As Senator, Obama Voted to Make 529 College Savings Plans Permanent
On August 3, 2006, then-Senator Barack Obama voted to make the current tax treatment of 529 college savings plans permanent.
President Obama’s recently proposed tax plan, however, reverses this vote on 529 plans.
The vote on H.R. 4 — the Pension Protection Act of 2006 — took place in the second session of the 109th Congress, vote #230.
H.R. 4 made permanent the 529 plan expansion in the otherwise temporary 2001 Bush tax cut package (the Economic Growth and Tax Relief Reconciliation Act of 2001 — EGTRRA). The vote for H.R. 4 enshrined into permanent law the current tax-free growth of these college savings plans if used for tuition and fees. The 529 provision was in Section 1304 of the legislation.
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Delay of Water Settlements Needlessly Costing Taxpayers
One of the main powers and responsibilities of Congress is to spend money. Often times this authority is abused and taxpayers end up burdened by the costs of wasteful spending on pet projects (earmarks) and needless programs that otherwise wouldn’t be approved. However, sometimes there are issues that are misrepresented. Another responsibility of Congress is to finalize water rights settlements that have already been negotiated by Congress. This is an issue that that hasn’t gotten much attention but is costing taxpayers. A Republican-controlled Congress may be able to move these settlements forward.
As Congress makes progress in taking care of these settlements, some may want to characterize these as earmarks. While some have said these settlement agreements are tantamount to earmarks, that is not simply the case. The Taxpayers Protection Alliance (TPA) is fully aware of what constitutes an earmark in Congress and these are not even close. TPA has been exposing earmarks for years. The latest expose of earmarks by TPA was the 293 earmarks hidden in the Defense appropriations bill worth more than $13 billion (click here for a full list). The settlements reached by Congress regarding these water and land disputes are not earmarks and shouldn’t classified as such.
Indian water rights settlements are agreements that resolve certain legal claims that Native American tribes have with the United States government. The settlements that are entered into are ultimately agreed upon by Congress and various federal agencies with jurisdiction on these matters. The stated agreements “fulfill the federal government’s obligation to manage water resources held in trust on behalf of Native American tribes.”
The cost of this settlement process as opposed to the cost of protracted litigation is an easy choice for Congress and the other parties involved. During a hearing on this issue in March of 2012, former Sen. Daniel Akaka (D-Hawaii), then-Chairman of the Committee on Indian Affairs, noted in his opening remarks to the Committee that:
“Congress has approved over two-dozen water settlements in the past 35 years. Last Congress, we enacted legislation that settled the water rights for seven tribal nations. Collectively, these seven tribes spent nearly a century litigating their water rights in court before having their settlements approved by Congress. Can you imagine this?
In determining water rights claims, a tribe and other stakeholders may pursue either litigation or negotiation. Negotiating to reach a settlement in Indian water rights claims is advantageous for all parties. It is cheaper, takes less time and is more flexible than litigation. Negotiations may also foster better working relationships between all parties. This can have positive outcomes for not only the tribes but for the surrounding non-Indian communities as well.”
Last year Congress passed, and President Obama signed, H.R.3716, the Pyramid Lake Piute Tribe – Fish Springs Settlement Act. This legislation brought to a close a long fought legal battle over water rights, and in the end spurred a new partnership that will economically benefit all parties involved at no cost to taxpayers.
Taxpayers shouldn’t be on the hook for additional costs due to the hold up of these agreements, and this is why the settlements reached should be allowed to proceed. Over the past few decades we have seen these types of settlements approved and move forward without delay, so there’s no reason to stop that progress now. Just one settlement being held up can add more legal costs paid for unnecessarily by taxpayers and also negatively impact the local parties involved who have done the hard work to come to a resolution that suits everyone.
TPA is always encouraged when Congress actually works together to get something done, because it happens so rarely. In this case, these are routine settlements that have been negotiated in good faith by all parties involved and there’s no need for further delay that leads to more costs for taxpayers simply under the guise of the false notion that they are earmarks. TPA will continue to look at this issue and press for fair and swift resolutions that reflect the spirit of the settlements as congress intends.
