Obama caved on 529 taxes because ... it hit too many Democrats?

The hasty retreat on Barack Obama’s plan to pay for “free” community college looked clumsy even for a president who routinely floats proposals without performing due diligence. The community college proposal was a major policy announcement from the White House, an attempt to connect with younger voters again who have been drifting away from the Democratic Party (although not necessarily toward the GOP) during the Hopenchange Era. Obama made a dozen references to college in his State of the Union speech, and spent a significant amount of time arguing for both the subsidy and the 529 tax to pay for it.

In less than a week, though, Obama abandoned it — so quickly that the White House didn’t even get a chance to get it out of the budget proposal they will send to Capitol Hill.

“The announcement yesterday,” Eric Schultz told the press, “was made after the book was in the shop to be produced.” In other words, this was no trial balloon for media consumption in the wake of the SOTU, but a funding strategy to which the White House was committed. So what happened? Josh Kraushaar writes that the Obama administration apparently never bothered to discuss this with its allies on Capitol Hill, who would have warned him that the 529s were in fact popular with upper middle class voters … in their own party, emphasis mine:

To understand the backlash President Obama received after proposing to remove the tax exemption for college savings accounts, it’s essential to recognize how closely it struck at the political heart of his own party.

Contrary to popular stereotypes, Democrats depend nearly as much on upper-class voters as Republicans do. Democrats represent seven of the 10 wealthiest congressional districts in the country, and Obama also won those districts twice. …

The decision, and the initial White House response criticizing the tax-free vehicles as tools for the rich, offers a useful peek in the political thinking of the Obama White House. Several Democratic operatives interviewed said that since few of the proposals stood to pass through a Republican Congress, there wasn’t the same degree of scrutiny paid to the political impact of all of the budgetary details.

But it also underscores how the White House was wading into dangerous territory by proposing to raise middle-class taxes to pay for preferred government programs. There are only so many ways to generate revenue without hitting political resistance from a key constituency.

They didn’t apply “the same degree of scrutiny” to a key tax hike? No one bothered to look at the political implications of demanding a new tax on savings accounts, especially one used for education of taxpayers’ children, to be used to educate … other people’s children. Apparently, they never bothered to look at the math of the tax either, as they would have discovered that the 529s aren’t a tool of the super-wealthy, but used by families who are not likely to get grants and subsidies because of their upper-middle-class income level.

In short, it’s a political disaster, one not entirely avoided by the Obama administration. Now that they have signaled their intent to go after savings plans, Republicans have a pretty powerful talking point on economic policy differences, especially going into the 2016 election cycle. If the White House issued this proposal without considering either the math or the politics, it really appears that Obama is simply mailing in his proposals these days and wallowing in the lame-duck pond already.

Consider that when reading Obama’s prescription for “middle class economics” at the Huffington Post today. He’s still talking about attacking savings and trust funds to fund “free” community college, although 529s are nowhere to be found:

My budget will build on that progress with reforms to health programs, our tax code, and our broken immigration system. It would eliminate the trust fund loophole that allows the wealthiest Americans to avoid paying taxes on their unearned income, and use the savings to cut taxes for middle class families. If Congress passes my budget, our country would meet the key test of fiscal sustainability, with our debt declining as a share of our GDP.

We have to tax the middle class to save the middle class! We could take Obama a little more seriously here if (a) his budget will still include the tax on savings he’s now disavowing because he didn’t know it would hit Democrats, and (b) his administration bothered to calculate the impact of these policies before making them his budgetary centerpieces. It’s Amateur Hour at the White House, and that hour will last almost another two years.

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John Sexton 1:00 PM on December 05, 2022