It took President Obama just a week to ditch his proposal to roll back tax breaks for 529 college-savings plans. Why such a quick about-face?
Chalk it up, yet again, to the political strength of the middle class—or at least those who think they belong to that demographic.
Mr. Obama had pitched his plan as a means to help pay for free community college and expand the main tuition tax credit, framing it as a shift in subsidies toward needier students. He argued that the savings plans disproportionately benefit upper-income individuals who would go to college even without a tax break.
There’s some truth to that claim, but the middle class—or, perhaps, the politicians who fear its wrath—weren’t buying it. Republicans, aiming to exploit what they saw as a political misstep, issued a series of news releases denouncing the plan. In private, Democrats pressed the president to abandon the idea. The White House did so late Tuesday, telling The New York Times that it had become a “distraction” from his broader tax-reform agenda.
A day later, nearly everyone agreed that the president’s plan was dead on arrival. Even if Mr. Obama had stood by his proposal, there was no chance that Congress would have adopted it. As Andrew P. Kelly, director of the Center on Higher Education Reform at the American Enterprise Institute, put it: “Congress wouldn’t touch this with a 10-foot pole.”
“This was a case of sound policy that is awful politics,” he said. “It was tone deaf.”
That’s because most Americans who invest in 529 plans consider themselves middle class, even if economists and the administration deem them rich. Many earn too much to qualify for federal grants but too little to pay for college out of pocket. They are nervous about rising college tuition, and they see the tax-free treatment of 529 plans as a promise that the government has made to savers. And they aren’t about to let lawmakers back away from that commitment.
Instant Backlash
Mr. Obama had offered his proposal to tax college savings without fanfare, burying it in a broader tax overhaul that he unveiled the Sunday before his State of the Union address. He argued that the changes, taken together, would make education tax benefits simpler and fairer, while lowering taxes for millions of Americans.
To bolster its case for taxing 529 plans, the White House pointed to a 2010 survey that it said showed that 70 percent of the money invested in 529 accounts and Coverdell Education Savings Accounts belonged to households earning more than $200,000 a year. That same survey found that less than 3 percent of families had 529 accounts, and their median income was three times that of families without the accounts.
Advocates for the plans challenged those numbers, calling them outdated. They cited a 2014 survey by Strategic Insight, which found that 70 percent of 529 accounts are owned by households with annual incomes below $150,000. That survey also found that the average value of a 529 account was less than $20,000.
Taken together, those statistics suggest that middle-income families are indeed investing in 529 plans, as advocates say, but they’re not investing nearly as much as wealthier families are.
They’re not benefiting nearly as much, either. According to a 2012 report by the Government Accountability Office, families with annual incomes below $100,000 who withdrew money from a 529 in 2010 saved an estimated $561 in taxes; families earning over $150,000 saved more than five times that amount.
Sandy Baum, an economist and senior fellow at the Urban Institute, said that disparity is “hard to justify.”
“I understand that if you make $200,000, you don’t feel rich,” she said. “But it’s hard to argue that we should have a policy that gives such a large majority of benefits to people at the top.”
A Swift Reversal
But the president’s plan didn’t go over well. Critics warned it would discourage savings and drive up student debt, creating a “chilling effect on contributions by middle-income Americans,” as Mary Morris, chair of the College Savings Foundation, put it.
“The last thing that students struggling to meet the rising cost of attending college need is higher taxes,” she said in a written statement.
The phrase “middle-income Americans” was echoed in other attacks on the plan. Speaking to reporters on Tuesday, Rep. John Boehner of Ohio, the Republican speaker of the House of Representatives, urged the president to scrap the plan “for the sake of middle-class families.”
To 529-plan advocates, the president’s swift reversal came as a relief, and a bit of a surprise. “To have this in a week was remarkable,” said Betty Lochner, chair of the College Savings Plan Network’s board. She attributed the about-face to a grass-roots effort to show the administration that 529 plans aren’t only for the wealthy.
“There was enough noise and enough concern that it just snowballed,” she said. “This is how government should work.”
But to critics of the savings plans, the president’s decision to drop his proposal was a disappointing reminder that, in Washington, politics often trumps sound policy.
“The 529-plan tax break is one more tax shelter for the wealthy in a tax code that already has too many of them,” tweeted Kevin Carey of New America, formerly the New America Foundation. “It’s unfortunate to see the administration cave so quickly on a basic issue of cost, benefit, and fairness.”
In hindsight, some in Washington wonder whether the president was floating the proposal as a sort of trial balloon. When lawmakers in both parties rejected the plan, he withdrew it.
“A lot of people in the president’s party saw that it would be an opportunity for the president to get publicly pummeled,” said Neal P. McCluskey, associate director of the Center for Educational Freedom at the Cato Institute. “It went away quietly because it was never introduced particularly loudly.”
Kelly Field is a senior reporter covering federal higher-education policy. Contact her at kelly.field@chronicle.com. Or follow her on Twitter @kfieldCHE.
