The President’s budget includes a long list of tax changes including at least one that he has already disavowed: his plan to limit the tax exemption of withdrawals from 529 college savings accounts. The proposal—which would have collected about $1 billion over the next decade—was pilloried from the left and the right as a tax hike on the middle-class. When packaged with a number of other education subsidies in Obama’s budget, the higher education changes would have been a net benefit to middle-income households. But rather than trying to tell that story, Obama abandoned his 529 proposal. The whole episode may, at least, be a useful learning experience about the politics of tax subsidies such as 529s. In a blog post earlier this week, Sandy Baum and I explained why we thought Obama’s proposal was good policy. 529 plans allow an almost unlimited Roth IRA- type account people can use to pay for college and other education expenses of their kids or other relatives or themselves if the funds aren’t being used by the named beneficiary. The plans benefit people with very high incomes the most, both because they have the resources to save, and because the tax exemption is much more valuable in high tax brackets. Because the wealthy are most likely to send their children to college even without the subsidy, the accounts likely do little to expand access to higher education. High-income households are much more likely to use these accounts and have dramatically larger average balances (table). Those with incomes over $200,000 make up 6 percent of households, control almost 40 percent of accounts and hold 70 percent of the balances.  Education or Health/Medical Savings Accounts in the 2013 Survey of Consumer Finances

Income Category	Thousands of Households	Household with an Education or Health/Medical Saving Account
		Thousands of Households	Total Balance [billion $]		Household Participation Rate		Average Household Balance [$]
All	122,314	3,727	183.7		3.0%			49,300
$0 – $10,000	5,284	0	0.0		0.0%			-
$10,000 - $20,000	17,457	47	0.1		0.3%			3,000
$20,000 - $30,000	15,623	28	0.4		0.2%			14,700
$30,000 - $40,000	14,411	144	2.0		1.0%			13,900
$40,000 - $50,000	11,637	96	1.6		0.8%			16,100
$50,000 - $75,000	19,703	318	10.2		1.6%			32,000
$75,000 - 100,000	12,815	450	8.6		3.5%			19,200
$100,000 - $200,000	17,567	1,385	34.1		7.9%			24,600
$200,000 - $500,000	5,839	884	71.3		15.1%			80,800
$500,000 - $1,000,000	1,280	237	21.5		18.5%			90,900
$1,000,000 or more	697	137	33.8		19.6%			246,800

Source: Tax Policy Center Calculations from the 2013 Survey of Consumer Finances (SCF) Notes: Households refer to the primary economic units as defined by the SCF. In the public use version of the 2013 SCF, the information regarding education saving accounts include Coverdell/Education IRA or 529/State-sponsored Education Account are combined with information on Health Savings Accounts. What are lessons of all this: First, politicians need to think about what they mean by middle-class. Much of the debate came down to who exactly is in that group. It’s no surprise that the Democrats who were the most vocal defenders of 529s —Representatives Chris Van Hollen from DC’s Maryland suburbs and Nancy Pelosi from the San Francisco Bay Area—come from places where constituents firmly count themselves as middle class despite earning more than $200,000. Second, entirely eliminating the tax-exemption of 529 withdrawals might have been a bridge too far. Instead, Obama might have tried to limit contributions to low- and middle-income families (similar to Roth IRAs). Or the value of the tax exemption could be capped at 28 percent, similar to what Obama has proposed before for other tax breaks. However, these ideas would weaken a major benefit of Obama’s initial plan-- simplification. The President wanted to consolidate the myriad of education benefits, which meant getting rid of some of them. A simpler system of education subsidies might encourage more low- and middle-income households to take advantage of them. But Obama never made that case. Instead, critics focused on the subsidy that was being cut without thinking about the entire package. College savings accounts are probably here to stay. The President’s failed proposal may at least renew interest in the accounts, and perhaps encourage more low- and moderate-income households to use them. As Justin King has noted, some states including Maine, Rhode Island and Nevada are trying to encourage college attendance by setting up accounts for all children and seeding them with initial deposits (though the $500 per child in Maine seems more encouraging than the $50 in Nevada). Perhaps creating an account in a child’s name will get families thinking about college.