(Bloomberg) White House officials say they are seeking to dismantle a popular college savings tax break because it favors wealthy households and does little to encourage lower-income students to go to college.
The proposal would mean that withdrawals from so-called 529 college savings plans for tuition would no longer be tax-exempt. Republicans say that would be a middle-class tax increase.
“Overwhelmingly, this plan provides much more of a tax incentive, much more assistance through the tax code to go to college than anything that we have in our system now,” said Jason Furman, chairman of the White House Council of Economic Advisers, at a meeting Friday with Bloomberg reporters and editors in Washington.
“The current 529 is very tilted towards the upper end, and a variety of research has shown it’s ineffective in serving its goals of getting people to go to college who wouldn’t otherwise have gone,” he said.
The proposal, which stands little chance of advancing in Congress, would apply only to new contributions. That means any money in accounts before it takes effect would still qualify for the tax break.
The education tax plan is part of the administration’s effort to remove tax breaks for top earners and use the proceeds to help middle- and lower-income households. It would undo a break that’s become popular with many U.S. families.
Americans held $221.1 billion in college savings plans as of June 2014, according to the Investment Company Institute. That’s about double the amount in 2007.
The administration would expand other tax breaks for students, supplying 50 times more assistance than it would remove with the change to 529 plans, Furman said. Those breaks include income caps and wouldn’t be available to households with income over $180,000.
The administration released the proposal Jan. 17 as part of a broader plan to raise taxes on capital gains and banks and cut taxes for two-earner households, college students and families who pay for child care.
“President Obama wishes to turn back the clock and further burden hard-working families with new taxes,” Representative Lynn Jenkins, a Kansas Republican, said Wednesday. “Middle- income families that have worked hard and saved to send their children to college should receive our support, not a new tax bill to pay for his agenda.”
Jenkins plans to introduce a bill on 529 plans, her spokesman, Tom Brandt, said in an e-mail. The bill would ensure that funds from 529s can be used to buy computers and that taxpayers can put refunds from colleges into their tax-advantaged plans without penalty, such as if a student withdraws due to illness.
According to a 2012 study by the Government Accountability Office, the median income of families with 529 plans or similar plans was $142,400, compared with $45,100 for other families.
Furman said the 529 proposal would raise about $1 billion for the government over 10 years, compared with $50 billion in tax assistance for college costs in the administration’s proposal. Some of the costs of changing the 529 rules would occur outside the 10-year budget time frame.
Jeffrey Zients, the director of Obama’s National Economic Council, said the 529 proposal is part of the broader package of education tax cuts and shouldn’t be viewed in isolation.
White House Press Secretary Josh Earnest said Friday, “The reforms that the president has proposed for the 529 program are reforms he would consider only in the context of other education reforms.”
The House Ways and Means Committee last year approved a similar set of changes to education tax credits. The proposal didn’t become law, and tax policy in Congress is now at a virtual standstill because of the broader partisan deadlock.
On other matters, Furman and Zients said the president wouldn’t accept legislation that undercuts administrative initiatives such as the Obamacare health overhaul, the president’s policies protecting some undocumented workers from deportation and the financial regulatory laws passed during his administration.
“The president is not going to support anything that waters down Dodd-Frank,” Zients said. “If there is something that strengthens it, he’d consider that.”
Furman said Congress could help boost middle-class incomes during the next two years by passing Obama’s proposals to raise the minimum wage and increase infrastructure spending.
“We could pass an infrastructure bill tomorrow,” he said. “That would help in the next two years.”
—With assistance from Angela Greiling Keane in Washington.
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