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.

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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 SchumerChuck SchumerDemocrats call on Biden administration to ease entry to US for at-risk Afghans Predictions of disaster for Democrats aren't guarantees of midterm failure Voting rights and Senate wrongs MORE (D-N.Y.), Sherrod BrownSherrod Campbell BrownThese Senate seats are up for election in 2022 Biden calls Intel's B investment to build chip factories a tool for economic recovery Democrats see good chance of Garland prosecuting Trump MORE (D-Ohio), Ben CardinBenjamin (Ben) Louis CardinDemocrats hope to salvage Biden's agenda on Manchin's terms  Senators introduce bill aimed at protecting Ukrainian civilians Biden to huddle with Senate Democrats as voting bill on brink of defeat MORE (D-Md.), Bob CaseyRobert (Bob) Patrick CaseyOn the Money — Inflation hits highest level in decades Pressures aligning on Biden, Democrats to forgive student loans Senate Democrats grow less confident in Manchin MORE (D-Pa.) and Debbie StabenowDeborah (Debbie) Ann StabenowMichigan Republican John James 'strongly considering' House run Updated reconciliation text includes electric vehicle tax credit opposed by Manchin Stabenow calls for expansion of school mental health services 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 BoehnerDemocrats eager to fill power vacuum after Pelosi exit Stopping the next insurrection Biden, lawmakers mourn Harry Reid 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 BoehnerDemocrats eager to fill power vacuum after Pelosi exit Stopping the next insurrection Biden, lawmakers mourn Harry Reid 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 KindRedistricting reform key to achieving the bipartisanship Americans claim to want Democrats confront rising retirements as difficult year ends Members of Congress not running for reelection in 2022 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 RyanHow Kevin McCarthy sold his soul to Donald Trump On The Trail: Retirements offer window into House Democratic mood Stopping the next insurrection 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.