In the annual ‘State of the Union’ speech on 20 January, President Obama included a number of new tax proposals that purportedly aim to raise taxes on the wealthy and lower taxes for working families and the middle-class. The additional tax revenue thereby generated would be used to provide two years of community college education free of charge to qualifying students. These are truly noble goals, and both political parties want to help the middle-class. However, some of the proposed changes seem to be designed to allow Democrats to vote ‘yes’ to proposals that appear to favour the middle-class, while the Republicans would be forced to vote against these proposals, so establishing the pro middle-class message for the Democrats in the 2018 elections. Elements in the tax plan seem to be designed to offer up overtly political totems similar to those the Republicans have been offering for years, with little chance of enactment.

An example of the political football is the much discussed proposed changes to the taxation of section 529 plans. Section 529 plans generally encourage US taxpayers to save for future higher education for a particular beneficiary or beneficiaries (usually children or grandchildren). The plan incentivizes saving by allowing a US taxpayer to contribute an amount to a plan which grows tax deferred (i.e. interest, dividends, capital gains in the account are not subject to US federal income tax), and distributions from the plan are not subject to US federal income tax if used for tuition, fees or books etc., at an accredited college or university.

In his speech, President Obama proposed that distributions from section 529 plans should be subject to US federal income tax on the earnings within the plan when a distribution is made. This is generally how the section 529 plan originally worked when initially drafted into US tax law in 1996.

However, the Administration quickly realised that this was developing into a political own goal as the middle classes, who have been most severely hit by rising college tuition costs, protested. The proposal was dropped.

A more fundamental reform proposed by the Administration is the denial of the tax free uplift at death for capital gains purposes. If you own 100 shares of Microsoft worth $10,000 for which you paid $1,000 you will be taxed more heavily if you sell them shortly before you die than if your estate sells the shares after your death. At a time when the estate tax exemption is at an all time high and when estate tax rates are capped at 40%, the lowest for some considerable time, and income tax rates are relatively high, the tax free basis uplift, looks increasingly generous.

However, it is a long standing feature of the US (and the UK) tax firmament and its repeal seems unlikely with a Republican congress. Nevertheless, it is a thoughtful tax policy initiative which may take root in future. The Administration continues to want to reduce the estate and gift tax exemption from $5.43m (currently) to its 2009 level of $3.4m, but again that is unlikely with this Congress.

So overall some items were clearly rhetoric but there are some more serious political tax ideas within the political hot air.