State of the Union Address Stresses Deficit Reduction, Jobs Creation

President Obama Touches on Health Reform, Other NAIFA Interests

On January 27, President Obama delivered his first State of the Union address. In it he called for bipartisan work on pressing problems—especially with respect to the economy. He called on Congress to enact a jobs bill “without delay” and vowed to make economic recovery—including jobs growth—the first and biggest priority of this legislative year.

Few of the themes in the President’s address directly impact the business interests of NAIFA members. Those touched on included:

• Deficit Reduction Commission: President Obama told Congress that he would issue an executive order to create a commission to recommend ways to reduce the future federal budget deficits. The Congressional Budget Office currently predicts that the FY 2010 deficit will hit $1.3 trillion. Spending programs, tax incentives, Medicare, Medicaid and Social Security would all be within the scope of the commission’s jurisdiction.

House and Senate leaders have publically pledged to bring the recommendations of the Presidential Commission to both chambers for an up-or-down vote. While it is likely that most NAIFA members strongly support reigning in federal deficits, concerned citizens should understand that there are only three ways to do that: cut spending or increase taxes, or employ a combination of the two. The increased revenue option poses serious risk to the favorable tax treatment currently afforded life and health insurance, annuities and employer-provided benefits because of the sheer size of the tax benefits that result from the tax rules that govern these products. NAIFA will remain on guard.

President Obama did call for a “flexible” three-year spending freeze starting in 2011. The freeze would exempt spending for certain government functions such as homeland security, veterans’ benefits, national defense, Medicare, Medicaid and Social Security. This proposal will likely be part of the deficit reduction commission’s considerations.

• Health Care/Insurance Reform: The President promised to continue his push for health reform, and implored Congress to “find a way” to move forward. He did not offer any suggestions on how to proceed other than to ask opponents to “take another look” at pending reform bills.

The President’s lack of specificity could signal that health care reform has dropped considerably down on priority lists of both Congress and the President. On the other hand, no one should conclude that health care reform is dead. For both substantive policy reasons, and because of a perceived political imperative, the President and leaders in Congress have declared they will continue to search for ways to enact some form of health care reform.

• Retirement Savings Initiatives: President Obama mentioned several retirement initiatives that will likely be explained in more detail in his upcoming budget proposal due on Capitol Hill February 1. Programs mentioned include:

• Creation of a program under which employers that do not offer retirement plans would be required to automatically enroll (subject to employee opt-out) workers in automatic IRA programs.
• Expansion and simplification of the savers credit (which provides federal matches of low-income retirement savings).
• New rules (anticipated to be Department of Labor (DOL) regulations on 401(k) fee disclosure and investment advice) to provide clear and understandable financial information about retirement savings.

Congress is expected to take up legislation to implement the auto IRA and expanded savers credit programs after it completes work on its FY 2011 budget, probably in the spring. DOL regulations on fee disclosure and investment advice are expected shortly—perhaps as soon as the end of February.

• Financial Services Regulatory Reform: The President said little about the pending financial services regulatory reform effort. He offered no new details on what he wants in that bill, or a time frame for enacting it. He noted that the House had passed a bill, and that lobbyists are now trying to kill it. He said, "But we cannot let them (the lobbyists) win this fight.  And if the bill that ends up on my desk does not meet the test of real reform, I will send it back until we get it right."

• Tax Rates: President Obama said the country “cannot afford” to extend the current 15 percent rate on capital gains, or the two top tax rates (33 percent and 35 percent). So, he proposed that Congress extend the “middle class” income tax rates (those applicable to incomes under $200,000/individual and $250,000/married), but should let the top two rates revert to their 2001 levels (36 percent and 39.6 percent) for earners above those two individual or married taxpayer levels. Under current law, all the tax rates now in force, set in 2001’s EGTRRA, expire as of December 31, 2010.

• Capital Gains: The 15 percent capital gains rate will also expire on December 31, 2010, and revert to the 20 percent rate in effect prior to enactment of EGTRRA in 2001. President Obama recommends that Congress enact a special rule that would exempt small business investments from any capital gains tax. Explanatory details on just what this means are expected to be included in the President’s FY 2011 budget proposal due on Capitol Hill February 1.

• Business Hiring Tax Incentives: As part of the jobs bill that Congress is currently crafting, the President called for tax credits to jump start hiring, particularly by small businesses. He did not go into detail about how the tax credits would work, but Administration personnel earlier in the day described the proposal as follows:

• A 20 percent credit for new hires (or salary increases) for companies with fewer than 100 workers, with the credit based on the amount of salary paid to new workers, not on overall payroll
• A 15 percent credit for companies with more than 100 workers that hire additional employees

More details on these credits, and other tax incentives to help jump start new hiring, are expected in the President’s budget and during Congressional work on developing a jobs package. Congress has already begun work on a jobs bill.

No Call for Tax Reform:
Notably missing from the President’s address was a call for tax reform. The Presidents Tax Reform Advisory Board chaired by Paul Volker is still in the process of collecting an “almanac” of tax reform ideas. When items in the almanac might be unveiled is unknown at this time.

NAIFA Staff Contact: Michael Kerley, Senior Vice President – Federal Government Relations, at (703) 770-8155; or Dani Kehoe, NAIFA Outside Counsel.