(Bloomberg) — George W. Bush left office six years ago — and his tax cuts still constrain President Barack Obama's agenda. Obama had a sharp reminder of that fact this week.
The president tried to get rid of Bush's 529 tax break for college savings accounts loved by many middle-class families. He found out how hard it is to remove taxpayer benefits bestowed by Bush, even if the middle class as a whole would benefit.
The White House gave up on its plan to end the 529 tax break Tuesday, six days before it was to be included in the president's Feb. 2 budget proposal. The Obama administration unsuccessfully tried to sell the idea as a way to redirect aid from upper-middle-class families toward people with less income who otherwise couldn't afford college.
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"You could have seen this coming seven miles away," said Dean Zerbe, national managing director of Alliantgroup, a tax advisory firm based in Houston. "You're putting your hand into a raccoon sack if you're going to get involved with it."
The administration's proposal would have ended the tax-free status of money withdrawn from 529 college accounts. Even though upper-income families disproportionately benefit from the break because its value increases with income, middle-income families use it, too.
Obama and his advisers may have been able to advance the proposal if they had built a case against the 529 break as part of a broader tax-code plan and a strategy to address college costs, Zerbe said. He was an aide to Senate Finance Committee Republicans during the Bush era.
Bush's framework
For most taxpayers, Obama's permanent accomplishments on tax policy have been a continuation of the framework outlined by Bush and implemented by Congress in 2001, 2003 and 2006.
Obama signed a law extending all of the Bush tax cuts for two years in 2010 and almost all of them indefinitely in 2013. The big features of Bush's plans — the 10 percent tax bracket, across-the-board rate cuts, more generous estate-tax exemptions and equal standard deductions for married couples and two individuals — are now locked into U.S. law.
After several bruising fights with Congress, Obama was able to raise taxes on the highest-income households — married couples with incomes exceeding $450,000.
The top 1 percent of households now face higher rates on wages and capital gains than they did before Bush took office.
Temporary breaks
Obama has been able to enact temporary breaks for middle- income households and college students, some of which expire at the end of 2017, after he leaves office. Middle-class families are affected by some of his smaller tax increases — limits on health-care flexible spending accounts and higher cigarette taxes.
Those changes are the exception. With the two parties still at odds on major individual tax changes, the next president is set to inherit a budget deficit and a tax code that Bush and his allies in Congress designed as a way to return projected surpluses to the public.
Obama will detail his latest plan to raise taxes for the wealthy and reduce them for lower-income households in next week's budget plan. The budget proposal won't include the plan to tax withdrawals from 529 accounts, though the written budget will still contain the item, said Eric Schultz, deputy White House press secretary.
'A distraction'
"This particular piece was becoming a distraction," Schultz said Wednesday.
Schultz said the administration still stands behind the 529 proposal as good policy that was part of a larger package aimed at helping students and their families afford college.
He said the lobbying against it by House Democratic Leader Nancy Pelosi and Representative Chris Van Hollen, a Maryland Democrat, was "indicative of the distraction it was becoming."
The provision would have raised about $1 billion over a decade. It would have financed only a fraction of the $50 billion expansion in tuition tax credits and other tax breaks, plus $60 billion in new education spending, that Obama outlined in his State of the Union address Jan. 20.
Obama isn't changing another part of his plan that would raise taxes on some middle-income families, Schultz said. He's still proposing to repeal child care flexible savings accounts, which let people pay for day care and summer camp with pre-tax money. The proceeds would pay for expanded child care tax credits.
Higher taxes
Obama's latest set of tax proposals would raise taxes on the top 1 percent of households by an average of $28,983, according to estimates released Wednesday by the nonpartisan Tax Policy Center. The estimates don't include the 529 and child- care tax proposals.
Among households in the middle 20 percent of the income distribution, 48.2 percent would see a tax increase averaging $289, while 24.4 percent would get a tax cut averaging $549.
The 529 episode sent Obama back firmly to his usual playbook — raise taxes for the rich and give the middle class more.
Senate Majority Leader Mitch McConnell of Kentucky said Wednesday that he welcomed Obama's decision to drop the plan on 529 accounts and embrace a "pro-middle class point of view."
"I'm not sure why President Obama would have sought to undermine them in the first place," he said on the Senate floor.
With assistance from Kathleen Hunter and Annie Linskey in Washington.
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