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Top Issues, Key Insights: The 2015 State

of the Union Address

Brunswick Group 2015

President Barack Obama’s State of the Union Address kicked off a year in which both Democrats

and Republicans face competing pressures to work together on governing the country while

also laying the groundwork for the 2016 election. How the two parties resolve their conflicting

goals in the next few months will determine which of Mr. Obama’s proposals—most of which

target the middle class—will be enacted.

Mr. Obama outlined a range of proposals on Tuesday, but with Republicans now in control of

both houses of Congress, the president’s highest-profile proposals, such as middle class tax cuts

paid for by expanded taxes on businesses and high-income Americans, face long odds. Rather,

the speech’s greatest impact will likely be to begin framing the Democrats’ agenda for the 2016

election.

Mr. Obama is seeking to capitalize on recent momentum from the improving economy, low

gasoline prices and executive actions on immigration and Cuba that were popular with his

Democratic base. His proposals aim to refocus the country on economic issues with a core

appeal to the middle class by providing tangible, if small, benefits—from additional tax credits

for two-income households to expanding paid medical leave.

Republican lawmakers have already sounded warnings on some of Mr. Obama’s proposals. In

the Republican response to the president’s speech, freshman Senator Joni Ernst of Iowa sought

to elevate her party from its opposition status. The unspoken aim of her speech was to position

her party as ready to govern now that Republicans have full control of Congress and an eye on

the 2016 presidential race.

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The Brunswick Group’s analysis of key issues in the State of the Union:

Top Issues

Taxes

Mr. Obama’s tax proposals represent one of the areas of deepest partisan division and lowest likelihood

of adoption. The president made a strong push for a “fairer” tax code, introducing measures to close

corporate tax loopholes and offer relief for middle-class Americans. His proposals, which he called

“middle-class economics”, introduce several methods to increase the share financial firms pay, including a

tax to deter banks from taking on excessive leverage (known as the “bank tax”) and closure of loopholes

to prevent corporate inversions. Though only alluded to during the president's speech, the call from

Democrats to stop corporate inversions will continue, and the Treasury Department has signaled that it

will likely pursue additional regulatory steps to curtail the practice.

In the immediate aftermath of the mid-term elections, many expressed hope that the Republican

majority and the Obama Administration would seek compromise on comprehensive corporate tax

reform, but that now appears a distant possibility. To counter this difficulty, Mr. Obama

attempted to emphasize a bipartisan purpose for tax reform: investment in 21st century

infrastructure that allows American businesses and citizens to thrive. This shared purpose may be

the only glimmer of hope for bipartisan collaboration.

Financial Regulation

Not surprisingly, progress on financial reform and the importance of “sensible regulations”, such as the

Dodd-Frank Act of 2010, was a central point in Mr. Obama’s speech. This year will likely see Republicans

use their majority to propose a scale-back of Dodd-Frank. The House has already passed a bill which

delayed the implementation of aspects of the Volcker Rule until 2019 (from 2017). Mr. Obama again

confirmed his willingness to veto any bill to delay the implementation. In the event of another high-

profile scandal similar to the LIBOR and foreign-exchange issues banks have already faced,

populist sentiment from both sides of the aisle could very well increase, resulting in openness to

tougher banking legislation.

Budget

Many of the policy proposals detailed on Tuesday by the president will be formally submitted to Congress

as part of the President’s budget, scheduled for February 2. In previous years, submission of the budget

has been delayed by fiscal cliffs and partisan gridlock. This year’s budget benefited from the passage of

the Bipartisan Budget Act of 2013, but the respite from budget wars will likely be short-lived. Barring

congressional action, sequestration returns in 2016 with enormous implications for the discretionary

spending upon which Mr. Obama’s policy proposals aimed at strengthening the middle class rely. The

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prospects for Republican support of the president’s budget remain grim. Instead, watch for Congress to

pass its own budget resolution, setting the stage for an appropriations battle, with the president’s

veto as his only leverage.

Energy

Mr. Obama's speech signals a busy year ahead for fossil fuel industries and their lobbyists. He pledged to

continue his administration’s efforts to fight climate change by finalizing new regulations limiting

emissions of carbon from power plants and methane from natural gas wells. And he took a veiled swipe at

the proposed Keystone oil pipeline, a project championed by Republicans and Canada’s government. Mr.

Obama urged lawmakers to “set our sights higher than a single oil pipeline” and pass legislation to

fund “modern ports, stronger bridges, faster trains and the fastest Internet”. Mr. Obama was silent

on another industry priority—lifting the 40-year-old ban on exports of domestic crude oil.

