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Washington Update: State of the Union - Defining a legacy

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The backdrop for President Obama’s sixth State of the Union was notably different from past addresses — his party’s defeat in November’s midterm election still fresh, a nation as divided as ever, and a world gripped by myriad international crises. But any notion that Obama may have lost his fervor as a result was dispelled when he took to the rostrum in the House Chamber on Tuesday night.

Entering the final two years of his presidency, this State of the Union was about Obama’s  legacy. The President laid out perhaps his most focused plan yet. He introduced a number of economic proposals aimed at helping low- and middle-income families, and broader efforts to revamp the country’s tax code and infrastructure. Whether any of his initiatives ever become law, however, depends on his relationship with Congress.

“A rejuvenated Obama coupled with a GOP emboldened by its newfound majority in Congress appears to be a recipe for gridlock. While there’s incentive on both sides to work collaboratively to produce tangible results – Obama must define his legacy and Republicans must prove they can govern as they set their sights on reclaiming the White House in 2016. I remain cautiously optimistic. Both sides will have to make an earnest effort to find a middle ground.”

Mary Moore Hamrick
National Managing Principal of Public Policy


In this edition of the Washington Update — State of the Union: Defining a Legacy, Grant Thornton’s Public Policy group and industry experts weigh in with specific insights on how the President’s agenda will affect Grant Thornton and the market sectors we serve.

Construction and real estate

President Obama indicated that a component of continuing our economic recovery could be accomplished through the repair of America’s infrastructure. And one of the central tenets of his “middle-class economics” proposal was giving families the financial freedom and flexibility to purchase their own home.

“The President’s call for a bipartisan infrastructure plan should create more construction jobs, replacing the more than 400,000 construction jobs lost during the economic downturn. Of course, the question that must be answered is how will this plan be paid for? An increase in the gasoline tax, use of funds previously spent to finance our wartime activities, or changes to the overall tax system might be possibilities.

“With home interest rates at historic lows, the homebuilding industry has continued its recovery and homeowners have the opportunity to refinance their mortgages through the Home Affordable Refinance Program — a plan that would cut the red tape and allow for greater ease in refinancing home mortgages. The President also proposed lower mortgage insurance premiums on government-backed loans, which will make home ownership affordable for lower-income families and further benefit the real estate industry.”

Alvin Wade
National Managing Partner, Construction, Real Estate, Hospitality and Restaurants Practice

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Education
Perhaps the worst-kept secret in the lead-up to the State of the Union was the President’s initiative to lessen the burden of student loans and make higher education available to more Americans. He seemed particularly passionate about this issue, emphatically announcing, “I’m sending this Congress a bold new plan to lower the cost of community college — to zero.” However, the plan to pay for it with new taxes is a major point of contention.

“We applaud the President’s recognition of higher education as essential to the growth of the economy. Community colleges serve a vital role in the higher education sector and providing access for students who might otherwise not have the opportunity to attend will help to keep our country competitive in the years to come. Affordability in higher education is an issue that transcends the sector — from large private research institutions to small liberal arts colleges. It is incumbent on political leaders and higher education professionals to seek solutions that allow greater numbers of students to have access to affordable and quality education.”

Mark Oster
Managing Partner, Not-for-Profit Practice, Higher Education Practice


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Energy
The President took great pride in America’s energy independence, citing its standing as the world leader in both oil production and wind power. He also touted increased solar output and lower gas prices, but didn’t delve too deeply into the future of energy and the country’s long-term needs.

“Although our dependence on foreign oil has decreased, President Obama did not specifically address the current oil and gas industry outlook, challenges, related geopolitical issues or developing impacts on U.S. jobs and the economy. Because the U.S. energy revolution has been driven by the private sector, this was not necessarily surprising.

The President went on to highlight climate concerns and referenced combatting climate change in the way we produce and use energy. Given the limited substance in these statements, I expect that we will continue to see energy industry participants reference regulation and political uncertainty as key business risks into the future. Has the current Administration turned the page on its previously coined ‘All The Above’ energy strategy; and what does the new page look like?”

Kevin Schroeder
National Managing Partner, Energy Practice


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Global Public Sector
The issues of government spending and efficiency were largely left untouched in this year’s State of the Union, with no initiatives to modernize or streamline operations.

“What I hoped to hear from the President was more about what the Administration would do to create a more efficient and effective government built for 21st century challenges. Our surveys invariably show that federal agencies are struggling to cope with budget uncertainty, a demoralized workforce and a broken acquisition process. Our veterans are still subject to long wait times for benefits. And at the height of tax-filing season, the IRS does not have the manpower to process returns in a timely manner, adequately combat fraud, or answer more than half of the 100 million support calls it expects to receive. Proposals to deal with these systemic issues would have resonated not only with the American people, but also with Democrats and Republicans, providing an opportunity for a bipartisan, bicameral win.”

Robert Shea
Principal, Global Public Sector


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Health care
The Affordable Care Act (ACA) didn’t get much attention in this year’s address. In fact, neither “health care reform” nor “Affordable Care Act” were mentioned at all. However, the President did mention that “more of our people are insured than ever before.” He also made it clear that health care is an integral part of “middle-class economics” and certainly the implications to the health care industry of many of his stated agenda items are significant.

