Obama caves on taxing 529 college savings plans

Here’s a refreshing change of pace for you. Normally when we have to talk about politicians caving in on a position they’ve staked out, it winds up being the Republicans. This week, however, the collapse took place in the White House. Barack Obama had been pushing for what amounted to another tax increase by eliminating the 529 college savings program whereby parents could set aside pretax money for their kids’ education and not pay taxes on it upon withdrawal provided the money was used to pay for tuition. But in the face of bipartisan opposition and negative feedback from outraged parents, the President blinked first.

President Barack Obama is abandoning his proposal to eliminate Section 529 – the popular tax break used by millions of Americans to save for college — following a big backlash, not only from Republicans and parents, but also from his own Democratic allies.

“Given it has become such a distraction, we’re not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief that has bipartisan support, as well as the president’s broader package of tax relief for child care and working families,” a White House official said Tuesday.

According to The New York Times, Obama and his advisers were lobbied directly by House Minority Leader Rep. ancy Pelosi while she flew with the president on a flight from India to Saudi Arabia. Other Democrats, including House Budget Committee Ranking Member Chris Van Hollen, were also big critics of the proposal.

Obama’s argument all along was that this program primarily benefited “the rich” so this shouldn’t bother anyone. Of course, as has been pointed out by numerous analysts, this was some completely backwards thinking. The wealthiest Americans (above the $200K annual income mark) frequently make use of 529s, but a lot of them can – and do – just write a check for tuition without the tax break being a deciding factor. The poorest citizens qualify for financial aid in various forms and probably can’t afford to save all that much for college to begin with, assuming they can even find a job these days. The people who benefit the most from the 529 plans are the working middle class who may not be able to cover the tuition without some sort of break, so this idea was a political disaster from the beginning.

Still, it’s interesting that Obama chose to describe the circumstances surrounding the cave as one where the issue had turned into a distraction. That phrase has embedded itself so deeply in American political-speak that whenever you hear it you can rest assured that somebody is raising the white flag. But there is a deeper story behind this which may be more of a cautionary tale than simply a reason to celebrate the President caving. As Dave Wessel points out at the Wall Street Journal, this is one more example of why it’s so difficult to have a tax reform conversation in Congress.

In one sense, this looks like amateur hour. The White House dropped a what was sure to be a controversial proposal into a fact sheet before the State of the Union without offering much context or explanation. Officials clearly didn’t think through the politics of the concept, whatever its merits. And now the administration is in the embarrassing position of sending Congress a budget on Monday that includes a proposal the president has dropped. Presidents often offer proposals they know have little chance of enactment; usually, they don’t disavow them before they are formally presented.

But there’s a bigger lesson here too: Tax reform is very popular in principle and very difficult in practice. Tax reform creates winners and losers–and the losers often shout louder. The losers know what they’re losing; the winners first have to do the math.

We’ve railed about this very thing here repeatedly. Tax reform needs to happen, but it’s a brutal struggle. Cleaning up the tax code sounds great from the 10,000 foot level, but every nugget that gets clipped out of the bloated, arcane tax code is going to represent the removal of some benefit that well heeled donors fought long and hard to get. Any proposal for sweeping change which just wipes the slate clean will draw opposition from across the board.

It’s a broken system, but the people who broke it have tremendous incentive to keep it broken. And they frequently have the political pull to make sure things don’t change.