Recapping the State of the Union

President Obama gave his annual State of the Union address Tuesday night. The election-year speech contained a laundry list of proposals aimed to create jobs and promote economic growth. As is all-too-often the case in the midst of campaigns, the ideas put forth where aimed to appeal to certain constituencies with little discussion of their budgetary impact or if limited resources could be used more prudently.

The President offered new tax incentives or benefits for a variety of groups like domestic manufacturers, clean energy companies, and college students. In addition, he promised to use half of the already-enacted savings from the drawdown of the two wars to pay for infrastructure spending, with the rest going towards deficit reduction. While investing in infrastructure is critical for long-term growth prospects, it should be done with real offsets, not budget gimmicks. Counting the war "savings" towards infrastructure and deficit reduction amounts to taking credit for policies that are already in effect, as we explain here (p. 6). There are genuine ways to offset the costs of infrastructure improvements over the longer-term.

As we noted in our statement immediately after the address, President Obama spent very little time talking about plans for reducing the deficit, simply giving a nod to his negotiations with Speaker John Boehner (R-OH) this summer and his willingness to work to overhaul health programs and Social Security. However, the White House fact sheet for the speech does mention the need for Congress to work together to fashion a balanced $4 trillion deficit reduction plan. During the speech, he mentioned that "we’ve already agreed to more than $2 trillion in cuts and savings" -- referring to the mostly discretionary spending cuts mandated in the Budget Control Act and the $1.2 trillion in sequestration that is due to begin next year. He also rightly recognized that "we need to do more, and that means making choices." Especially in light of congressional attempts to roll back or alter the trigger, which to his credit the President has promised not to support, it is imperative to put together a comprehensive "Go Big" plan that lays out at least $4 trillion in savings.

The President got somewhat more specific in discussing revenue proposals to reduce the deficit. He proposed to make millionaires pay a minimum tax rate of 30 percent and make multinational companies also pay a minimum percentage of their income. The exact mechanisms of these floors are largely unknown, but he would eliminate many itemized deductions for millionaires as a way to accomplish the first goal. Other changes that he has proposed in the past to upper-income taxes and foreign taxation would likely also contribute to these goals, in addition to whatever new or modified minimum tax he would put in place.

President Obama ended his speech with a passionate call for cooperation, noting that if we work together "there is no challenge too great; no mission too hard."

In the official Republican response to the speech, Gov. Mitch Daniels's (R-IN) also implored lawmakers to work together, saying that "2012 must be the year we prove the doubters wrong." In his remarks he specifically and forcefully identified the national debt as a major factor in our economic woes and the need to address it as critical to our future -- "No nation, no entity, large or small, public or private, can thrive, or survive intact, with debts as huge as ours." While we have a "short grace period" as the world's reserve currency, he said, time was running out on our ability to reduce the debt before we face the same problems as Europe. He called for action immediately to address the issue, specifically by cutting entitlement spending (although he didn't get specific).

Daniels did seem to agree with Obama on the need to scale back tax expenditures for upper-income earners, but he also called for it in the context of comprehensive tax reform that would also lower marginal rates and be more conducive to economic growth. We hope that this general agreement on the need for tax changes can lead to fundamental tax reform that broadens the base and eliminates tax expenditures. The Bowles-Simpson tax reform proposal represents a sound approach.

Traditionally, an election year is a difficult time to accomplish major policy changes. Politicians are wary of discussing painful choices or promoting policies that will displease voters. Yet, delaying action on our rapidly decaying fiscal outlook would be the height of irresponsibility.

We believe that this election offers a prime opportunity to have a constructive debate on our fiscal challenges and how to address them. Our US Budget Watch project has offered fiscal principles to guide this debate. Principles include offering specific policies, not attacking an opponent's plan without offering an alternative, refraining from budget gimmicks; and being open to bipartisan compromise. We hope that the President and those who seek to succeed him follow these principles; the state of our fiscal future depends on it. 

Update: Here is CRFB's Senior Policy Director Marc Goldwein talking about the State of the Union speech.