(Bloomberg) President Barack Obama is dropping his proposal to tax the earnings on college savings accounts, responding to criticism of an idea the White House announced 10 days ago.
A White House official, speaking on condition of anonymity, said the issue had become a distraction from the president’s broader plan to expand and simplify tax breaks for education.
The administration’s quick retreat on the proposal emphasizes the difficulty of changing popular tax breaks, even in ways that lower the overall tax burden.
Republicans had pounced on the proposal, saying the administration was raising taxes for middle-class savers.
“This tax would have hurt middle-class families already struggling to get ahead,” House Speaker John Boehner of Ohio said in a statement.
Representative Lynn Jenkins, a Kansas Republican, said in a statement, “Clearly, the president was pressured from both sides of the aisle not to go forward with his horribly misguided proposal to tax an extremely popular college savings tool for middle-class families.”
The criticism on Obama’s 529 proposal didn’t come only from Republicans.
An aide familiar with the conversations said House Democratic Leader Nancy Pelosi of California and Representative Chris Van Hollen of Maryland were among those urging Obama to back down. Pelosi is traveling on Air Force One with Obama, who is returning from a trip to India and Saudi Arabia.
Defending Proposal
As recently as Jan. 23 the administration was defending the proposal, which would require people to pay income taxes when they withdraw money from savings plans under section 529 of the U.S. tax code.
The proposal, which had almost no chance of advancing in the Republican-led Congress, would have applied only to new contributions.
“The current 529 is very tilted towards the upper end,” Jason Furman, chairman of Obama’s Council of Economic Advisers,
Furman said the 529 proposal raised about $1 billion over a decade, compared with about $50 billion the administration was planning to use to expand tax breaks for education.
Income Restrictions
While 529 plans don’t have income restrictions, the new proposed tax credits wouldn’t be available to households with incomes exceeding $180,000.
A 2012 study by the Government Accountability Office showed that the median income of families with 529 or similar plans was $142,400, compared with $45,100 for other families.
As of June 2014, there were almost 12 million 529 accounts, up from about 8 million in 2005, according to the Investment Company Institute.
Most of the burdens from the tax plan the White House announced this month would fall on the wealthy, and the existence of the 529 plan focused attention on that tax break and not the other parts of Obama’s proposal.
Capital Gains
Obama proposed raising the top capital gains rate to 28 percent from 23.8 percent, taxing appreciated assets at death and imposing a fee on large financial institutions. Those proposals would raise $320 billion over a decade.
A few of the provisions would have hit a broader swath of the population. In addition to the 529 idea, the administration also proposed eliminating flexible spending accounts that let parents set aside tax-free money for child care and eliminating the student loan interest deduction for new borrowers.
Grover Norquist, president of the anti-tax Americans for Tax Reform, said the decision to scrap the 529 proposal “is a huge victory in highlighting that the America people will unite against crushing tax-free savings plans for education, for housing, for retirement, for health care, for each of these.”
“They tried to strangle the baby in the crib, and while it was small, they didn’t realize it had 12 million friends,” Norquist said in an interview.
—With assistance from David Weigel in Washington.
