(Bloomberg) The House Ways and Means Committee voted to expand college savings tax incentives that President Barack Obama proposed limiting earlier this year.
The bill would let people use so-called 529 accounts to buy computers as well as tuition, books and other expenses. It also would make it easier for people to put refunds from colleges back into tax-advantaged accounts without penalty.
“These are great tools that families use to save for college,” said Ways and Means Chairman Paul Ryan, a Wisconsin Republican. “They reward people for investing in our kids’ future.”
The committee backed the bill on a voice vote Thursday, after Republicans rejected an amendment that would have limited 529 plans for people earning more than $3 million a year.
The 529 plans, named for the section of the U.S. tax code that allows them, have become increasingly popular since they were expanded in 2001. Contributions are made with post-tax money and withdrawals aren’t subject to income taxes.
The measure passed by the committee, which would cost the government $51 million over a decade, is scheduled for a vote by the full House later this month.
Democrats offered an amendment to prevent people from contributing to 529 accounts if they had adjusted gross income of more than $3 million in the prior year. That would have offset the cost of the bill and affected slightly more than 0.1 percent of households.
Taxing Earnings
“Just because someone has means does not mean they’re saving for their own child,” said Representative Lynn Jenkins, a Kansas Republican. “They may be saving for a child who is very much in need.”
As part of a broader revamp of education tax incentives, Obama earlier this year proposed taxing earnings in the accounts when withdrawn. That rule would have applied only to new contributions.
Administration officials sought to justify that proposal by saying that the benefits of 529 plans are skewed to high-income families who have enough money to be able to save.
A 2012 study by the Government Accountability Office showed that the median income of families with 529s or similar plans was $142,400, compared with $45,100 for other families.
“If we’re going to focus on reducing taxes, let’s do something about the tax bill for working families, middle-class families, so that their children also will have an opportunity to get a higher education,” said Representative Lloyd Doggett, a Texas Democrat.
Obama’s Proposal
Obama, who has put $240,000 into 529 plans for his daughters, abandoned his plan to limit them within 10 days of proposing it.
“Our thinking was you could save money by eliminating the 529 and shifting it into some other loan programs that would be more broadly based,” the president said Feb. 6 in Indianapolis. “There were enough people who already were utilizing 529s that they started feeling as if well, changing like this in midstream, even if I’m not affected right now, I like the program. It wasn’t worth it for us to eliminate it. The savings weren’t that great.”
The committee also voted Thursday along party lines to revive two tax breaks that lapsed at the end of 2014 and extend them indefinitely.
One of the breaks would let individuals deduct state sales taxes instead of income taxes, at a cost of $42.4 billion over 10 years. The other would continue the research tax credit for businesses, at a cost of $181.6 billion over a decade.
“Every dollar in the pocketbook makes a difference,” said Representative Sam Johnson, a Texas Republican who backs the state sales tax deduction, in part because Texas lacks an income tax.
The education bill is H.R. 529. The sales tax bill is H.R. 622. The research credit bill is H.R. 880.