(This post originally appeared on the website of the Taxpayers Protection Alliance and is cross posted here with their permission).
Will Obama's 529 Plan Tax Hike Also Hit Disabled Kids?
On top of everything else, it appears that President Obama’s 529 plan tax hike might also fall on–of all things–disabled children and the parents who save for them.
In the most embarrassing of all possible starts to 2015, President Obama’s administration appears to be in full retreat on their proposal to tax middle class college savings plans (known as “529 accounts“). The final death blow to this reckless and politically suicidal assault on the American Dream came out yesterday when it was revealed by the Wall Street Journal that the Obamas made a $240,000 contribution to the 529 plans of their daughters back in 2007. There’s nothing wrong with that, of course, but it is a tad hypocritical for Obama to want to deny the middle class their opportunity to save for their own children’s education, be the contributions ever so modest. Even the New York Times, of all outlets, is turning tail.
It can get even worse.
Back in December 2014, a little more than one month ago, President Obama signed into law the “Achieving a Better Life Experience (ABLE) Act,” which sailed through Congress. It creates a brand new kind of 529 plan. Traditional 529 plans are all about saving for college. An ABLE account will be about saving for kids who will likely never get a “normal” college experience, or anything close to it. Qualified expenses include things like disability education, housing, transportation, employment support, health and wellness, financial/administrative/legal costs, and even funeral fees.
Like other 529 plans, ABLE account contributions are made after-tax. The money grows tax-free. Provided the contributions and earnings are used for qualified disability expenses, withdrawals are tax-free. They very much resemble Roth IRAs, except the savings intention here is disability costs and not retirement.
The Administration’s plan calls for all earnings distributions on 529 plans to be subject to ordinary income taxation, at rates as high as 39.6 percent. Will this include the new type of 529 plan signed into law by President Obama just a month ago, the ABLE account?
If the Obama tax hike plan sweeps in ABLE accounts, they may never actually achieve liftoff. Conventional 529 plans would “dry up” and die off, according to Joe Hurley of the 529 portal website savingforcollege.com. “States that are not able to retain sufficient assets in their 529 plans will have a difficult time keeping their plans open,” Hurley added.
Since ABLE accounts are only a little over a month old, none have actually been established yet by 529 sponsors (i.e., states). If the tax treatment were to change, there would be no market for ABLE accounts and no incentive to invest resources in rolling them out for parents of disabled kids.
Even if ABLE accounts are excluded from the rest of the president’s tax hike plans for 529s, it would still kill them off. Since ABLE accounts will only be offered in conjunction with the larger 529 accounts, the death of the latter necessarily means the stillbirth of the former. It’s like shooting the horse and expecting the cowboy to keep riding.
Was all this done on purpose? Did anyone in the Obama Administration raise their hand and say “wait, didn’t we just sign a 529 expansion–for disabled children–just before Christmas?”
Who knows? My guess is “no.” Considering how ill-conceived and botched this entire fiasco has been, crediting officials with thinking this deeply about the topic is a bridge too far.
Assuming that this 529 plan tax hike (including de facto ABLE account preemptive repeal) remains in the president’s budget, it will be fully fleshed out in the Treasury Department’s post-budget “Blue Book,” where all stupid tax ideas slouch toward Bethlehem, waiting to be born. Only then will we find out for sure if some technocratic nimrods at the White House accidentally decided to tax the tax-free savings accounts of disabled children, or whether they were even more reality-addled and did it on purpose.
But can someone in the press please ask them between now and then?
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ATR Supports H.R. 310, the Taxpayer Transparency Act
Americans for Tax Reform supports the Taxpayer Transparency Act (H.R.310) and urges members of Congress to support this bill. The Taxpayer Transparency Act makes sure that the government is held accountable for spending taxpayer dollars for political purposes. This will foster increased transparency and government accountability, especially for government spending that promotes unpopular and broken laws.
Government accountability and transparency are nonpartisan ideals and requiring the government to disclose that their advertisements are being paid for by the taxpayers will let Americans know that they are the ones footing the bill.
