The president’s quick about-face on eliminating some tax benefits for owners of college savings plans will likely be remembered as a bipartisan revolt of the middle class.
The thing is, it would be far more accurate to call it a revolt of people who just think of themselves as middle class. And along the way we all got a little glimpse into the tax-policy dynamics that will make any real tax reform a great trick to pull off.
Dumping a popular college savings tax break wasn’t part of any fundamental tax reform proposal, of course, but just one little provision in a package of policies that the Obama administration has pitched as middle-class economics.
These college savings accounts include the popular 529, another one of our classically American financial products named for a part of the tax code. A 529 allows parents and grandparents to put money aside for future education expenses.
The money goes in a 529 after taxes, just like a regular investment account. The money that comes out, which could include many years of interest, dividends and other investment gains that would ordinarily be taxed, is tax-free.
This break is one of those tax policies that’s easy to support, as it encourages families to save money for a really important investment. The White House staff, however, concluded that lower-income families would be better off with an expanded tax credit for college, and thought taxing earnings from new 529 account deposits could help pay for it.
Uproar isn’t too strong of word for the reaction.
To critics, the president looked to be backing off an original campaign promise to not let taxes increase for families making less than $250,000 per year. Even leaders from the president’s own party piled on.
Those same critics couldn’t help but point out that the first family had already dropped $240,000 into 529 accounts in 2008 to pay for its college expenses down the road.
Coming out in favor of taxing 529 gains now may have looked like hypocrisy, but perhaps a better explanation is that the president was well aware that any family earning about $2.7 million, as his did in 2008, isn’t middle class. And maybe it doesn’t need a tax break.
There is no more popular group in America in politics, of course, than the middle class. Not that it’s easy to identify just who is in it.
Here in the Twin Cities, by taking the middle third of households, ranked by income, and calling that the middle class, the incomes start at $45,000 and top out at $93,600.
Another rule of thumb is to put the bottom edge of the middle class at 50 percent of the median and the top at 50 percent more than the median. That puts the upper end of middle class in the Twin Cities area right at $99,000.
No matter how hard covering the monthly nut feels, and there’s no question it can feel plenty hard, a household that takes in more than $99,000 is no longer part of the middle class.
How big is the group of better-off-than-middle-class households? According to a Pew Research Center survey from last year, about 15 percent of Americans self-identified as “upper middle class” or “upper class.”
But by the numbers, though, twice as many households here in the Twin Cities have an income of more than $99,000. About 13 percent of Twin Cities households have $150,000 or more in annual income.
And as it turns out, it’s those families between $100,000 in income and $150,000 that really have embraced these 529 plans.
A March 2014 survey by a firm called Strategic Insight found that nearly 63 percent of 529 accounts were owned by families with household income of greater than $100,000, with most of those owned by households earning less than $150,000.
The households with higher income also had saved a lot more in them, too, which makes sense because they should find it a little easier to have some money left over after the bills have been paid. They also have greater incentive to save in an account with some tax benefits, which are more valuable in a higher tax bracket.
So it’s no surprise that families of greater than $100,000 of income had an average 529 balance of just under $7,500, as shown in a study put out by Sallie Mae. Genuinely middle class 529 account owners had only managed to save an average of less than $1,700.
When the White House sensibly pointed out that most of the 529 tax breaks sure seem to going to some pretty well-off families, a financial trade association shot back that it’s still not exactly a program for the town-and-country set. After all, almost 95 percent of these accounts are owned in households with income below $250,000, a fact also confirmed by Strategic Insight. So rich people don’t own them.
And what to call these not-quite-rich-but-too-well-off-to-be-middle-class folks who own most of the 529s? Upper middle? That seems accurate, and the debate over tax breaks that make it a little easier for them to send their kids to college shows how difficult any tax reform will be.
Families with a quarter million in income may be better off than 96 percent of other Twin Cities families, but as far as they’re concerned, it seems they’re really just middle class.