The Visible Hand in Government-Sponsored Financial Services: Why States Should Not Be Allowed to Offer 529 Plans
51 Pages Posted: 27 Oct 2005
In 1999, Congress granted states the exclusive right to sell 529 college savings plans, which parents use to invest on a tax-advantaged basis for their children's college education. This article argues that there is no logical connection between Congress's purpose of promoting investment in education and the existence of this state tax monopoly, and that parents may be worse off investing in state 529 plans than if they had instead invested taxable, privately offered mutual funds. State 529 plans offer no material benefits over private mutual funds, and they are uniquely susceptible to rent-seeking costs that will reduce investors' investment returns. In addition, 529 plans are exempt from regulations governing mutual funds, which significantly disadvantages plan participants. Congress should permit private firms to offer 529 plans in competition with states and even consider prohibiting states from offering such plans as long as they are exempt from the federal securities laws.
Keywords: mutual funds, 529 plans, securities, municipal securities, rent-seeking, pay-to-play, education, education law
JEL Classification: K23, H53, H72, I28, I29, L33
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