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Obamas Make Jumbo 529 Contribution While Pushing Repeal for Everyone Else
President Obama proposed this week to tax the earnings on new contributions to “Section 529″ college savings plans. These plans work like Roth IRAs for college–you put in after-tax money, the money grows tax-free, and withdrawals are tax-free if used to pay for tuition and fees.
Obama wants the earnings on these plans to face ordinary income tax, at rates as high as 39.6 percent federally. 529 expert Joe Hurley correctly predicts that taxing 529 plans this way will result in their effective repeal, as new contributions in will “dry up” overnight.
The tsunami of popular outrage against the Obama proposal can be explained by seeing that this tax increase is really an assault on the American Dream.
But just your American Dream–not the Obamas’.
You see, back in 2007, Barack and Michelle Obama made a stunning $240,000 contribution to the 529 plans of their two daughters. There’s a special provision in 529 tax rules that allow for a “jumbo” contribution in exchange for not gifting any more money to your kids for the next five years. The Obamas (wisely) took advantage of this–you can see the actual tax form reporting here.
This is odd, considering some of the nasty things the White House has said about 529 plans in recent days. Administration officials have called 529 plans “inefficient,” that 80% of the benefits accrue to those making more than $250,000 per year, and that 529 plans should effectively be repealed in order to plus up an education tax credit. Obama Administration mouthpiece Slate went so far as to call de facto 529 repeal “a great idea.”
In fact, the College Savings Foundation–which knows a thing or two about the 529 industry–says that 70% of families which own a 529 plan make less than $150,000 per year, and almost 95% of families make less than $250,000 per year (note that this is the Obama Administration’s preferred dividing line to mark off the “middle class”). The average account balance in these 12 million 529 plans is just under $21,000.
So which one is it? Are 529 plans an evil distortion in the tax code? If so, why did the Obamas plow nearly a quarter of a million dollars in them back in 2007? And why does Obama want to effectively repeal 529s (there would be no reason to contribute without the tax-free growth) for middle class families today?
The Obamas have already gotten their full tax advantage from 529 plans. Under his plan, they would get to keep all the tax-free growth their quarter-million dollar contribution will yield. But they want to deny that to others not so fortunate, to middle class families struggling to save for college.
If that sounds familiar, it should. Back in 2009, President Obama tried to kill school scholarships for some 1,700 low income elementary school students in the District of Columbia. This was at the same time as he sent his daughters–the ones who benefit from the Obamas’ 529 plan contributions–to the uber-pricey Sidwell Friends School in town. All this was done to appease the teachers’ unions, who largely dictate education policy to Democrats.
The story is the same–only the best for the Obama clan and his friends, but everyone else can eat cake.
Obama Tax Hike on College Savings Plans Breaks Middle Class Tax Pledge
Tonight, in his State of the Union address, President Obama will propose a series of tax increases on the American people. One of these tax increases is indisputably an income tax hike on middle class families with children.
Under Obama’s plan, earnings in “Section 529” (named for its location in the Internal Revenue Code) college savings plans will face full income taxation upon withdrawal.
Under current law, earnings growth in 529 plans is tax-free if account distributions are used to pay for college tuition and fees. The Obama plan will tax earnings in these accounts even if they are used to pay for college tuition and fees.
These accounts are commonly used by middle class families. There are about 12 million 529 accounts open today, and they have an average account balance of approximately $21,000. Most 529 plans permit monthly contributions as low as $25 per month.
This middle class income tax increase is a clear violation of President Obama's “firm pledge” against “any form of tax increase” on any family making less than $250,000. This promise to the American people is documented below:
Speaking in Dover, New Hampshire on Sept. 12, 2008, candidate Obama said:
“I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.” [Video]
During a nationally televised Vice-Presidential debate in St. Louis on Oct. 3, 2008, candidate Joe Biden said:
“No one making less than $250,000 under Barack Obama’s plan will see one single penny of their tax raised whether it’s their capital gains tax, their income tax, investment tax, any tax.” [Transcript]
In an address to a joint session of Congress on Feb. 24, 2009, President Obama restated the promise in forceful terms:
"Rather than raise taxes on middle class families trying to save for their children’s education, Obama should abolish the seven tax increases in Obamacare that directly hit middle-income Americans,” said Grover Norquist, president of Americans for Tax Reform.
