Thursday, January 29, 2015

Taking a whack at the tax reform pinata -- Jan. 29, 2015 column


Tax reform is like the old song about heaven. Everybody wants to go there, but nobody wants to die.

Nearly everybody -- President Barack Obama, politicians, most taxpayers -- says we need a simpler, fairer tax code, but nobody wants to give up anything to get there.
The uproar over Obama’s proposal to tax 529 plans is a case in point. You can imagine how the big brains in the White House figured that 529s were ripe for picking. Less than 3 percent of families use 529 and similar tax-free savings plans for college, and the plans disproportionately benefit the well off.

Households at all income levels may make after-tax contributions, earnings are tax-deferred and funds may be used tax free for qualified education expenses. About 70 percent of account balances are held by households with incomes over $200,000.

As part of his “middle class economics” plan, Obama suggested taxing 529s and using the revenues to expand an education tax credit for couples making up to $180,000 a year.

Cue the outrage. House Speaker John Boehner charged Obama’s proposal would hurt the very people the president claimed he wanted to help: the middle class. Congressional Democrats also took a whack at Obama’s 529 pinata.

The Obama family’s own hefty 529 accounts would have been unscathed as the proposal only would have taxed future contributions to plans. Back in 2007, the then-senator and Michelle Obama socked away $240,000 in 529 plans for their daughters’ education.

About half the households with 529 and similar college savings plans had incomes above $150,000, according to a Government Accountability Office study in 2012. But that means about half had income below that amount.

The GAO began its report with a disturbing fact: “While median family income decreased between 2005 and 2011, college tuition and fees increased at an average annual rate of 6 percent, more than double the rate of inflation.”

However promising taxing 529s looked on paper, it should not have come as a surprise to anyone in the White House that families that could afford to save used the plans and would hate to lose them.

In federal budget terms, taxing the capital gains of future contributions wasn’t a big ticket item. It would have resulted in revenues of $1 billion over 10 years -- but the proposal hit millions of families. There are about 12 million accounts nationwide.

Thus, Obama managed to accomplish something rare in Washington: His proposal united Democrats and Republicans – against him. The White House said the proposal had become “a distraction” and dropped it within a week.

A peevish editorial in The Wall Street Journal lamented that Obama had moved so quickly. “This is a cut-their-losses move, but we wish the idea had rotted in the sun for a few more months. It would have been instructive to the same middle-class taxpayers Mr. Obama claims to serve,” the paper opined. Pass the sour grapes – or raisins.  

Income inequality, long a Democratic issue, has become a new political cause for Republicans. As they weigh 2016 presidential bids, former governors Mitt Romney and Jeb Bush as well as Sen. Rand Paul of Kentucky and Wisconsin Gov. Scott Walker talk of ending poverty.   

Another problem is the shrinking middle class. About as many Americans identified themselves as lower or lower-middle class as middle class in a Pew Research Center/USA Today survey last year.  The share of Americans who said they were middle class dropped from 53 percent in 2008 to 44 percent last year.

The median household income was about $52,000 in 2013, the latest year for which the Census has figures. That’s 4.6 percent lower than it was in 2008 and 8.7 percent below 1999’s median household income of $56,895.

For the time being, savings in state-run 529 accounts appear safe from tax reform efforts.
Families will continue to use the plans tax-free for tuition, books, fees and other qualified expenses at any college or university in the country. 

One necessity that doesn’t qualify is computers. A bipartisan bill in the House would allow computer purchases with 529 funds, and Boehner has urged Obama to support it.

But that helps illustrate the problem with tax reform. It’s always easier to give -- or expand -- a tax break than to take one away.

©2015 Marsha Mercer. All rights reserved.


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