“The President cited several successes of the act, such as the fact that health care inflation is at its lowest rate in 50 years, and that 10 million people gained the security of health insurance over the past year. While both of these facts are true, there are still many challenges ahead for health care reform, including the elephant in the room of funding it. In addition, there are still some lingering court battles over its constitutionality, state battles over Medicaid expansion, and continued difficulties with Healthcare.gov.

“We continue to think that the providers that focus on population health management, especially chronic disease control and preventative maintenance, while also being ultra-diligent with cost-control measures and clinical efficiencies, will ultimately be the leaders in the new health care economy.”

Anne McGeorge
National Managing Partner, Health Care Practice


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While the ACA didn’t get its usual spot in the limelight, the President did announce the Precision Medicine Initiative to help cure diseases and help Americans access personalized health information.

“The pharmaceutical industry has a clear opportunity to support the President’s focus on Precision Medicine by leveraging a deep understanding of disease states and unmet patient needs. The future of health care will be driven by continued research in genomics, allowing physicians to identify and diagnose current and future health concerns and develop personalized treatment plans. Pharmaceutical companies will need to increase investments in innovative solutions that will streamline treatment and increase patient engagement, leading to improved outcomes and enabling personalized medicine.”

Lisa Walkush
Life Sciences Advisory Leader


Manufacturing
The resurgence of American manufacturing has played a large part in the country’s economic recovery, creating nearly 800,000 jobs since 2010 and bringing back positions outsourced to countries such as China and India. President Obama conveyed a desire to help manufacturers continue this trend, specifically through modern infrastructure improvements and new trade agreements with Asia and Europe.

“The United States manufacturing sector has rebounded considerably over the past few years. Our auto industry, especially, is making robust progress at home. Lower energy costs; shorter, more responsive supply chains; better customer service; innovative technologies; and higher-quality products are reinforcing the benefits of manufacturing close to home. Even so, there is work to be done to position the manufacturing sector for growth. There are still 1.5 million fewer manufacturing jobs than when the recession began in 2007. Our high federal corporate tax rate, onerous business regulations and disadvantageous trade agreements remain hurdles for U.S. businesses that continue to dampen our industry’s progress. While it is encouraging that President Obama addressed the need to approve trade agreements, comprehensive tax reform and resolution of the tax inequity for small- and medium-sized businesses remained elusive topics. It is disappointing that these important issues went unmentioned, since they pose very real challenges to the U.S. manufacturing industry.”

Jeff French
National Managing Partner, Consumer and Industrial Products Practice
National Leader, Manufacturing Practice



Tax
The President made some references to tax reform, particularly in reference to closing loopholes and simplifying the system. However, many of his remarks on taxes focused on the overarching theme of the State of the Union as a whole — giving middle-class families an opportunity to get ahead in today’s economy.

“President Obama rolled out an ambitious new tax platform in his address. The new proposals would increase taxes on investment income and high-income earners to pay for new incentives for low-income taxpayers, but widen the gap between the President and the Republican Congress. The proposals stand little chance of enactment with Republicans controlling Congress, and may establish taxation as a campaign issue for 2016 rather than an item of potential compromise.

Mel Schwarz
Partner, Washington National Tax Office


Technology
Technology was one of the broader themes of the President’s address, touching almost every other issue in some way. Obama spoke of a renewal of American innovation, one fueled by science, technology, and research and development. He called for breakthroughs in fields such as aerospace and medicine to create new avenues for economic growth. “I want Americans to win the race for the kinds of discoveries that unleash new jobs,” he said. In light of recent events, a great deal of emphasis was also placed on cybersecurity.

“We applaud the President’s focus on technology’s role in propelling society through the 21st century – in the two specific areas: economic growth and quality of life. The innovation engine of the technology industry has already created jobs in sectors that didn’t exist a decade ago. By empowering the next generation of digital innovators and entrepreneurs we can be assured of future growth. And as with previous infrastructure engines of commerce, like highways and railroads, greater access and enhanced speed of the Internet are critical to the growth of the US economy.
 
The President’s call to arms to combat the acute and expanding threat in the cyber world is much welcomed. No longer can we be content with building walls around our corporate or personal data. The financial and reputation risks are too great. We need effective collaboration and investment between government and the private sector to effectively combat these rising enterprise risks.”
 
Steve Perkins
National Managing Director, Technology Industry Practice


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Transportation
Although President Obama made no specific mention of the transportation industry in his address, he did allude to the central role it plays in our economy in his call for better bridges, ports and trains. While he didn’t lay out a specific plan to pay for these improvements, the sheer cost of such an endeavor suggests it would have to involve an expansion of public-private partnerships and an increase in the gas tax.

“The country’s outdated infrastructure can be a nuisance for most Americans, but for those in the transportation business, it’s one that affects their livelihood. The millions of trucks that move over 9 billion tons of goods across the country each year are incessantly bogged down by delays, congestion and out of route miles. This challenge is one of many that hamper the industry’s ability to operate efficiently. Beneath the surface, transportation companies face the same obstacles as other U.S. businesses – high taxes, regulatory overreach and uncertainty. A 'proposed' capital gains tax increase is particularly alarming for the transportation industry as it may lead to higher costs of capital. Privately owned companies are also concerned about capital gains tax rates as many consider whether to sell all or a portion of their business. Our clients are generally feeling more optimistic, but are still very cautious in making decisions to innovate, hire and grow as a result of these factors.”

Randolph Smith II
Tax Partner, Transportation