By MARSHA MERCER
Tax reform is like the
old song about heaven. Everybody wants to go there, but nobody wants to die.
Nearly everybody --
President Barack Obama, politicians, most taxpayers -- says we need a simpler,
fairer tax code, but nobody wants to give up anything to get there.
The uproar over
Obama’s proposal to tax 529 plans is a case in point. You can imagine how the
big brains in the White House figured that 529s were ripe for picking. Less
than 3 percent of families use 529 and similar tax-free savings plans for
college, and the plans disproportionately benefit the well off.
Households at all
income levels may make after-tax contributions, earnings are tax-deferred and
funds may be used tax free for qualified education expenses. About 70 percent
of account balances are held by households with incomes over $200,000.
As part of his “middle
class economics” plan, Obama suggested taxing 529s and using the revenues to
expand an education tax credit for couples making up to $180,000 a year.
Cue the outrage. House
Speaker John Boehner charged Obama’s proposal would hurt the very people the
president claimed he wanted to help: the middle class. Congressional Democrats
also took a whack at Obama’s 529 pinata.
The Obama family’s own
hefty 529 accounts would have been unscathed as the proposal only would have taxed
future contributions to plans. Back in 2007, the then-senator and Michelle Obama
socked away $240,000 in 529 plans for their daughters’ education.
About half the
households with 529 and similar college savings plans had incomes above
$150,000, according to a Government Accountability Office study in 2012. But
that means about half had income below that amount.
The GAO began its
report with a disturbing fact: “While median family income decreased between
2005 and 2011, college tuition and fees increased at an average annual rate of
6 percent, more than double the rate of inflation.”
However promising
taxing 529s looked on paper, it should not have come as a surprise to anyone in
the White House that families that could afford to save used the plans and
would hate to lose them.
In federal budget
terms, taxing the capital gains of future contributions wasn’t a big ticket
item. It would have resulted in revenues of $1 billion over 10 years -- but the
proposal hit millions of families. There are about 12 million accounts
nationwide.
Thus, Obama managed to
accomplish something rare in Washington: His proposal united Democrats and
Republicans – against him. The White House said the proposal had become “a
distraction” and dropped it within a week.
A peevish editorial in
The Wall Street Journal lamented that Obama had moved so quickly. “This is a
cut-their-losses move, but we wish the idea had rotted in the sun for a few
more months. It would have been instructive to the same middle-class taxpayers
Mr. Obama claims to serve,” the paper opined. Pass the sour grapes – or
raisins.
Income inequality,
long a Democratic issue, has become a new political cause for Republicans. As they weigh 2016 presidential bids, former
governors Mitt Romney and Jeb Bush as well as Sen. Rand Paul of Kentucky and
Wisconsin Gov. Scott Walker talk of ending poverty.
Another problem is the
shrinking middle class. About as many Americans identified themselves as lower
or lower-middle class as middle class in a Pew Research Center/USA Today survey
last year. The share of Americans who said they were middle class dropped
from 53 percent in 2008 to 44 percent last year.
The median household
income was about $52,000 in 2013, the latest year for which the Census has
figures. That’s 4.6 percent lower than it was in 2008 and 8.7 percent below
1999’s median household income of $56,895.
For the time being,
savings in state-run 529 accounts appear safe from tax reform efforts.
Families will continue
to use the plans tax-free for tuition, books, fees and other qualified expenses
at any college or university in the country.
One necessity that
doesn’t qualify is computers. A bipartisan bill in the House would allow
computer purchases with 529 funds, and Boehner has urged Obama to support it.
But that helps
illustrate the problem with tax reform. It’s always easier to give -- or expand
-- a tax break than to take one away.
©2015 Marsha Mercer.
All rights reserved.
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