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Hasty Retreat on 529 College Savings Plans

The Obama administration dropped its plan to tax 529 College Savings Plans after detractors said it would hurt, not help middle-class Americans.The Obama administration beat a hasty and tactical retreat by yanking its idea to tax 529 College Savings Plan investment earnings. The proposal drew bipartisan barbs in defense of the popular college savings accounts available in most states.

Obama spokesperson said the 529 plan tax proposal was scrapped to allow the focus to remain on other parts of the President's higher education initiative, especially free tuition for two years of community college paid for by an increase in the federal capital gains tax. They also said the tax revenue from the proposal wasn't that large anyway.

However, the pressure to dump the idea was intense. Republicans, led by House Speaker John Boehner, said eliminating the tax-preferred status of 529 College Savings Plans would hurt middle-class Americans. House Democratic Leader Nancy Pelosi said pretty much the same thing as she rode with President Obama on his Air Force One flight from India to Saudi Arabia.

529 College Savings Plans vary from state to state, but essentially allow contributors — usually parents and grandparents — to put money into an account for a student and receive a tax break. The earnings on money in the student's 529 account aren't taxable as long as they are withdrawn down the line for a qualified educational expense.

Data shows that 80 percent of the tax benefits from contributions to more than 7 million existing 529 plan accounts go to households with more than $150,000 of annual income and 70 percent to households earning more than $200,000. Defenders of 529 plans say 10 percent of contributions are attributed to households with $50,000 or less in annual income, which means the program also works as an incentive for lower-earning households.

Obama's proposal sought to redirect tax benefits associated with college expenses to an expanded American Opportunity Tax Credit, which started in the 2009 economic stimulus bill as a tuition credit aimed at helping families paying for college, even if they didn't earn enough to pay federal income tax. The Government Accountability Office ran estimates showing Obama's plan would drive more economic benefits for families with $100,000 or less in annual income than the current 529 plan benefits.

“It’s kind of baffling that people in the middle are convinced they are getting hit hard when virtually all of them are the winners,” Robert Greenstein, the president of the liberal Center on Budget and Policy Priorities, told the New York Times.

However, that was lost in the political furor Obama's plan ignited.

529 plans are popular in part because they are a fairly easy way to transfer wealth from one generation to another. Tax benefits aren't always the primary motivating reason for the contributions. Threatening these plans showed their broad-based acceptance and popularity by many middle-income families and households.


Picture of Gridlock

President Obama's State of the Union Address didn't appeal to Republicans, but may have been intended as the first salvo in the 2016 election.It was easy to spot who was who last night at President Obama's next-to-last State of the Union Address to Congress. The people standing up and cheering were fellow Democrats. The people sitting down were Republicans.

After the speech, GOP spokesmen said Obama needs a "reality check" because many of his proposals, such as raising taxes on wealthy Americans, won't fly in the new Congress controlled by Republicans. Democrats said Republicans can't admit that the economy is rolling and are unwilling to tackle issues such as wage stagnation that hobble middle and lower income Americans.

You could say the packed House chamber was the picture of gridlock in Washington, DC.

A close-up of that picture was visible as the TV cameras showed the respective reactions from Vice President Joe Biden and House Speaker John Boehner who were seated behind Obama during the speech. Biden nodded in agreement and rose repeatedly to applaud. Boehner clapped his hands tepidly a few times and mostly grimaced as Obama spoke.

Republicans say Obama failed to acknowledge voter repudiation of his policies that led the GOP to majorities in both the House and Senate. They also say he missed opportunities to identify areas of potential compromise, such as steps to strengthen Medicare.

Obama did cross swords with his own party by asking for fast-track authority to negotiate new international trade agreements in Europe and Asia, which many Republicans support. But he promised vetoes on legislation that tried to undo his executive actions on immigration.

Despite the closing section of Obama's speech where he said Washington is better than gridlock, there was little in his text or delivery to suggest he was willing to budge on his political priorities. Many observers called his speech the first salvo in the 2016 election.

When Obama mentioned he has no more election campaigns, some congressional Republicans applauded. Obama, with a smile on his face, shot back, "I know because I won both of them." The President also looked directly at the concentration of Republicans in the chamber when he ticked off positive economic indicators and said something to the effect of "That's good stuff."

