Obama scraps plan to tax college accounts

President Obama is scrapping his proposal to tax withdrawals from a popular savings account for college expenses, after facing sharp criticism from both Republicans and outside groups, a White House official said Tuesday. 

The president’s plan to overhaul the so-called 529 accounts was just one part of his broader plan to raise taxes, mostly on the wealthy, to help expand incentives for higher education.

But the White House found itself on the defensive after Republicans latched on to the 529 proposal to accuse the president of raising taxes on the middle class, hurting its ability to make a case for the president’s broader plan.

“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 childcare and working families, paid for by eliminating the trust fund loophole and making sure the wealthy pay their fair share,” a White House official said Tuesday.

Obama made the decision to drop the proposal, which was first reported by The New York Times, at the urging of senior Democrats including House Minority Leader Nancy Pelosi (D-Calif.) and Rep. Chris Van Hollen (D-Md.). Raising taxes on the accounts would have raised around $1 billion — enough to pay for roughly 2 percent of the president's plan to expand tax incentives for higher education for the middle class.

Pelosi pressed the case aboard Air Force One as she was flying with the president from India to Saudi Arabia, according to a person familiar with the conversation. On the other side of the Capitol, Sens. Charles SchumerCharles (Chuck) Ellis SchumerOvernight Finance: White House planning new tax cut proposal this summer | Schumer wants Congress to block reported ZTE deal | Tech scrambles to comply with new data rules OPEC and Russia may raise oil output under pressure from Trump The Hill's 12:30 Report — Sponsored by Delta Air Lines — GOP centrists in striking distance of immigration vote MORE (D-N.Y.), Sherrod BrownSherrod Campbell BrownSenate Dems to Mnuchin: Don't index capital gains to inflation Trump on collision course with Congress on ZTE Pa. health secretary: 'Sustainable funding' needed to attack opioid crisis MORE (D-Ohio), Ben CardinBenjamin (Ben) Louis CardinDem sen: No military option in North Korea ‘without extreme risks’ Deregulating firearms exports risks putting guns in the wrong hands Senate Dems to Mnuchin: Don't index capital gains to inflation MORE (D-Md.), Bob CaseyRobert (Bob) Patrick CaseySenate Dems to Mnuchin: Don't index capital gains to inflation Senators offer tax bill aimed at helping first responders McConnell: Midterms will be 'very challenging' for GOP MORE (D-Pa.) and Debbie StabenowDeborah (Debbie) Ann StabenowSenate Dems to Mnuchin: Don't index capital gains to inflation This week: House GOP regroups after farm bill failure The Hill's Morning Report - Sponsored by CVS Health - A pivotal day for House Republicans on immigration MORE (D-Mich.) also pushed Obama to back away from the idea.

“The president’s plan has the puzzle pieces necessary to bring the middle class back, but this particular piece didn’t fit,” Schumer said in a statement.

The plan was already a non-starter on Capitol Hill, where Republicans had objected to the proposed tax increases. But as Schumer's statement made clear, Democrats believe that the White House's broader set of proposals could be a winner among middle-class voters as the 2016 campaign heats up.

Speaker John BoehnerJohn Andrew BoehnerJim Jordan as Speaker is change America needs to move forward Paul Ryan’s political purgatory Republicans fear retribution for joining immigration revolt MORE (R-Ohio) claimed victory after the announcement on Tuesday, and said he hoped the White House would learn a lesson from the flap over the savings accounts.

“I’m glad President Obama has decided to listen to the American people and withdraw his tax hike on college savings. This tax would have hurt middle-class families already struggling to get ahead," BoehnerJohn Andrew BoehnerJim Jordan as Speaker is change America needs to move forward Paul Ryan’s political purgatory Republicans fear retribution for joining immigration revolt MORE said in a statement. "This is also an opportunity for the president to reconsider his threats to veto common-sense jobs bills, like the Keystone XL pipeline and restoring the 40-hour workweek. Together, by listening to the people, we can get our economy moving, create jobs, and help give our children the best opportunities to succeed.”

Earlier on Tuesday, Boehner had called on the president to take the proposal dealing with the savings accounts out of his budget. Sensing a political advantage, Republicans were also pushing a bill from Reps. Lynn Jenkins (R-Kan.) and Ron KindRonald (Ron) James KindLobbying world Overnight Energy: Pruitt taps man behind 'lock her up' chant for EPA office | Watchdog to review EPA email policies | Three Republicans join climate caucus Three Republicans join climate change caucus MORE (D-Wis.) that would have strengthened the 529 plans.

House Republicans showed no signs of backing away from that proposal either, even as the president was dropping his. House Ways and Means Committee Chairman Paul RyanPaul Davis RyanDon't let them fool you — Republicans love regulation, too Senate harassment bill runs into opposition from House The Hill's Morning Report — Sponsored by PhRMA — The art of walking away from the deal MORE (R-Wis.) urged Obama to work with the GOP to pass the bill from Jenkins and Kind.

Under the president’s proposal, people holding 529 accounts would have to pay taxes when they took money out of the plans. Contributions to the accounts have been tax free since 2001, which has spurred savings of close to a quarter of a trillion dollars in 529 plans.

The White House argued that the accounts disproportionately help the wealthy, and liberal-leaning groups noted that similar proposals previously received bipartisan support.

Obama’s plan also includes raising taxes on capital gains and forcing heirs to pay taxes on inherited assets. Additionally, the president called to make permanent a tax break for college expenses for middle-class families, and to offer two free years of community college to students.