As reported at The College Fix, President Obama’s original new year tax proposals included a plan to tax (formerly) tax-free college savings “529” plans as ordinary income.
The president himself had taken advantage of 529 rules to make a huge contribution to his plan in 2007.
But now, the administration has done a one-eighty. Officials said that “the backlash against the president’s plan became ‘such a distraction’ that it was best to drop the proposal …”
The administration had tried to frame the elimination of the tax break as a way to redirect more money to middle-class families, arguing that the savings plans were being used disproportionately by wealthy families.
But the proposal proved to be a serious political miscalculation. With more than $1 trillion of outstanding student debt in this country, the 529 plan has become one of the best tools for families to save for college. About 12 million American families rely on the accounts.
The administration’s proposal to roll back the benefits of 529 plans was like “kicking a ball in your own goal,” said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and former economic adviser to Vice President Biden.
“The president’s plan has the puzzle pieces necessary to bring the middle class back, but this particular piece didn’t fit,” said Sen. Charles E. Schumer (D-N.Y.), who lobbied the White House to drop the plan.
Even liberal House Minority Leader Nancy Pelosi (D-Calif.) warned Obama that targeting college savings was a political misstep. Pelosi pressed the case to drop the 529 proposal with senior administration officials on board Air Force One as she flew with the president from India to Saudi Arabia, according to people familiar with the meeting who were not authorized to speak publicly.
Another lawmaker who raised objections to Obama’s proposal was Rep. Chris Van Hollen (D-Md.), ranking Democrat on the House Budget Committee. “This particular proposal undercut the message that they were focused on helping the middle class,” Van Hollen said in an interview.
The president initially had defended his plan claiming that some seventy percent of 529 accounts were held by families making over $200,000 per year.
But the non-profit College Savings Foundation counters that the seventy percent number actually pertains to households making less than $150,000 per year, with another ten percent earning less than $50,000.
h/t to Instapundit.