The Truly Awful Idea to Tax 529 Plans

Megan McArdle:

Earlier in the week, I discussed the Obama administration’s proposal to tax earnings on so-called 529 college savings plans, part of a package of tax hikes that will pay for new programs such as his proposal to make the first two years of community college free. This has been touted as a plan to hike taxes on the rich to help the middle class, but in fact it’s more of a plan to redistribute money from the upper middle class to the lower middle class.

As I noted then, this proposal is not going anywhere, not just because Republican congressmen will block it, but because it would be very unpopular with affluent blue-state voters who currently vote for Democrats. About the only people I saw defending this particular idea were blue-state singles who haven’t yet confronted the monstrous expense of shepherding their progeny into the new mandarin class to which they belong.

Everyone else seems to be somewhere between confused and aghast. One comment in particular struck me, as I saw it several times on social media and in writings: “How would you feel if they did this to Roth IRAs?”

This proposal turned out to be quite the clunker, which is why the Obama administration is dropping it. But the fact that it was being pushed in the first place helps show that this White House is not nearly as interested in “middle class economics” as the president pretended during his State of the Uni0n address (about which I hope to write a post sometime in the near future). Middle class voters who think that this administration is on their side should think again. Especially after they read this:

. . . according to the College Savings Foundation, a consortium of financial institutions backing 529s, measuring tax benefits tells only part of the story. Close to 10 percent of 529 account holders have incomes below $50,000, and more than 70 percent of the total number of accounts are owned by households with incomes below $150,000.

In other words, the rich may be reaping the clear majority of the tax break, but a lot of other people are benefiting as well.

“Many people who fall within the lower echelon of the middle class were among the people the president proposed to tax,” said David Lillard, the state treasurer of Tennessee and president of the National Association of State Treasurers, who added that many states had made college savings a focal point of policy making.

Something to remember the next time the Obama administration tries to sell middle class voters a bill of goods.