A conservative demand to expand tax-advantaged college savings plans to home-schooled and disabled children has prolonged uncertainty for legislation that would erase accidental tax hikes on Gold Star families.
Congress is nearing a fix to a provision in the 2017 GOP tax overhaul law meant to close a loophole for unearned income that instead caught up the benefits of widows, widowers, and children of fallen service members, subjecting them to major tax increases.
“It caught them off guard,” said Candace Wheeler, senior adviser for policy and legislation for the Tragedy Assistance Program for Survivors, a nonprofit organization that supports and advocates on behalf of families of fallen service members. “In terms of paying a higher tax rate it wasn’t anything people could prepare for.”
Wheeler estimated that the changed treatment of survivor benefits to unearned income tripled or quadrupled tax bills for some families. “For some it’s a house payment, it’s rent, it’s groceries, it’s real tangible things,” she said.
Language to undo that change was attached to a bipartisan retirement reform package that passed the House of Representatives on May 23 in a vote of 417-3. The bill was expected to be passed in the Senate before Memorial Day weekend through a procedure known as unanimous consent, which allows for legislation to pass without a vote if no senator objects. But opposition from multiple Republican senators to separate unrelated provisions within the bill have delayed consideration.
Chief among those concerns are that House Democratic leadership removed a provision from the bill meant to allow more flexibility in the use of tax-privileged 529 college savings plans. The provision would have allowed families to use the plans for noncollege education and tutoring for children with special needs.
Several conservatives decried the 529 provision’s exclusion, including Heritage Action, the Heritage Foundation’s political wing.
“Unfortunately, Speaker Pelosi gave in to the special interests of teachers’ unions and cut the bipartisan provision at the eleventh hour,” said Jessica Anderson, Heritage Action’s vice president, in a statement to the Washington Examiner. “The Senate should reject this partisan action and restore the 529 expansion in the SECURE Act before voting on the bill.”
Sen. Ted Cruz, R-Texas, a major proponent of broad 529 expansion, objected to the bill on those grounds, delaying further consideration. But if the bill were amended in the Senate, it would need to go back to the House, or the two chambers would have to reconcile differences, further delaying the fix for military families.
Cruz supported a separate, narrower bill for the fix that passed the Senate last month, but Democratic leadership does not appear likely to bring the bill for a vote, instead favoring the similar provision tucked into the broader retirement reform package that the House passed on a bipartisan basis.
Sen. Chuck Grassley, R-Iowa, the chairman of the Senate’s primary tax policy committee, said his staff was trying to address the concerns of Cruz and other Republicans. Cruz and his office declined to comment.
A Republican aide familiar with the negotiations said that, while the bill would pass with an overwhelming bipartisan majority if brought to the Senate floor, Majority Leader Mitch McConnell would prefer to move it through unanimous consent to avoid using up valuable floor time. The same aide thought that a path forward might be clearer near the middle of this week. But without unanimous consent, the process of passing a fix figures to drag out, as McConnell prioritizes confirmations of administration nominees.
Despite the current hold-up, Senate Majority Whip John Thune, R-S.D., expressed optimism the bill would move sooner rather than later.
“There’s some changes we have to work through on changes that the House made, but retirement security is a big priority for us, and that bill passed for us in the Senate out of the committee, but never got to the floor,” said Thune, the chief Republican vote wrangler in the chamber.
Wheeler, who has pushed for the fix through her role at TAPS, also expressed optimism. “We’re very confident that Congress wants to fix this unintended consequence,” she said.
