Obama Proposes Free Community College, Tax Plan To Fund It

Obama Unveils Plan To Make Community College Free For Millions Of Students. On January 9, Obama announced a plan to make community college free for “all students if they attend classes at least half time and maintain a grade point average of 2.5 or better,” as The Washington Post's Post Politics blog reported:

The White House estimated that the cost of the program would be “roughly $60 billion over 10 years” and would, if all states choose to participate, include about 9 million students, said an administration official.

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Under the White House's plan, the offer of free tuition would extend to all students if they attend classes at least half time and maintain a grade point average of 2.5 or better. The federal government would cover up to 75 percent of the costs of the initiative, while states would pick up the remaining quarter. [The Washington Post, Post Politics Blog, 1/9/15]

Plan Includes “Ending A Popular Tax Break On 529 Plans.” During his State of the Union address on January 20, Obama proposed ending a tax break on what are referred to as “state 529 college savings plans,” named for their section in the Internal Revenue Code. According to Money magazine, Obama says he would use the money generated by this change to “raise the American Opportunity tax credit” (emphasis added):

In his State of the Union address Tuesday, President Obama promised to make college more affordable for low- and middle-income families. But one way he would pay for that would be to make college more expensive for millions of upper-income Americans.

The president proposed ending a key tax break on state 529 college savings plans. Today, the money you invest in a 529 plan isn't deductible on your federal taxes (34 states and the District of Columbia give you a break on state taxes), but your savings grow tax-deferred, and you won't owe any taxes on your earnings when you withdraw that money to pay for higher education expenses, including tuition, room and board, and books. Under Obama's plan, those investment profits would be taxable, even if the money went toward college.

President Obama says he'd use the estimated extra $2 billion in tax revenues to raise the American Opportunity tax credit, which is a $2,500 write-off targeted at low- and middle-income families paying tuition bills. The administration points out that 529 plans disproportionately benefit higher-income households. [Money, 1/22/15]

Media Outlets Suggest Obama's Tax Plan Will Hurt The Middle Class

WSJ Editorial: Obama's Tax-Break Rollbacks Go “After Middle-Class Savers.” A Wall Street Journal editorial proclaimed in a January 21 headline, “Now He's After Middle-Class Savers,” implying that Obama's plan to “help the middle class at the expense of the rich” would actually hurt the middle class:

President Obama is pitching his new tax plan as a way to help the middle class at the expense of the rich. But middle-class savers are bound to notice if he achieves two of the White House's stated goals -- to “roll back” tax benefits of 529 college savings plans and “repeal tax incentives going forward” for Coverdell Education Savings Accounts.

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The College Board says the average cost of tuition, fees, room and board at a private four-year nonprofit college this year is more than $42,000. So we're supposed to believe the President is sticking it to fat cats when he targets savings plans that might cover one semester at a private college, or a full year for in-state students at public universities. This now makes you a Rockefeller on Planet Obama. [The Wall Street Journal, 1/21/15]

Limbaugh: Obama “Eliminating” Tax Cuts For The Middle Class. On the January 21 edition of his radio show, Rush Limbaugh claimed that Obama was “eliminating the opportunity for the middle class to set aside tuition money tax-free, under the guise of providing free junior college tuition.” [The Rush Limbaugh Show, 1/21/15]

Forbes Contributor: Obama Implementing “Tax Hike On Middle Class 529 Savers.” Forbes contributor Ryan Ellis wrote on January 19, “The Obama plan aims to turn back the clock, once again taxing earnings growth in 529 plans as ordinary income. This is a direct and clear tax increase on middle class families sacrificing to save for college, and it's likely to result in a mass divestment from this type of savings.” [Forbes, 1/19/15]

But 529 Investors “Tend To Be Wealthy,” And Tax Plan Will Reportedly Help More Than 8.5 Million Families

Slate: Tax Increase On College Savings Plan “By And Large [On] Wealthy College Savers.” Slate's Jordan Weissman wrote that while Obama's plan “would hit some families that earn below the quarter-million-dollar mark,” they are “by and large, wealthy college savers” (emphasis added):

First a little background: 529 college savings plans are tax-deferred accounts in which parents can stow away up to $14,000 per year for their child's education (any more, and they have to worry about the gift tax). Unlike a 401(k) retirement plan, families can only save post-tax dollars in them. But once the money is in the account, it can be invested in stock or bond funds, and grow tax-free. Then, when Mom and Dad withdraw their cash to pay for Junior's school, the gains aren't taxed.

Obama wants to change that slightly. Under his proposal, investments could still grow tax-free. But when families retrieve their money, the gains will be taxed as ordinary income. As the Wall Street Journal notes, this is how 529 plans worked in the 1990s, until the Bush tax cuts made them even more generous.

So, yes, Obama wants to tax college savers. But, by and large, they're wealthy college savers. When the Government Accountability Office looked at 529 plans and their less popular cousins, Coverdell accounts, it found that 47 percent of families that had them earned more than $150,000 per year. (Depending on who's measuring, that puts them in at least the top 10 percent of U.S. households.) By comparison, it noted, the median income of families with a student in college is $47,747.

