Obama's middle class dilemma on 529s

A tax shocker: Death of the 529?

Here's the thing about income redistribution: Those who benefit love it, but those who pay do not.

That's true when it comes to corporate tax reform, where sectors profiting from low rates line up on the opposite side of those who would lose their favorite loopholes. It's true on President Barack Obama's Affordable Care Act, where older Americans assured of health coverage even if they're ill think differently than young healthy ones who object to paying for coverage they might not need.

And it's true of the shifts in education tax policy that Obama announced this week as part of his new "middle-class economics" push.

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The president's goal is lifting the incomes of middle-class families that have stagnated in recent decades while more affluent Americans have benefited from economic growth. To do that, he proposed decreasing some tax benefits from the affluent in order to increase benefits for the less well off.

Specifically, the president proposed to raise $1 billion over 10 years by taxing capital gains realized in withdrawals from so-called 529 college savings accounts. The White House cites surveys showing that 70 percent of the assets in such accounts are held by families earning more than $200,000 per year, and notes that higher income families benefit most from the current tax exemption for such gains.

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The president aims to benefit families with more modest incomes. His proposal would make permanent the American Opportunity Tax Credit, which provides up to $2,500 per year for families with incomes up to $180,000. It would also extend that credit, which is refundable (distributed as a government check) for some families who don't owe federal income taxes, to new categories of students such as those attending classes part time.

The overall net tax reduction for education would be $50 billion for middle-class families. But that won't settle the argument, since there's no consensus on what qualifies as a middle-class family in the first place.

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Families earning $200,000 are in the top 5 percent of all American earners. But many of them, especially in the high-cost, high-tax states on the East and West Coasts, do not feel very affluent. And because such families are comparatively influential politically, especially with Democratic lawmakers representing those states, prospects for the 529 changes appear dim.

For similar reasons, Obama abandoned his 2008 campaign pledge to roll back the Bush tax cuts for couples earning $250,000 a year or more. Instead, in the 2013 "fiscal cliff" deal, Obama accepted the rollback of those cuts only for couples earning more than $450,000 per year.