State of the Union

Let's Pay for 'Free' Community College by Taxing College Savings!

Obama's new tax proposals hit more than the rich.


There are alternative solutions out there.

President Barack Obama's State of the Union Address tomorrow proposes $320 billion in taxes over the next 10 years. Pretty much every new story is presenting it as "increasing taxes on the wealthiest" to pay for programs to help the middle class. That's bad enough. It's not like he's proposing increasing taxes to pay for fundamental government operations. It's just a wealth transfer to cover the "costs" of offering up tax credits to famillies with two working parents (screw you, stay-at-home moms and dads!). But beyond that, Americans for Tax Reform looked at the package and point out several ways these tax increases are going to potentially come back and hurt others besides the richest among us.

Obama previewed his plan for "free" community college for students seeking associate's degrees a couple of weeks ago. The administration has put a price tag of $60 billion over 10 years for it (which means it's likely to be much higher). Part of how Obama plans to pay for it is to tax the special saving funds, called 529 plans, that people can use to gather money to pay for their children (or themselves) to go to college:

Under current law, 529 plans work like Roth IRAs: you put money in, and the money grows tax-free for college. Distributions are tax-free provided they are to pay for college.

Under the Obama plan, earnings growth in a 529 plan would no longer be tax-free. Instead, earnings would face taxation upon withdrawal, even if the withdrawal is to pay for college. This was the law prior to 2001.

As you may recall, I argued that Obama's "free community college" plan was a subsidy for college administrators and bureaucrats, not students. Nothing could make my analysis more clearly true than to literally tax people's college savings in order to give more money directly to colleges.

Read more analysis from Americans for Tax Reform here