President Barack Obama’s surprise move to drop his proposal to scale back tax breaks for 529 college savings plans illustrates, among other things, why tax reform is so hard.
Tax reform means taking tax breaks from someone to finance some broader goal–in some cases lower tax rates or, in this case, to move toward a simpler tax code with fewer different tax breaks for education and to shift federal aid for college tuition away from upper-middle-class families and toward lower-middle-class families.
Now, as I wrote on Friday, there was a logic to the president’s proposal. According to the White House, about 70% of the benefits of 529 plans go to households with incomes of more than $200,000, which is fewer than 4% of all tax returns. But a lot of people–many of whom are in Washington–are saving for college in 529 accounts and don’t think of themselves as rich. Republicans spotted a juicy target and aimed at it. And a couple of senior Democrats–including House Democratic leader Nancy Pelosi of California and Rep.Christopher Van Hollen of Maryland–reportedly beseeched White House to pull the idea.
The president flinched. The White House says he no longer favors it. “We proposed it because we thought it was a sensible approach, part of consolidating six programs to two and expanding and better targeting education tax relief for the middle class,” a White House official said Tuesday. “Given it has become such a distraction, we’re not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief that has bipartisan support.”
In one sense, this looks like amateur hour. The White House dropped a what was sure to be a controversial proposalinto a fact sheet before the State of the Union without offering much context or explanation. Officials clearly didn’t think through the politics of the concept, whatever its merits. And now the administration is in the embarrassing position of sending Congress a budget on Monday that includes a proposal the president has dropped. Presidents often offer proposals they know have little chance of enactment; usually, they don’t disavow them before they are formally presented.
But there’s a bigger lesson here too: Tax reform is very popular in principle and very difficult in practice. Tax reform creates winners and losers–and the losers often shout louder. The losers know what they’re losing; the winners first have to do the math.
Remember that the next time you hear someone wax optimistic about the odds of Congress passing corporate tax reform in the next couple of years.