Obama Calls for $320 Billion in New Taxes
On Saturday night the White House leaked the major tax hike details of the president's upcoming budget. The common theme is higher taxes on savings and investment, totaling $320 billion over the next ten years.
"Democrats are demanding, yet again, tax increases on America. This never ends. When it comes to tax hikes Democrats are like a teenage boy on a prom date: they keep asking the same question different ways but always to the same point," said Grover Norquist, president of Americans for Tax Reform.
Here are the major tax increases in the President's upcoming budget:
1. Capital Gains Rate Hike: raises capital gains and dividends tax rate from 23.8% today (20% plus 3.8% Obamacare surtax) to 28% (including the Obamacare surtax).
The capital gains tax has not been that high since President Clinton signed a rate cut in 1997.
It would represent a massive hike in the rate since Obama took office. When he was sworn in, the rate was 15%. He proposes to nearly double it to 28% in the twilight of his administration.
2. Stealth increase in the death tax rate from 40% to nearly 60%.
Under current law, when you inherit an asset your basis in the asset is the higher of the fair market value at the time of death or the descendent's original basis. Almost always, the fair market value is higher.
Under the Obama proposal, when you inherit an asset your basis will simply be the descendent's original basis.
Example: Dad buys a house for $10,000. He dies and leaves it to you. The fair market value on the date of death is $100,000. You sell it for $120,000. Under current law, you have a capital gain of $20,000 (sales price of $120,000 less step up in basis of $100,000). Under the Obama plan, you have a capital gain of $110,000 (sales price of $120,000 less original basis of $10,000).
There are exemptions for most households, but this misses the larger point: the whole reason we have step up in basis is because we have a death tax. If you are going to hold an estate liable for tax, you can't then hold the estate liable for tax again when the inheritor sells it. This adds yet another redundant layer of tax on savings and investment. It's a huge tax hike on family farms and small businesses.
It's like a second death tax (the first one has a top tax rate of 40% and a standard deduction of $5.3 million/$10.6 million for surviving spouses). Conceivably, an accumulated capital gain could face a 40% death tax levy and then a 28% capital gains tax on what is left. Do the math, and that's an integrated federal tax of just under 60% on inherited capital gains.
3. "Bank Tax"
A new 7 basis point (0.07%) tax on the liabilities (not assets) of the 100 or so U.S. firms with assets over $50 billion. This will obviously be passed along to these firms' customers and employees, since businesses don't pay taxes--people do.
4. Tax Increase on Families Saving for College
Under current law, 529 plans work like Roth IRAs: you put money in, and the money grows tax-free for college. Distributions are tax-free provided they are to pay for college.
Under the Obama plan, earnings growth in a 529 plan would no longer be tax-free. Instead, earnings would face taxation upon withdrawal, even if the withdrawal is to pay for college. This was the law prior to 2001.
5. Tax Increases in Retirement Plans and a New Employer Mandate
There would be a new cap in the amount one could accumulate in the aggregate in all IRA and 401(k) type accounts of $3.4 million. After that, you can't save any more new dollars. The idea is that this is enough to secure a $210,000 annual distribution in retirement, which the government apparently deems "enough" for a retiree.
In addition, all employers with more than 10 workers and who do not have a 401(k) type plan would be mandated to set up payroll deduction Traditional IRAs for their employees. Also, part-time workers would have to be covered under retirement plans if they have been working someplace long enough. These two things are a new kind of employer mandate from Obama.
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ATR Supports H.R. 647, the ABLE Act
On Wednesday, the U.S. House of Representatives will consider H.R. 647, the ABLE (Achieving a Better Life Experience) Act of 2014. ATR is supportive of this legislation and urges Members to vote for it.
H.R. 647 is a net tax cut.
At its heart, the ABLE Act creates a brand new tax-advantaged savings account vehicle. A new form of 529 college savings plan is authorized under tax law. They would work much like existing 529 plans: money goes in after tax, and grows tax free for the intended purpose of the account.
