assembly
                                   2021 Session
                           FISCAL AND POLICY NOTE
                                 Third Reader
Senate Bill 779                 (Senator Elfreth, et al.)
Budget and Taxation                                                        Appropriations
  Maryland 529 Program – Board Authority and State Contribution – Alterations
This bill modifies and adds requirements for receiving a State contribution within the
Maryland Senator Edward J. Kasemeyer College Investment Plan. Specifically, the bill
requires an account holder under the State Contribution Program to be a resident of
Maryland and file income taxes on or before July 15 of each year. The bill also alters the
income measurement of account holders for program eligibility from Maryland taxable
income to Maryland adjusted gross income. A qualified beneficiary must be younger than
age 26 in the calendar year before the account holder submits an application to receive a
State contribution. The bill also establishes a $9,000 cap on the State contribution amount
received over the lifetime of an account holder. Finally, the bill authorizes the
Maryland 529 Board to aggregate and distribute administrative fees across all
Maryland 529 programs. The bill takes effect July 1, 2021.
                                    Fiscal Summary
State Effect: General fund expenditures likely decrease beginning in FY 2023; however,
the reduction depends on the extent to which program eligibility restricts total State
contributions as discussed below. State agencies can implement the bill’s changes with
existing resources. Maryland 529 fee revenues decrease to the extent fewer account holders
and beneficiaries are eligible for the contribution program.
Local Effect: None.
Small Business Effect: None.
                                         Analysis
Current Law: The Maryland 529 Board currently operates two qualified tuition plans: a
prepaid plan and an investment plan. State income tax deductions are available
independently for both plans, generally for up to $2,500 per year. Investment accounts
established after December 31, 2016, are also eligible for a State matching contribution
under specified conditions, as described below. An investment account holder may not
claim an income tax deduction in the same year that a State match is received.
Generally, funds in the plans may only be used for qualified education expenses, which
historically meant certain expenses related to higher education. However, under the federal
Tax Cuts and Jobs Act of 2017, the investment plan may be used to pay for tuition expenses
at K-12 public, private, and parochial schools.
State Matching Contributions
For 529 investment accounts established after December 31, 2016, a State contribution of
$250 or $500, depending on income, may be made to an investment account if:
      the qualified beneficiary of the investment account is a Maryland resident;
      the account holder (for example, a parent) submits an application to the 529 Board
       or its designee between January 1 and June 1 of each year; and
      the account holder has Maryland taxable income in the previous taxable year no
       greater than $112,500 for an individual or $175,000 for a married couple filing a
       joint return.
A minimum amount of funds must be deposited into the investment account by the
account holder in order to receive a State match, which is received by the end of the
calendar year. Minimum contributions increase with income as the State match decreases.
Chapter 538 of 2020 limited a qualified beneficiary to two State matching contributions
per year beginning for application periods after December 31, 2020.
The Governor must provide at least $3.0 million each fiscal year for matching
contributions. If the amount of funding is insufficient to fully fund all contributions, the
529 Board must prioritize awards based on the order in which the applications are received
and for account holders who did not receive a contribution in any prior year.
State Expenditures: Since fiscal 2019, the cost to fund eligible applications has exceeded
the $3.0 million mandated appropriation for State matching contributions. For fiscal 2021,
a total of $12.5 million (including a $2.4 million deficiency appropriation) is budgeted to
fully fund eligible applications. The Governor’s proposed fiscal 2022 budget includes
SB 779/ Page 2
$10.1 million. Although not required, since the program began (in fiscal 2018), it has
provided a match for all eligible applicants and, if demand exceeded appropriated funding
in a fiscal year, a deficiency appropriation was provided.
The bill’s changes to residency requirements and age restrictions will reduce the number
of accounts eligible for State contributions. The income requirement change from
Maryland taxable income to Maryland adjusted gross income would, in many cases, also
restrict eligibility. The total amount of Maryland adjusted gross income is often greater
than the total amount of Maryland taxable income for taxpayers at the margins of eligibility
(i.e., an individual with taxable income less than $112,000, but adjusted gross income
greater than $112,000). The more individuals who fall out of eligibility because of these
restrictions, the greater the potential expenditure reduction. Finally, to the extent
individuals would receive more than $9,000 in total State matching contributions,
expenditures decrease by the difference between potential matching contributions and the
$9,000 cap across however many account holders would exceed that cap.
The total impact on State general fund expenditures cannot be reliably estimated, but it is
likely a significant decrease in expenditures above the mandated appropriation level
beginning in fiscal 2023. Although the bill has a July 1, 2021 effective date, it is assumed
that the changes do not apply to 2021 applications, which are due between January 1 and
July 1, and that the changes would apply beginning with applications received after
December 31, 2021.
                                Additional Information
Prior Introductions: None.
Designated Cross File: HB 1238 (Delegate Forbes) - Appropriations.
Information Source(s): Comptroller’s Office; College Savings Plans of Maryland;
Department of Legislative Services
Fiscal Note History:      First Reader - February 23, 2021
rh/rhh                    Third Reader - March 5, 2021
Analysis by: Michael E. Sousane                        Direct Inquiries to:
                                                       (410) 946-5510
                                                       (301) 970-5510
SB 779/ Page 3
Statutes affected: 
Text - First - Maryland 529 Program – Board Authority and State Contribution – Alterations: 1-819A Education, 18-1901 Education, 18-1905 Education, 1-819A Education, 1-819A Education, 1-819A Education, 10-208 Education
Text - Third - Maryland 529 Program – Board Authority and State Contribution – Alterations: 1-819A Education, 18-1901 Education, 18-1905 Education, 1-819A Education, 1-819A Education, 1-819A Education, 10-208 Education