When Tax Policy Goes Viral in a Bad Way

Obama's 529 flop holds a lesson for would-be reformers.

Changing the tax code is hard. Changing it in the age of social media is even harder.

President Barack Obama's 10-day flip-flop on college savings plans showed how fast an idea can go viral and toxic.

Obama's proposal on so-called 529 plans was just one small piece of a tax agenda he outlined Jan. 17. The idea: Raise taxes on rich people and plow the proceeds into expanded tax breaks for two-income households, child care, and college tuition.

That all got lost in the social-media furor over 529s.

Obama wanted to remove the tax break from future contributions, so that people couldn't make tax-free withdrawals any more. It's an idea that drew praise from left-leaning Beltway think tanks, because most of the benefit goes to high-income households with spare cash to save. And it raised only $1 billion over a decade, compared with the $50 billion in expanded tax breaks for education Obama was promoting.

The plan landed with a thud.

"They really, really stumbled into a nerve here, and I don't think anyone knew quite how hot this was before it happened," said Ryan Ellis, tax policy director at Americans for Tax Reform in Washington, the group run by anti-tax advocate Grover Norquist.

A piece Ellis wrote on 529s for Forbes has gotten more than 340,000 hits, he said, more than six times his previous high. Ellis credits Twitter and Facebook users—amplified by talk-radio hosts such as Rush Limbaugh and Dave Ramsey—with making the issue so big that the White House ditched it on Tuesday to avoid distracting from the broader proposal.

"This was catching a wave," Ellis said. "We didn't plan this in any way."

The 529 episode might be a unique case where Obama touched the hot buttons of family and savings—and where Ellis and others were able to point to Obama's own $240,000 contributions for his daughters. He also went after a break enjoyed by the upper middle class—exactly the professionals in the New York, Washington and San Francisco metropolitan areas who help elect Democrats.

But it's a phenomenon that lawmakers are thinking about.

Back in 1986, the last time Congress revamped the tax code, a petition drive that attracted a few thousand signatures might have taken a few weeks and really swayed senators, said Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee.

Now, he said, "If some special interest feels their ox is gored, they're going to go online within 60 minutes" and declare that the end of "Western Civilization" is nigh.

That's a particular problem in tax policy, where the potential losers are often louder than the winners and also more eager to stop legislation before it can gain momentum.

What's the answer?

Wyden says senators working on tax policy need to "join forces" across party lines to develop and defend a plan.

That's easier said than done.