Facing pressure from both sides of the political aisle, President Obama backed off his plan to tax college savings plans to help fund his “free” community college proposal.
The White House announced Tuesday, at the urging of House Minority Leader Nancy Pelosi, that they would drop the mention of the 520 program in its plan, but continue to make expanded tuition tax credit at the center of his college access plan,the New York Times reported.
Republicans had seized on Obama’s taxing of the college savings fund and his plan had lost a lot of popular support. His reversal came just hours after House Speaker John Boehner demanded that the proposal be cut from the president’s budget “for the sake of middle-class families.”
“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 White House had always tried to position their argument for the taxes as a tax on the wealthy, but Americans for Tax Reform was the first one to point out that this could hurt middle-class American families that had the forethought to plan ahead for their child’s college education.
“Under current law, 529 plans work like Roth IRAs: you put money in, and the money grows tax-free for college. Distributions are tax-free provided they are to pay for college,” Americans for Tax Reform explained.
“Under the Obama plan, earnings growth in a 529 plan would no longer be tax-free. Instead, earnings would face taxation upon withdrawal, even if the withdrawal is to pay for college. This was the law prior to 2001.”
Without the 529 plan tax, Obama’s plan will likely include a greater reliance on education tax credits, another proposal that has some experts worried that it could hurt more than help.
While in theory this should provide more dollars to low-income students, some experts believe that by making them tax credits instead of need-based grant aid, the administration is effectively tying them up behind red tape and rendering them useless.
The president’s budget is due out Monday.