For their part, Republicans invited Israeli Prime Minister Benjamin Netanyahu to speak from the same podium as Obama did. Netanyahu has objected to the deal the Obama administration is trying to cut with Iran to prevent it from becoming a nuclear power. Boehner pointedly told reporters he extended the invitation to Netanyahu without notifying Obama.​

The President's speech and Republican reactions follow what has become a political ritual. Now that political points have been made and battle lines drawn, it is still possible Obama and GOP congressional leaders can do some of the country's business.


NW Delegation Gains Clout

Elections bring change and the biggest change after last year's election was the demotion of Senate Democrats to the minority. Here is a quick look at how the Pacific Northwest delegation stacks up in the just convened 114th Congress:

Senator Patty Murray has been given immense responsibility by her Democratic Caucus, including co-chairing the Super Committee, heading the Democratic Senatorial Campaign Committee and chairing the Veterans Committee and the Transportation and Housing Appropriations Subcommittee. Murray and GOP Budget Chairman Ryan crafted the budget compromise that avoided deep domestic spending cuts and set a framework for a bipartisan roadmap to address longer-term challenges. In the 114th Congress, Murray takes on possibly her most challenging assignment. She gave up her chairmanship of both the full Budget Committee and Transportation/Housing Appropriations Subcommittee to take over the most powerful domestic discretionary issue, health care. Murray will now be the lead authorizer and appropriator on health care, education and workforce development. She is the Ranking Member of the Labor, Health, Human Services and Education Appropriations Subcommittee and the full Health, Education, Labor and Pension Committee.

Senator Ron Wyden will continue as the lead Democrat on the powerful Finance Committee.  Even in the minority, Wyden will wield significant power on the tax writing committee in a year when tax reform may finally percolate to the surface.  The Committee also will have a significant role in financing a transportation reauthorization bill, crafting a Trade Promotion Authority bill, addressing online sales tax and passing a host of tax extenders. 

Senator Jeff Merkley, who joined the Appropriations Committee in the last Congress, was recently selected to be the Ranking Member of the Agriculture Appropriations Subcommittee. Merkley is the beneficiary of a number of retirements and departing colleagues on the Appropriations Committee and is probably overjoyed to start his second term as the lead Democrat on the subcommittee. Agriculture is huge in Oregon, including the exploding wine industry, and Merkley will be well positioned to promote research and development of key agricultural products. Since coming to Congress, Merkley has been frustrated with the obstructionist tactics of the Republican minority. He led the fight for filibuster reform. It will be interesting to see if Merkley continues to champion the cause now that Democrats are in the minority.

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A Plea for Pro-Manufacturing Policies

Gallup says Americans think now is a good time to find a good-paying job. A spokesman for the Alliance of American Manufacturing says now is a great time to invest in jobs that involve making something. 

The U.S. economy is humming along, with many positive indicators. However, one not-so-good metric is the disappearance of so-called middle income jobs, the kind of jobs traditionally found in the manufacturing sector.

Scott Paul, president of the Alliance, says this is a critical time to invest in programs that promote job growth, especially in manufacturing. His suggestions, which are aimed at the new GOP-controlled Congress taking office in January, include:

  • Take advantage of low gas prices to raise the revenue to boost lagging investment in roads, bridges, water and sewer systems and the electricity transmission grid. Paul says 21,000 jobs are created for every $1 billion in infrastructure investment.

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The Shape of Government to Come

Predicting the future is tricky business, but Deloitte and Touche LLP gave it a whirl in painting a picture of government in 2020. It turns out to be not that much different than government today.

Governments will still be puzzling over how to finance a growing backlog of infrastructure investments, health care will become even more ubiquitous with technological innovations and we still will be debating over personal privacy, increased convenience and the need to snoop to protect us from terrorists.

Through in-depth research and interviews with experts on each topic, Deloitte provides analysis on 39 drivers that will impact government operations and 194 trends that represent the shifts that may result by 2020. The results are posted on its new website, Gov2020.

Gov2020 is designed to be a one-stop shop for leaders in the private and public sectors to analyze how changing demographic, societal, economic and technological trends may impact the future. William Eggers, the leader of Deloitte’s public sector research department, compares the website to a “Wikipedia on the future of government.” However, Eggers also hopes the creation will spur an interactive discussion among its users about what is possible in the future. 

For instance, it’s no surprise that investing in infrastructure will remain critical to economic competitiveness in 2020. As with today’s ongoing debate, the challenge for governments will be finding a way to pay for these investments. More electric and fuel-efficient cars on the road will continue to have a significant impact on the gas tax.

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