Obama Forced to Dump Tax on 529 College Savings Accounts

AP Photo/Mandel Ngan, Pool
AP Photo/Mandel Ngan, Pool

In a desperate attempt at relevance, President Barack Obama thought he could pay for two promised years of free community college tuition by eliminating the tax exemption on middle-class 529 college-savings accounts. Although the Administration argued that the 529 accounts disproportionately benefit higher-income families, disenfranchising 11.6 million accounts was seen as just short of a declaration of war on “the family.” This afternoon Obama dumped his tax plan.

In last week’s State of the Union address, President Obama proposed what he said would be a series of changes that would supposedly help low- and middle-income households by expanding the “American-Opportunity-Tax-Credit,” which would provide as much as $2,500 per student for higher-education. But to offset the cost, the White House decided to jettison tax-free distributions for college from 529 accounts.

Total investment by American families in 529 plans has reached a record level of $227.07 billion. Total assets in 529 plans grew by $36.4 billion dollars in 2013, and are believed to have grown by a similar amount in 2014. The total number of 529 accounts increased 4.4% over the past 12 months from 11.1 million to 11.6 million.

Going after the 529 college-savings accounts also seems to have created worries among middle-class investors that an administration desperate for cash might also want to take away the tax-advantages of 401K retirement accounts.

House Speaker John Boehner (R-OH) and his Republican allies were having a field day haranguing the Obama Administration’s insensitivity. In complete unity, Republicans demanded the White House dump the tax idea, “for the sake of middle-class families.”

A GOP aide said Tuesday that the House would vote next month on an alternative approach—sponsored both by Republican and Democratic lawmakers—that would expand 529 account benefits while preserving their current tax treatment. The move set up a high-stakes political test of Democratic support for President Obama’s plan.

Democrats, led by House Minority Leader Nancy Pelosi (D-CA) pressed senior Administration officials aboard Air Force One as she flew with the President from India to Saudi Arabia, according to the New York Times.

With the media smelling blood in the water, a White House official quoted by the Wall Street Journal late Tuesday evening said the 529 proposal was “a very small component of the President’s overall plan to deliver $50 billion in education tax cuts for middle-class families….Given it has become such a distraction, we’re not going to ask Congress to pass the 529 provision.”

The Administration says it is committed to pushing for expanded tax credits for higher-education costs, as well as other breaks for lower- and middle-income households. But with the centerpiece of Obama’s State of the Union address aimed at stoking middle-class anxiety over wage and income stagnation having imploded, a lame-duck president had to limp away.


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