President Barack Obama will deliver his State of the Union Address on January 28, and it will surely cover several issues that affect the middle market. The president will likely begin by stressing that the economy continues to improve, albeit slowly, and highlight some of the positives:
- The 4.1 percent third quarter economic growth, the best in two years.
- The stock market closed out 2013 with record highs.
- December's two-year budget agreement gives businesses a little more predictability — and Congress a little more money to spend.
But at least one economic dark cloud looms: the debt ceiling. The budget agreement that ended the October government shutdown included a short-term debt-ceiling increase, extending it to February or March, depending on how well the government can juggle its expenses. Republicans have sent mixed messages about whether they will use that deadline to try and secure more spending reductions — perhaps in Medicare.
By contrast, the president's position has been unwavering: Congress must unconditionally raise the debt ceiling to pay for spending it has approved. It's unclear who would win in another showdown, but the smart money is probably on the president.
Obama will also address at least three domestic policy issues that could have a significant impact on business.
1. Income Inequality. The president thinks that one of the biggest challenges facing the country is a widening gap between the richest and poorest Americans. While many economists question just how wide that gap is — or whether it even exists — Obama will propose legislation that he hopes will reduce it. His top solutions:
- Increased infrastructure spending. This effort could be beneficial to companies in the construction industry, but the president has found very little Republican traction since he pushed through infrastructure spending in his fiscal stimulus bill in February 2009.
- Increasing the minimum wage. The president has proposed raising the minimum wage from $7.25 to $9.00 an hour, but some Democrats want to go much higher. While the president would get some resistance from the House, if House Speaker John Boehner were to allow a vote on a moderate increase, it would have a good chance of passing.
The real solution, however, to income inequality is strong economic growth. But the president's regulatory and tax-increase efforts, not to mention the Affordable Care Act, have discouraged economic growth rather than boost it.
2. Immigration Reform. The president will make an effort to revive immigration reform — a key issue for many middle markets companies that depend on certain types of labor.
For example, unemployment in the tech industry is around 3.5 percent, half the national average. And construction and agricultural industries that depend on contract and seasonal labor have been struggling to find enough workers in many areas of the country.
There is both business and bipartisan support for some reforms: expanding the number of skilled foreign workers through the H1-B visa program (capped at 85,000 a year) and for creating a temporary guest worker program.
While a "path to legality" for those who are here illegally is legislatively possible, the president's goal of creating a path to citizenship for undocumented workers will meet with a lot of resistance in the House.
The president has indicated he would consider immigration reform piecemeal, rather than one comprehensive bill, which could help some reforms move forward.
3. Tax Reform. Few issues are more important to CEOs than tax reform. The U.S. has the highest corporate tax rate in the developed world. And, unlike nearly every other country, it imposes that highest tax rate on profits earned in other countries, which encourages companies to leave those profits overseas.
The president's latest proposal was for lowering the corporate tax rate from 35 percent to around 28 percent. The business community is pushing for somewhere between 20 percent and 25 percent. The president, however, also wants to "close tax loopholes," which is laudable if the goal is to make the tax system simpler and more efficient. But most companies see that as code for increased tax revenue.
Good tax reform would be a shot in the arm for economic growth — as well as addressing income inequality — but there is a lot of concern that it would be used as a hammer to get more revenue rather than a tool to make U.S. companies more competitive.
Finally, the president probably will take a minute to praise the progress of ObamaCare. While the law remains one of middle market CEO's biggest concerns, the president has repeatedly downplayed serious problems that could dramatically affect employers' and employees' access to affordable coverage. And that response is unlikely to change on January 28.
The president has both said and demonstrated that he thinks the best way to spur economic growth is to boost government spending. And the best way to lower the federal deficit is to increase taxes. House Republicans have mostly stymied both efforts.
The good news is that the economy seems to be moving forward and may be picking up steam. The unresolved question — though it won't be unresolved in his State of the Union — is whether the improving economy is because of the president's economic policies or in spite of them.