A New York Times story described President Obama’s backtrack on a plan to tax earnings from college savings accounts as a gain for “well-off” and “affluent” families.
The plan, pushed recently by the White House, would tax the earnings in 529 college savings accounts, which are run by individual states. The earnings have been tax exempt since the George W. Bush administration, leading to a boom in people using the accounts.
Following backlash from both Republican and Democratic leadership in Congress, though, Obama’s team withdrew the proposal, while maintaining that had it been executed, the tax would have affected mostly higher-income families.
“White House economists had thought that taking away the tax advantage of the 529 plan for better-off families was a simple matter of tax fairness,” said the Times story in Monday’s editions.
Though the story noted that many families of four making less than $150,000 per year would be affected by such a tax, it characterized the administration’s plan as mostly targeting the wealthy.
“The idea was to end one tax break tilted toward the wealthy and plow that billion-dollar savings over 10 years into a far larger expansion of another tuition tax credit aimed more squarely at the middle class,” said the Times.
And another: “Affluent savers were angered [at the White House plan], Wall Street and state governments that run the accounts balked, and Republicans were given an opening to say that they are the better guardians of the struggling middle class.”
The Times’ characterization of the tax as primarily benefitting the wealthy was disputed by Betty Lochner, chairman of the College Savings Plan Network, a nonprofit that provides information on 529s and advocates for legislation that benefits them.
“We would disagree with that,” she told the Washington Examiner media desk. “We’re thrilled that this [taxing 529 earnings] didn’t last very long. It was very distracting to the mission of these plans. The unintended consequences got out there and a lot of people read up on it.”
“You had a lot of people saying, ‘are you kidding me?’ ” Lochner said, “so, he withdrew it.”
Citing supporters of the White House plan, the Times article said the majority of benefits for 529 plans — they work by a family depositing money into an account, which then earns money from the bank’s investments until the beneficiary is ready to attend secondary education — go to families making more than $150,000.
“That is because those people have the most money invested and can contribute $14,000 a year or more without worrying about reaching federal gift tax limits,” the Times report said.
Lochner countered, saying that the average 529 account balance is under $21,000, which is barely enough to pay for a year’s worth of tuition at a typical public university. CSPN data also show that 40 percent of 529 accounts are funded by direct deposits of less than $150 per month.
That indicates, Locher said, that people are making smaller payments out of financial necessity.
