White House scraps plan to tax college savings

The Obama administration decided Tuesday to scrap its proposal to raise taxes on college savings accounts to head off a battle with Congress over an issue even Democrats did not support, a White House official said.

Obama had proposed doing away with tax-free investment accounts for college tuition — called 529 plans — as part of a broad package of tax reforms aimed at raising taxes on wealthy families while providing more benefits for the working and middle class.

But Republicans as well as Democrats rebelled against the plan, and Tuesday the White House said Obama would scrap it.

"The 529 provision is a very small component" of Obama's plan, said the official, speaking on condition of anonymity because they were not authorized to speak publicly.

The proposal, the official said, has become "such a distraction," so the White House is dropping it and focusing instead on a larger package of "education tax relief that has bipartisan support."

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Speaker John Boehner, R-Ohio, said Tuesday morning, "529 plans help middle class families save for college, but now the president wants to tax those plans. It's another example of this outdated, top-down approach when our focus ought to be on providing opportunity for all Americans. So for the sake of middle class families, the president ought to withdraw this tax increase from his budget when he submits it soon."

After the announcement, Boehner said he was glad Obama had decided to listen to the American people.

House Minority Leader Nancy Pelosi, D-Calif., pressed Obama to drop the proposal during a flight to Saudi Arabia aboard Air Force One Tuesday, according to two sources familiar with the conversations. Rep. Chris Van Hollen, a senior Democrat from Maryland, has also been actively pushing the White House to drop the plan.

The White House had said that 70% of the benefits of 529 plans go to households making more than $200,000 a year. IRS statistics showed that was only 4% of all tax returns.

Contributing: David Jackson and Susan Davis