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that 80% of the benefits accrue to those making more than $250,000 per year, and that 529 plans should effectively be repealed in order to plus up an education tax credit.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.