Cybersecurity

Amid escalating cyber threats against American companies and consumers, the president doubled down

on his call for the cybersecurity reforms that he announced last week. The president was also careful to

emphasize the importance of balancing civil liberties and privacy against security considerations. Chief

among the president’s proposed reforms is greater data sharing between businesses and the federal

government about cyber threats and vulnerabilities. Targeted liability protection for participating

companies would shield them from lawsuits and regulatory repercussions over any data shared with the

government. Despite criticism from privacy advocates over greater government access to data, the

likelihood a data sharing bill will pass Congress this year is high, as both parties are fearful of the

“next” Sony hack. And rank-and-file Republicans, who believe the federal government should not

regulate cybersecurity in the private sector, are unlikely to object, viewing the proposed data sharing

arrangements between business and government as sufficiently limited in scope.

Technology Policy

Mr. Obama reiterated his support for a free and open Internet. Late last year, the president called for the

Federal Communications Commission to adopt new regulations on Internet Service Providers (“ISPs”)

that would effectively reclassify the Internet as a public utility. While FCC Chairman Wheeler has signaled

support for this approach, congressional Republicans and ISPs fiercely oppose reclassification.

Republican legislators recently unveiled a draft net neutrality bill, which would reinstate and bolster the

FCC’s old net neutrality rules while preventing the agency from creating stronger regulations. The

bottom line is that net neutrality is far from settled and, notwithstanding congressional action,

any rule issued by the FCC will almost certainly be challenged in court.

On the issue of expanding Internet access, the president announced that his administration will help

communities build and access faster broadband networks. In recent days, the White House rolled out a

series of broadband proposals, including support for local choice and greater competition through

municipal broadband. Mr. Obama’s support for municipal broadband comes at a sensitive time politically:

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In addition to the net neutrality rules, the FCC is also poised to preempt state laws so that municipal

broadband can be offered as an alternative to for-profit ISPs. With Republicans fiercely opposed to

Title II net neutrality and to the FCC preempting existing state restrictions on municipal

broadband, the president’s support for both is sure to escalate the political stakes for ISPs,

especially if consumers increasingly view net neutrality and municipal broadband as related

issues. Left unanswered in the debate is whether a viable business model even exists to successfully scale

municipal broadband across the country.

Health Care

Though a signature accomplishment of his first term, health care was only briefly mentioned Tuesday.

Not surprisingly, the president did continue to tout the millions of Americans that now have coverage as a

result of the Affordable Care Act as well as the slowing of healthcare cost inflation. Left unaddressed

was previously proposed federal legislation to repeal the medical device tax, which recently

resurfaced with bipartisan congressional support. Republicans have signaled that repealing the 2.3%

excise tax, a source of funding for the Patient Protection and Affordable Care Act, is a top priority now

that they control the Hill. Additionally, the president reinforced his recent push for mandatory paid sick

(seven days) and maternity leave for every worker in America. Though this initiative would bring the

United States closer to international norms regarding employment benefits seen in other developed

nations, it has met with resistance over whether the federal government is the appropriate starting point

for such an effort.

Education

Education was front and center in the speech, signaling a strong policy focus during the final two years of

Mr. Obama’s presidency. The president called for improved access to education, from preschool

through higher education, with a strong emphasis on reducing the financial burden for students

and families. His plan includes new tax credits, federal-state partnerships and two years of free

community college. He specifically urged the private sector to engage in strategic partnerships to support

educational opportunities. Mr. Obama also reiterated his focus on the importance of protecting student

data. Notably, he left thornier issues off Tuesday’s stage, including the “No Child Left Behind Act”,

the Common Core standards and high stakes testing. Expect the education debate to continue to grow,

especially as former Florida Governor Jeb Bush, a leading voice in education, signals a run for the

presidency.

Trade

With Republicans in control of both the House and Senate and movement on trade promotion authority

likely, Mr. Obama may soon have greater leverage to negotiate trade deals and to push the Trans-Pacific

Partnership (TPP) across the finish line, with an agreement on the table likely by Labor Day. This year is a

pivotal one for trade, extending beyond the TPP and the Transatlantic Trade and Investment Partnership

(T-TIP). The U.S. Export-Import Bank faces a tough fight for survival with friends and foes on both sides

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of the aisle and particular opposition from Senate Majority Leader Mitch McConnell. Also up for

negotiation is a new Transatlantic Trade and Investment Partnership between the United States and the

European Union, likely to take center stage later in 2015. Following the Administration's 2011 announced

“pivot” to Asia, expect Tuesday’s minor highlight on trade to translate into a major policy issue for the

final two years of Mr. Obama’s presidency.

Conclusion

As he enters his final two years in office, Mr. Obama’s ability to execute on new initiatives is severely

constrained by time and politics. The president understands he has a narrow window of time to deliver

on his proposals before Washington’s focus turns toward the 2016 presidential and congressional

elections. If the White House and Republicans want to find common ground, a few of Mr. Obama’s

proposals on cybersecurity and trade offer some opportunities for bipartisan compromise. But many of

the president’s proposals will serve as a foundation for the Democrats’ campaign proposals in 2016.