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Meanwhile, the White House says that revenue brought in from taxing gains in 529 plans would go toward expanding other higher education tax breaks, such as the American Opportunity Tax Credit, which is available to families earning up to $180,000. So it seems like the middle class makes out just fine in this deal. [Slate, 1/20/15]

Fortune: Wealthy Receive Six Times The Tax Break On 529s That Families “Earning Less Than $100,000 Per Year” Do. Fortune's Jean Chatzky highlighted that families earning more than $150,000 per year receive “six times the [tax] break by families earning less than $100,000” per year:

Fewer than 3% of families have 529s or Coverdell Education Savings Accounts (a smaller program on which the President also wants to do away with tax breaks), according to a 2012 report from the General Accounting Office. Of those that do, about half earn more than $150,000 a year. More than that, the tax break those families earn annually, the report said, amounts to more than $3,000 -- which is six times the break received by families earning less than $100,000 a year. [Fortune, 1/21/15]

Money: Obama's Plan “Ease[s] The Tuition Burden For More Than 8.5 Million Low- And Middle-Income Families.” A Money magazine article reported, “In essence, Obama is proposing making college more expensive for an estimated 2 million mostly upper-income families to ease the tuition burden for more than 8.5 million low- and middle-income families.” The article later said:

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.

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. [Money, 1/22/15]

And Savings From 529 Plans Will Be Redirected To Expand Eligibility For A Broader Tax Credit

White House: 529 Rollbacks Will Help “Consolidate Education Savings Incentives” And “Redirect” Them Into A Broader Tax Credit. A White House fact sheet detailed how rolling back the 529 tax plans would allow them to “redirect the savings” into the American Opportunity Tax Credit (AOTC) and “increase the refundable portion” of the benefit “so that more working families and students can qualify”:

The President's plan would consolidate education savings incentives into one vehicle and redirect the savings into the better targeted AOTC. Specifically, the President's plan will roll back expanded tax cuts for 529 education savings plans that were enacted in 2001 for new contributions, and -- like Chairman Camp's tax reform plan -- repeal tax incentives going forward for the much smaller Coverdell education savings program.

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Increase the refundable portion of the AOTC to $1,500. The President's plan adopts Congressional proposals - from members of both parties - to increase the refundable portion of the AOTC so that more working families and students can qualify. Like legislation that passed the House in 2014, the President's plan would increase the refundable portion from a maximum of $1,000, or 40 percent of the total AOTC benefit, to a flat maximum of $1,500. [WhiteHouse.gov, 1/17/15]

CNN Money: Those Who Use 529 Tax Breaks Would Benefit From Obama's New Plan To Expand The AOTC. CNN Money pointed out that “some of the same filers saving in a 529 plan” would benefit from the expanded version of the AOTC in Obama's plan:

The AOTC is available to joint filers with modified adjusted gross income up to $180,000 and up to $90,000 for single filers.

Presumably some of the same filers saving in a 529 plan would benefit from an expanded and permanent version of the AOTC.

An analysis by the Government Accountability Office found that in 2010 less than 3% of families saved in a 529 plan. The GAO estimated that families who saved in 529s had a “median financial asset value” that was 25 times that of families without a 529. [CNN Money, 1/21/15]

Businessweek: Obama's Plan Will “Boost” Low-Income Households And Add “Nearly $50 Million” In Tax Benefits. According to a January 20 article from Bloomberg Businessweek, by pairing the 529 rollbacks with the AOTC, President Obama's plan will “boost how the AOTC helps lower-income families.” A White House spokesperson explained that the move will “far outweigh the elimination of other tax benefits” and add “nearly $50 million more” in additional tax benefits (emphasis added):

Obama pairs these reductions with expanding the remaining education incentive, the American Opportunity Tax Credit, which is set to expire in 2017. Obama signed the AOTC into law in 2009 as part of the federal stimulus program, and it gives up to $2,500 in credits to families with incomes as high as $180,000. The AOTC does share some of the regressive nature of the tax programs--about a quarter of families that claim the credit make more than $100,000--so Obama's new proposal would make the AOTC permanent and take steps to boost how the AOTC helps lower-income families.

In particular, the plan would increase how much of the credit is “refundable,” which means that more of it will count in a family's tax refund if they don't earn enough to owe federal taxes. It also makes it easier for students who receive Pell Grants to get the AOTC credit, which was so complicated before it required a five-page fact sheet from the IRS just to show how it can most help families.

A White House spokesperson says the expansion of the AOTC will far outweigh the elimination of the other tax benefits, saying Obama's plan amounts to “nearly $50 million more” in additional tax cuts over the next decade. [Businessweek, 1/20/15]

Media Outlets Cited Koch-Funded Americans For Tax Reform To Push Back On Obama's Plan

Various Media Outlets Pushed Back On Obama's Plan Citing Americans For Tax Reform. Multiple media outlets, including FoxNews.com and the Washington Free Beacon, cited the group Americans for Tax Reform (ATR) to criticize Obama's plan to fund free community college. In addition, ATR's Ryan Ellis was the author of the Forbes piece claiming that the plan is a “tax hike on middle-class savers,” which Limbaugh read from on his radio show. [FoxNews.com, 1/21/15, Washington Free Beacon, 1/20/15, Forbes, 1/19/15, The Rush Limbaugh Show, 1/21/15]

Center For Media And Democracy: Americans For Tax Reform “Has Several Significant Ties To The Koch Brothers.” The Center for Media and Democracy's SourceWatch points out that ATR has numerous financial ties to Koch funding:

ATR has several significant ties to the Koch brothers and their network of conservative donors.

In 2010, ATR received $4,189,000 from the Koch-linked Center to Protect Patient Rights (CPPR). The Center's contribution amounted to approximately a third of ATR's revenue in 2010, which was almost $12.4 million. The CPPR, a 501(c)(4) group now known as American Encore, receives the bulk of its funding from the Koch-backed funding organizations TC4 Trust and Freedom Partners, and is overseen by “Koch operative” Sean Noble.

ATR has also received money directly from the Kochs. In 2012, Americans for Tax Reform's 501(c)(3) arm, the Americans for Tax Reform Foundation, accepted $50,000 from the Claude R. Lambe Foundation, one of the Koch Family Foundations. [Center for Media and Democracy, accessed 1/22/15]