Obama to Drop Proposal to End ‘529’ College Savings Plans By JONATHAN WEISMANJAN. 27, 2015 Photo House Speaker John A. Boehner of Ohio demanded the proposal be withdrawn from the president’s budget “for the sake of middle-class families.” Credit Win Mcnamee/Getty Images Continue reading the main storyShare This Page Email Share Tweet Save More WASHINGTON — President Obama, facing angry reprisals from parents and from lawmakers of both parties, will drop his proposal to effectively end popular college savings accounts known as 529s, but will keep an expanded tuition tax credit at the center of his college access plan, the White House said Tuesday. The decision came just hours after House Speaker John A. Boehner of Ohio demanded the proposal be withdrawn from the president’s budget, due out Monday, “for the sake of middle-class families.” But the call for the White House to relent also came from top Democrats, including Representatives Nancy Pelosi of California, the minority leader, and Chris Van Hollen of Maryland, the ranking member of the Budget Committee. Ms. Pelosi pressed the case to senior administration officials on board Air Force One as she flew with the president from India to Saudi Arabia, according to Democratic aides familiar with the discussions. “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. The official added that Mr. Obama’s proposed increase in the capital gains tax rate and change to the taxation of inherited wealth would be more than enough money to fund the tax plan. What to White House economists was a clearheaded assessment of tax fairness has proved to be a cautionary tale for politicians focusing their efforts on the shriveling middle class and trying to overhaul and simplify the tax code. The idea was to end one tax break tilted toward the wealthy and plow that billion-dollar savings over 10 years into a far larger expansion of another tuition tax credit aimed more squarely at the middle class. But in the days since the plan was rolled out, all anyone seems to remember of Mr. Obama’s college access plan is the proposed end to 529 accounts, which has angered more affluent savers, prompted a backlash from Wall Street and the state governments that run the accounts, and given Republicans an opening to claim they are the guardians of the struggling middle class. Mr. Boehner said Tuesday that “529 plans help middle-class families save for college, but now the president wants to tax those plans.” The contretemps over college accounts held broader lessons. For one, tax reform and “simplification” sound great in the abstract, but all those tax breaks that would be consolidated have constituencies, many of them vocal. For another, Americans’ concept of the middle class is far more elastic than that of economists. “That’s as middle class as it gets,” Representative Marlin Stutzman, Republican of Indiana, said of 529 college accounts. But there’s a continuing debate over the definition of middle class. The median household income is $53,046. Some economists have put a band around that figure, placing the middle class at incomes from $35,000 — 50 percent above the poverty line for a family of four — to $100,000, about double the median. Of the roughly seven million existing 529s, about 80 percent of the tax benefits go to households above $150,000, supporters of the Obama proposal say; 70 percent go to households with incomes over $200,000. That’s because the rich have the biggest plans and can salt away $14,000 a year or more without worrying about a gift tax. Investment gains can then be used for education expenses without a capital-gains tax. In 2007, the Obamas themselves illustrated the president’s point, front-loading five years’ of contributions into their daughters’ 529 plans, with deposits of $240,000. But according to the College Savings Foundation, a consortium of financial institutions backing 529s, measuring tax benefits tells only part of the story. Close to 10 percent of 529 account holders have incomes below $50,000, and more than 70 percent of the accounts are owned by households with incomes below $150,000. In other words, the rich may be reaping the clear majority of the tax break, but a lot of other people are, too. “Many people who fall within the lower echelon of the middle class were among the people the president proposed to tax,” said David Lillard, the state treasurer of Tennessee and president of the National Association of State Treasurers, who added that many states had made college savings a focal point of policy making. White House officials argued the 529 proposal had to be considered in the broader context. The idea was to consolidate six tuition tax breaks into two, for a net tax cut of $50 billion over 10 years. The bulk of that expansion would go to the American Opportunity Tax Credit, a tuition credit created by the 2009 stimulus law and available even to families who earn too little to pay income tax. The plan would make that tax credit available for a fifth year of college, because many students cannot graduate in four, and would offer it to part-time students. Continue reading the main story RECENT COMMENTS Tom 9 minutes ago As part of the 529 holders who earn less than 70k per year, what was Obama thinking? If he has a problem with his own front loading of his... roy 11 minutes ago Like health savings accounts the constituency for these education savings accounts are most often used by people who are already on solid... Sam I Am 11 minutes ago Now thats the courage of their convictions that Democrats are known for! SEE ALL COMMENTS WRITE A COMMENT A Government Accountability Office report in 2012 found that a family with income of $100,000 or less withdrawing from a 529 account could expect about $561 in benefits from investment gains that would go untaxed. For a family with income above $150,000, that benefit was $3,132. In contrast, the president’s proposed tax credit expansion would mean $2,500 more for college, White House officials. “It’s kind of baffling that people in the middle are convinced they are getting hit hard when virtually all of them are the winners,” said Robert Greenstein, the president of the liberal Center of Budget and Policy Priorities. But that reaction was in part because of the White House’s flubbed launch, Democrats said Tuesday. The tax proposals were rolled out the weekend before the president’s State of the Union speech, with virtually all the emphasis on tax increases targeting the very wealthy to finance broad-based tax cuts for the middle class, including a $500 credit for families in which both spouses work, increased child care credits and incentives to save for retirement. White House officials say they modeled their education tax-credit consolidation on a bipartisan education tax proposal by Representatives Diane Black, Republican of Tennessee, and Danny Davis, Democrat of Illinois. But Mr. Davis said they looked at ending the 529 benefit and opted against it. “We didn’t see any way that would be helpful,” Mr. Davis said Tuesday, adding, “I was not excited to see” the White House’s interpretation of his work. CONTINUE READING THE MAIN STORY 9 COMMENTS Republicans, who have latched on to the issue of wage stagnation but have struggled for a policy response, seized on their opposition to the president’s 529 proposal. “The president’s scheme to raise taxes on college savings accounts directly hits hard-working families,” Representative Lynn Jenkins, Republican of Kansas, said Tuesday as she reintroduced bipartisan legislation to expand 529s, making computers a permanent qualified expense and providing new government and employer incentives to contribute. Democratic Senators Charles E. Schumer of New York, Debbie Stabenow of Michigan, Robert Casey of Pennsylvania, Sherrod Brown of Ohio and Benjamin Cardin of Maryland also lobbied the White House to reverse its decision, arguing $1 billion over 10 years was not worth the fight brewing with Republicans.
Posted on: Tue, 27 Jan 2015 23:17:07 +0000
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