Blurred Class Lines in College Tax Debate

January 30, 2015 Updated: January 30, 2015

The swift death of Obama’s administration’s proposal to end tax breaks for college savings accounts offers a lesson on the difficulty of defining the boundaries of the middle class. 

Less than a week after the president proposed ending the tax-free status of college savings accounts known as 529 plans, he withdrew the proposal, and a White House official said that it had become “such a distraction.” 

Republicans were already opposed to most of the proposals Obama made during his State of the Union Address, but they saved particular spite for the plan to end 529 accounts. 

Speaker John Boehner (R-Ohio.) took time to promote a bill introduced early this week by Rep Lynn Jenkins (R-Kan.) to expand and strengthen 529 saving accounts. 

Obama called his proposals “middle-class economics” in his address, but opponents of the plan likewise describe themselves as the middle-class’s champions. 

“529 plans help middle-class families save for college, but now the president wants to tax those plans,” Boehner said. 

The proposal was also rebuffed by Democrats. Ron Kind (D-Wis.) co-introduced the bill to expand 529s, and House Minority Leader Nancy Pelosi personally lobbied the president on Air Force One to drop the proposal, Politico reported. 

Some conservatives pointed out the president has previously praised 529 plans, including in his own memoir The Audacity of Hope, as did numerous White House officials and advisers over the years. 

“When state tax benefits are included, a typical middle class family can accumulate 25 percent more in 529 accounts than they can in a typical taxable savings account,” former Treasury secretary Timothy Geithner said in 2009. 

The Government Accountibility Office states in a 2012 report that less than 3 percent of U.S. families had a 529 account, and had a median income of $142,400, more than three times the U.S. average. 

Still, the proposal would be a breach of the president’s earlier patterns of only raising taxes on the rich. However, when Obama phased out the tax-cuts from the Bush years, he kept them for households making less than $250,000 annually. 

According to the College Savings Foundation, over 95 percent of families with 529 accounts make less than $250,000 per year, and 10 percent make less than $50,000 a year. After the White House pulled the proposal, the Foundation thanked “the many middle class American families who reached out to Congress and the Administration” to stop the plan. 

However, families with 529 accounts are still, on average, far wealthier than those without them. The GAO report estimates that 47 percent of 529 accounts belong to households with more than $150,000 in annual income.