The difference is that ABLE accounts, unlike 529 plans, are not intended for college savings. Rather, ABLE accounts would be used to help pay for the disability expenses of those classified as disabled before age 26. Qualified expenses include: education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses.
The balance in an ABLE account cannot exceed $100,000 for practical purposes. Annual contributions are limited to the gift tax limit. As a result, these accounts are a modest aid to the target population of the bill, and are not intended as a significant wealth accumulation vehicle.
Put simply, an ABLE account is to a child with a disability what a 529 plan is to a child who has college in his future. Not only is an ABLE account a good way to increase tax-free savings for families (always a good thing), it's a compassionate way for families with special needs children to save for the needs of the most vulnerable.
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ATR Statement on Tax Extenders Package
This week, the U.S. House of Representatives will consider a one-year "tax extenders" package. The U.S. Senate will soon follow suit. This bill would move the expiration date of some 55 tax relief provisions from December 31, 2013 to December 31, 2014.
This $45 billion tax hike avoidance package contains both good and bad tax policy.
On the positive side of the ledger is a host of cost recovery provisions. Headlining these is a 50 percent partial expensing rule which allows businesses to write off half the cost of new investments in the year of purchase, with the remaining basis subject to multi-year depreciation. There's also a research and experimentation tax credit which firms can use to recoup these costs. Small businesses can expense most to all of their business fixed investment. There's also accelerated depreciation for restaurants, lease holders, Indian tribes, and others. Put together, these cost recovery provisions are a majority of the value of the extenders package.
All of these represent an important down payment toward a vital tax policy goal for conservatives--full business expensing of all business inputs. Under any consumption base/cash flow tax model (which has universal support on the Right), all business costs would be deducted in the year of purchase. Losing the extenders package's large steps toward this vision would be a big setback for the cause of fundamental tax reform.
There are also a dozen "personal" extenders which affect families. These include the ability to deduct state and local sales taxes, tuition and fees, and teacher classroom expenses. Families will not have to pay taxes on forgiven mortgage debt in the event of a foreclosure on their home. Retirees will be able to shift IRA dollars directly to churches and other charities. These, too, are important to consider as tax filing season gears up after the holidays.
Finally, there are two extenders which prevent double taxation of income earned abroad by U.S. companies--a "look-through" for controlled foreign corporations, and an active financing exemption from double taxation by the IRS. These are important placeholders as tax reform contemplates moving toward a territorial tax system and away from our antiquated worldwide tax regime.
On the negative side of the ledger are a few crony capitalist tax provisions which should not exist in an ideal tax code. Topping the billing here is the wind production tax credit, which is both a wasteful K Street giveaway and a sop to the big green lobby of the Left. It is regrettable that Wind "PTC" is part of this extenders package.
Nevertheless, the good clearly outweighs the bad here. Members of Congress and senators are encouraged to vote for this one-year tax extenders package. Next year, they should come back to work ready to make the best parts of the tax extenders permanent, and then proceed to tax reform.
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Earmark Ban Essential for Taxpayers in New Congress
Congress will soon wrap up its business for the year and go home for Christmas. Soon after returning, the budget and appropriations cycle will dominate life on Capitol Hill.
Americans for Tax Reform remains committed in the new Congress to preserving the House ban on spending earmarks. Getting a culture of corruption and influence peddling out of the legislative process has been a keystone achievement of the Republican majority.
Earmarks have an obvious character. They are spending programs tucked into appropriation or authorization bills by Members of Congress in order to "bring home the bacon." ATR has had a long history of not agreeing that tariff or tax revenue measures are germane to the otherwise essential earmark ban.
We would agree with others, too, that legal settlements made by the United States government and approved through legislation are neither part of the letter nor the spirit of the earmark ban. These legal settlements have saved taxpayers millions of dollars in litigation costs and denied windfalls to the trial lawyer bar. They ultimately result in less government spending, not more. They do not benefit particular Members of Congress like wasteful pork barrel earmarks do.
The earmark ban is too important to be bogged down in unintended consequences and mission creep. ATR looks forward to working with Congress to keep the earmark ban strong for many years to come.