Aim to kill tax break for college draws flak

GOP, Obama’s advisers at odds

FILE - In this Aug. 1, 2012 file photo, Jeffrey Zients testifies on Capitol Hill in Washington. President Barack Obama is calling Zients to help correct problems with the new federal health care website. The White House says Zients will assist a team that is said to be working around the clock on the site, www.healthcare.gov.  (AP Photo/J. Scott Applewhite, File)
FILE - In this Aug. 1, 2012 file photo, Jeffrey Zients testifies on Capitol Hill in Washington. President Barack Obama is calling Zients to help correct problems with the new federal health care website. The White House says Zients will assist a team that is said to be working around the clock on the site, www.healthcare.gov. (AP Photo/J. Scott Applewhite, File)

WASHINGTON -- White House officials have said they are seeking to dismantle a popular college savings tax break because it favors top income-earning households and does little to encourage lower-income students to go to college.

The proposal would mean that withdrawals from so-called 529 college savings plans for tuition would no longer be tax-exempt. Republicans said the move would amount to a middle-class tax increase.

"Overwhelmingly, this plan provides much more of a tax incentive, much more assistance through the tax code to go to college than anything that we have in our system now," Jason Furman, chairman of the White House Council of Economic Advisers, said of the proposal Friday.

"The current 529 is very tilted towards the upper end, and a variety of research has shown it's ineffective in serving its goals of getting people to go to college who wouldn't otherwise have gone," he said.

The Obama administration said all of the additional tax revenue would be used to help expand and make permanent a $2,500 tax credit that families can use for education expenses. Under current law, the tax credit is scheduled to expire at the end of 2017.

"The president's plan would consolidate education savings incentives into one vehicle and redirect the savings into the better targeted" American Opportunity Tax Credit, the White House said in a description of the proposal.

The expansion of such tax breaks for students would supply 50 times more assistance than would be removed with the change to 529 plans, Furman said. Those breaks include income caps and wouldn't be available to households with income over $180,000.

The proposal would apply only to new contributions to the college savings plans. That means any money in accounts before it takes effect would still qualify for the tax break.

Americans held $221.1 billion in college savings plans as of June 2014, according to the Investment Company Institute. That's about double the amount in 2007.

Obama laid out the proposal as part of this week's State of the Union address. It is part of a broader effort by the Obama administration to simplify a sometimes confusing array of tax breaks designed to make higher education more affordable.

The broader plan would raise taxes on capital gains and banks, and cut taxes for two-earner households, college students and families that pay for child care.

Obama also is proposing a $60 billion plan to make the first two years of community or technical college free.

Congressional Republicans have embraced the effort to simplify the education tax breaks, but key GOP leaders adamantly oppose scaling back college savings plans.

"President Obama wishes to turn back the clock and further burden hardworking families with new taxes," Rep. Lynn Jenkins, R-Kan., said Wednesday. "Middle-income families that have worked hard and saved to send their children to college should receive our support, not a new tax bill to pay for his agenda."

Jenkins said she supports the American Opportunity Tax Credit but said the $2,500 limit doesn't come close to covering the annual cost of a college education.

"I have two kids in college. It's about $20,000 per kid, at a minimum," Jenkins said. "Where are we supposed to get the rest?"

Contributions to college savings plans are not tax-deductible. But once the money is invested, it can grow and eventually be withdrawn with no tax on the earnings, as long as the money is spent on tuition, fees, books and supplies needed to attend a postsecondary school.

The savings plans, which are sponsored by states, can also be used to prepay college tuition.

Families could continue contributing to college savings accounts under Obama's proposal. Students would have to pay taxes on the earnings but not until the money is withdrawn.

Obama's proposal would make similar changes to Coverdell Education Savings Accounts, which are similar to 529 accounts but have income limits.

Jenkins plans to introduce a bill on 529 plans, her spokesman, Tom Brandt, said in an email Friday.

Her bill would ensure that funds from the plans also can be used to buy computers and that taxpayers can put refunds from colleges into their tax-advantaged plans without penalty, such as if a student withdraws because of an illness.

According to a 2012 study by the Government Accountability Office, the median income of families with 529 plans or similar plans was $142,400, compared with a median income of $45,100 for other families.

Still, Mary Morris, chairman of the College Savings Foundation, a nonprofit that supports the programs, said middle-class families still reaped great benefits from 529s. She said she would expect average account balances and monthly contributions to be far higher if only the most affluent families were benefiting.

The average value of a 529 account is $19,774, according to Strategic Insight, an investment consultant that tracks the industry. It estimates the average contribution to accounts that receive regular electronic contributions is about $175 a month.

Furman said the elimination of the tax breaks for 529 plans would raise about $1 billion for the government over 10 years, compared with $50 billion in tax assistance for college costs in the administration's proposal. Some of the costs of changing the 529 rules would occur outside the 10-year budget time frame.

Jeffrey Zients, the director of Obama's National Economic Council, said the 529 proposal is part of the broader package of education tax cuts and shouldn't be viewed in isolation.

White House press secretary Josh Earnest said Friday, "The reforms that the president has proposed for the 529 program are reforms he would consider only in the context of other education reforms."

The president's plan for expanding the $2,500 tax credit for college expenses would make it available to families with incomes up to $180,000 a year. The amount of the credit would grow with inflation, and students could use it for up to five years, as long as they are attending school at least part time.

Currently, students can only receive the credit for four years.

Dodd-Frank Defended

On other matters, Furman and Zients said Friday that the president wouldn't accept legislation that undercuts administrative initiatives such as the health care overhaul, the president's policies protecting some illegal aliens from deportation and the Dodd-Frank financial regulatory laws passed during his administration.

"The president is not going to support anything that waters down Dodd-Frank," Zients said. "If there is something that strengthens it, he'd consider that."

Furman said Congress could help boost middle-class incomes during the next two years by passing Obama's proposals to raise the minimum wage and increase infrastructure spending.

"We could pass an infrastructure bill tomorrow," he said. "That would help in the next two years."

Obama in his State of the Union speech Tuesday called for more trade agreements to boost U.S. exports, particularly to Asia. While that has met opposition from some Democrats, including Senate Minority Leader Harry Reid of Nevada, Furman said more trade fits well into a politically liberal agenda.

"If you don't do these trade deals, you're going to have lower labor standards in Vietnam; you're going to have lower economic standards in Malaysia," he said.

Obama is trying to complete free-trade agreements with Asia and Europe, saying that doing so would help the U.S. economy by opening markets for exports.

The strengthening U.S. economy provides an opening for "high-quality" trade deals, Zients said

Convincing skeptics in Congress is the next step, he said.

"Our job now is to take input from the Hill, make sure people understand what's being negotiated," he said. "There have been deals that haven't lived up to past promises, so there's some skepticism on the Hill."

Obama flies today to India, where trade with the world's second-most populous country will be on the agenda in meetings with Prime Minister Narendra Modi.

The U.S. had a $25 billion goods-and-services trade deficit with India in 2012, the most recent year for which statistics are available, according to the Office of the U.S. Trade Representative. India is the country's 11th-largest goods trading partner.

Information for this article was contributed by Richard Rubin, Mike Dorning and Angela Greiling Keane of Bloomberg News; by Stephen Ohlemacher of The Associated Press; and by Tara Siegel Bernard of The New York Times.

A Section on 01/24/2015

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