Last month, Obama announced a plan to tax 529 college savings accounts in order to provide funding for his tuition-free community college initiative. And then he backed down just over a week later.
But Obama had good reason for his initial attempt to remove the tax-free status of these plans, given how regressive they are:
In 2012, more than 97% of families had no special college savings account, according to a Government Accountability Office report. (The large number of accounts may be due to some families opening separate accounts for each child and parent.)
One reason for the low participation: Many still don’t know about 529s. Of parents who say they’re planning to send their kids to college, 49% don’t even know what a 529 plan is, Sallie Mae found in its annual “How America Pays For College” report.
Another factor: Low and middle-income families pay comparatively low taxes, so the tax break is not much of a lure to lock up money for one purpose. Families can take money out of 529s to spend on non-college expenses, but they’ll have to pay regular income taxes, plus an extra 10% penalty, on any earnings.
As a result, 529 investors tend to be wealthy. Families with 529s earned a median annual income of $142,400 and reported a median of $413,500 in financial assets, according to the GAO. About half of families with 529s (or similar Coverdell accounts) had an income above $150,000 in 2010.
And, in part because high earners typically owe higher taxes, the wealthy reaped large tax breaks from using 529s. In 2012, the GAO found that Americans who made less than $100,000 withdrew a median $7,491 from their 529s, saving just $561 on their taxes. But Americans who earned more than $150,000 withdrew a median $18,039, saving $3,132 in taxes.
So what does Congress do when it sees a regressive tax break?
It expands it, of course.
Today, the House passed H.R. 529, which amends the tax code to provide greater benefits to those with 529 plans:
H.R. 529 would expand the qualifying expenses to include certain computer and related expenses. The bill would also modify the computation of the taxable portion of a distribution when the contributor has established multiple accounts for the student. In addition, H.R. 529 would allow beneficiaries to pay no tax in the event that they receive a refund from the educational institution (for example, after withdrawing from enrollment) and contribute the refunded amount back to the savings plan within 60 days.
According to the
CBO, it would increase the deficit by by $51 million between 2015 and 2025, with revenue losses starting in 2015. As we already know, Republicans don't care about the deficit when it comes to tax breaks for upper incomes.
This bill passed easily 401 to 20.
One Republican--Walter Jones (NC-03)--voted against it.
19 Democrats voted against it:
Yvette Clarke (NY-09)
Keith Ellison (MN-05)
Marcia Fudge (OH-11)
Raul Grijalva (AZ-03)
Alcee Hastings (FL-20)
Steny Hoyer (MD-05)
Eddie Bernice Johnson
Marcy Kaptur (OH-09)
Betty McCollum (MN-04)
Grace Napolitano (CA-32)
Mark Pocan (WI-02)
Cedric Richmond (LA-02)
Bobby Rush (IL-01)
Kurt Schrader (OR-05)
Mike Thompson (CA-01)
Bennie Thompson (MS-02)
Pete Visclosky (IN-01)
Maxine Waters (CA-43)
Bonnie Watson Coleman (NJ-12)