President Barack Obama is abandoning his proposal to eliminate Section 529 — the popular tax break used by millions of Americans to save for college — following a big backlash, not only from Republicans and parents, but also from his own Democratic allies.
“Given it has become such a distraction, we’re not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief that has bipartisan support, as well as the president’s broader package of tax relief for child care and working families,” a White House official said Tuesday.
According to The New York Times, Obama and his advisers were lobbied directly by House Minority Leader Nancy Pelosi while she flew with the president on a flight from India to Saudi Arabia. Other Democrats, including House Budget Committee Ranking Member Chris Van Hollen, were also big critics of the proposal.
So-called 529 plans (named for a part of the tax code) are a popular way for many Americans to save for higher education, as any withdrawals made from the plans are not subject to taxation as long as they are used to pay for college. The plans were a part of the 2001 Bush tax cuts, and Obama himself voted to make them permanent in 2006, using them to save $240,000 for his daughter’s educations. According to the College Savings Plans Network, about 12 million children are estimated to be the beneficiaries of such accounts, spread across 7 million households. (RELATED: Obama Pushing Taxes He Fought Against In The Senate And In His Book)
Obama had argued that 529 plans primarily benefit high earners, but critics argued that it was also a popular option for millions of middle-class households as well. Just hours before the White House caved on Tuesday, Speaker of the House John Boehner slammed the proposal, saying that the plans “help middle-class families save for college, but now the president wants to tax those plans.”
Some state treasurers spoke out as well, since their states have tried to encourage college savings by offering to match contributions to the plans up to a certain dollar amount.
While the White House countered that any loss for the middle class from 529 reform would be offset by other college affordability proposals the president was making, the backlash ultimately proved too great and forced the president into a hasty retreat.
“This was a textbook case of the broad middle class of the country rising up in a true brushfire rebellion,” Ryan Ellis, tax policy director at Americans for Tax Reform, told The Daily Caller News Foundation. “Oh, and if this was a dress rehearsal for increasing taxes on IRAs and 401(k)s, consider the experiment a failure.”
While the 529 tax hike is gone, Obama is still pushing for an increase in the capital gains tax rate, and for the closure of a loophole that reduces the amount of capital gains tax paid on inherited assets. These increases, it is hoped, will in turn provide the money to fund several proposals Obama has made to try reducing the cost of college, such as expanding tuition tax credits and providing two free years of community college.
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