To understand the backlash President Obama received after proposing to remove the tax exemption for college savings accounts, it's essential to recognize how closely it struck at the political heart of his own party.
Contrary to popular stereotypes, Democrats depend nearly as much on upper-class voters as Republicans do. Democrats represent seven of the 10 wealthiest congressional districts in the country, and Obama also won those districts twice.
In 2008, Obama was the first Democratic presidential candidate in decades to win the vote of upper-middle-class Americans (those making a family income of $100,000 or more). Bill Clinton carried just 34 percent of those voters in his successful 1992 campaign; Obama improved on that total by 15 points in 2008.
It's no coincidence, then, that the Democratic leaders who reportedly lobbied Obama to drop the proposal represent two of the most affluent districts in the country. House Minority Leader Nancy Pelosi's San Francisco seat is the 37th wealthiest in the country, while Budget Committee ranking Democrat Chris Van Hollen's suburban Washington district is in the top 10.
Their districts are filled with constituents—both middle- and upper-class—who have utilized the 529 college accounts to save for their children's tuition. These days, sending a student to a top-tier private university can cost more than $200,000 for four years. Unless you're one of the top 1 percent, that's an economic burden that even the well-off can't afford without help.
"$200,000 in family income is comfortable. But if you're two accountants, or two college professors, the bottom line is if you have to play close to the sticker price for college, that's a tremendous amount of money unless you're so rich nothing is expensive," said Matt Bennett, cofounder of the centrist Democratic think tank Third Way. "And these are the very people at the heart of the Democratic coalition—highly-educated, fairly well off but not super wealthy."
The decision, and the initial White House response criticizing the tax-free vehicles as tools for the rich, offers a useful peek in the political thinking of the Obama White House. Several Democratic operatives interviewed said that since few of the proposals stood to pass through a Republican Congress, there wasn't the same degree of scrutiny paid to the political impact of all of the budgetary details.
But it also underscores how the White House was wading into dangerous territory by proposing to raise middle-class taxes to pay for preferred government programs. There are only so many ways to generate revenue without hitting political resistance from a key constituency.
As Democrats learned in the 1980s, taxing affluent voters to pay for the benefits of lower-class voters is rarely a smart political strategy. Michael Dukakis won a paltry 32 percent of the vote among upper-class voters in the 1988 presidential election, which prompted a messy intra-party battle for years. It took Bill Clinton's brand of centrism to broaden the party's appeal to the suburban voters who had abandoned Democrats en masse.
When Pelosi and Van Hollen are the politicians crying foul, it raises the specter of a president badly disconnected from his party's best interests. The proposal to tax college savings accounts wasn't close to becoming law, and it would hardly have the same impact as the administration's signature domestic reforms on health care and banking. But it was so resonant because it threatened to hit the pocketbooks of many voters that the party has been winning over.
"It's fairly rare for well-off voters to have an issue that affects them directly. Usually they have an issue they care about for altruistic reasons, or a pet cause. But this was about their bottom line," said one senior Democratic strategist. "Most State of the Union proposals are giveaways, not takeaways. They're usually very vague and easy to rally support behind. Out of the speech, most people heard that they are going to lose money this year as a result of this proposal."
Optimistic Democrats, including the president, are betting that the changing demographics of the electorate will render the party's past history irrelevant. In their view, the growing Democratic base of young, diverse, lower-income voters care less about taxes and more about the party's progressive push on social issues like gay marriage and immigration. That's what made this tuition episode so instructive.
Voters, as always, still care about their own bottom line. And if Democrats can't afford to pay for their priorities without risking a significant backlash, it threatens to spur another rethinking about the party's direction after Obama leaves office.