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Obama will drop proposal to end ‘529’ college savings plans

House Speaker John Boehner demanded the proposal be withdrawn.
House Speaker John Boehner demanded the proposal be withdrawn.(J. Scott Applewhite/Associated Pres)

WASHINGTON — President Obama, facing angry reprisals from parents and from lawmakers of both parties, will drop his proposal to end popular college savings accounts known as 529s but will keep an expanded tuition tax credit at the center of his college access plan, White House officials said Tuesday.

The decision came just hours after House Speaker John A. Boehner of Ohio demanded the proposal be withdrawn from the president’s budget, due out Monday, “for the sake of middle-class families.” But the call for the White House to relent also came from top Democrats, including representatives Nancy Pelosi of California, the House minority leader, and Chris Van Hollen of Maryland, the ranking member of the House Budget Committee.

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Pelosi pressed the case to senior administration officials on board Air Force One as she flew with the president from India to Saudi Arabia, according to Democratic aides familiar with the discussions.

“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 official added that Obama’s proposed increase in the capital gains tax rate and change to the taxation of inherited wealth would be more than enough money to fund the tax plan.

What to White House economists was a clearheaded assessment of tax fairness has proved to be a cautionary tale for politicians focusing their efforts on the shriveling middle class and trying to overhaul and simplify the tax code. The idea was to end one tax break tilted toward the wealthy and plow that billion-dollar savings over 10 years into a far larger expansion of another tuition tax credit aimed more squarely at the middle class.

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But in the days since the plan was rolled out, all anyone seems to remember of Obama’s college access plan is the proposed end to 529 accounts, which has angered more affluent savers, prompted a backlash from Wall Street and the state governments that run the accounts, and given Republicans an opening to claim they are the guardians of the struggling middle class.

Boehner said Tuesday that “529 plans help middle-class families save for college but now the president wants to tax those plans.”

The contretemps over college accounts held broader lessons. For one, tax reform and “simplification” sound great in the abstract, but all those tax breaks that would be consolidated have constituencies, many of them vocal. For another, Americans’ concept of the middle class is far more elastic than that of economists.

“That’s as middle class as it gets,” Representative Marlin Stutzman, Republican of Indiana, said of 529 college accounts.