Preview of President Trump’s Address to Congress
• President Donald Trump will address a joint session of Congress on Tuesday, 28 February at 9:00 pm EST.
• We expect Trump to lay out priorities for the repeal and replacement of the Affordable Care Act (ACA or “Obamacare”).
• We expect Trump to call for a substantial increase in defense spending that will be offset by cuts elsewhere in the Federal budget, in particular, in so-called non-defense discretionary spending.
• Trump also said that his speech will include a major infrastructure initiative, although it is not yet clear how an infrastructure program would be financed.
• We do not expect Trump to provide additional details on tax reform.
• Whatever the Trump administration proposes, the primary barriers to becoming law will be in Congress, and it could take several months to gain clarity about the crucial issues, such as the size and composition of the fiscal stimulus.
What to expect :
President Donald Trump will address both houses of the US Congress on Tuesday, 28 February at 9:00 pm EST. This will not be, technically, a “State of the Union” address. However, in recent decades, incoming presidents have used major speeches to joint sessions of Congress shortly after assuming office to present their policy agendas.1 During the campaign, Trump largely offered broad themes for economic policy – on
immigration, trade, taxes and deregulation – rather than detailed policy proposals. Since the inauguration, Trump has promulgated 25 Executive Orders and Presidential Memoranda. These actions have been focused, primarily, on deregulation and immigration. Trump’s specific priorities for spending, taxes, trade and other areas of economic policy remain unclear.
Today, President Trump and others in his administration gave us some hints as to what will be in his speech tomorrow night. Trump indicated that he plans to lay out priorities for the repeal and replacement of the Affordable Care Act (ACA or “Obamacare”). This has proven to be a difficult challenge for the Republicans in Congress. The failure to implement ACA changes has been an obstacle for the rest of Trump’s legislative priorities including tax reform. One way to gauge the effectiveness of tomorrow’s speech is the degree to which it accelerates the process of finalizing a replacement for the ACA.2
Today Trump administration officials also indicated that the president will call for a substantial increase in defense spending ($54 billion, or 9.8% of the current projected level) for the fiscal year that starts in October. They have also said that this increase in defense spending will be completely offset by cuts elsewhere in the federal budget, in particular, in so-called non-defense discretionary spending.
OMB Director Mulvaney said today that they would propose a 10.5% decrease in nondefense discretionary spending for FY2018. These are significant cuts (separately Treasury Secretary Mnunchin said over the weekend that the president will not be proposing changes in major entitlement programs). Mulvaney highlighted potential cuts in foreign aid, and the budgets of the State Department and the Environmental Protection Agency. In the current fiscal year we are spending $48 billion on foreign aid and 27% of that is for security/military aid. The entire budgets of the State Department and the EPA are $31.5 and $8.5 billion, respectively. Total non-defense discretionary expenditures have already been cut substantially in recent years. For example, in FY2016 non-defense discretionary spending was 3.3% of GDP, compared to an average of 3.8% for the years 1965-2006.
President Trump also said that his speech would include a major initiative related to infrastructure. It is not clear how any infrastructure program would be financed. During the campaign, Commerce Secretary Wilbur Ross and White House trade adviser Peter Navarro put out a proposal to encourage $1 trillion in infrastructure spending over 10 years by using $167 billion in tax incentives. Since then, there have been no other specific infrastructure proposals from Trump or his top advisers, so we do not know if he will come forth with more detail tomorrow night. That said, given the focus on offsetting the increase in defense spending with cuts elsewhere in the budget, we doubt that any infrastructure initiative will substantially increase government spending, especially given the reticence congressional Republicans have shown towards publicly financed infrastructure spending.
At his press conference on 16 February, President Trump indicated that the first priority for the administration is healthcare. At that time, Trump said that they would address tax reform only after they put forward priorities for modifications to ACA.
Many aspects of tax reform remain controversial. The proposal for corporate tax reform by Chairman Brady and Speaker Ryan includes the controversial “Border Adjustment Tax” (BAT). The BAT would increase the cost of imports. This has already generated substantial opposition from some parts of the business community and concerns among several Republican senators. The primary objectives of corporate tax reform are to lower the corporate tax burden and to provide better incentives for investment. To achieve those goals, the tax base has to be broadened or the deficit increased. Broadening the tax base means eliminating tax preferences that benefit specific sectors. That is always challenging because the beneficiaries of those tax preference have a substantial incentive to protect them. Forgoing the BAT makes the trade-off between lowering corporate tax rates and raising the deficit more acute because the BAT would raise substantial revenues.
Similar challenges exist in reforming personal taxes. Both Trump and the Republicans in Congress want to lower the top rate and eliminate the estate tax, but various Republican officials have also said that the benefits of personal tax reform will go primarily to the “middle class” and that high income tax payers will not get a substantial tax break. The only way that can happen is if there are significant restrictions on deductions. The three most important deductions are mortgage interest, state and local taxes, and charitable contributions. Each of these is very popular politically.
For Trump’s address, Treasury Secretary Mnunchin has suggested that Trump is likely to address high level objectives of reform, rather than details. Given the details of tax reform are still being negotiated across the House, Senate and the Trump administration, we do not expect to learn much more about the likely direction of tax reform this week.
When the president’s speech was announced shortly after the inauguration, we expected Trump to use this address to fill in some of the details in his economic policy agenda. However, it appears that the administration’s process of developing the specific policy proposals has been slower than we expected. Presidential transitions always take time. Moreover, Trump did not have a strong policy team during the campaign and he did not make substantial preparations for the transition before the election. Those choices probably have delayed the development of specific policy proposals. Note that Presidents Ronald Reagan and George W. Bush proposed major tax cuts within four weeks of taking office (in 1981 and 2001, respectively); and President Obama signed his major fiscal stimulus bill in February 2009 as well.
No doubt tomorrow’s speech will attract a lot of attention. But at this point, we do not expect Trump to provide much additional clarity on the likely course of key policies initiatives. To the extent that he focuses on economic policy, we expect the president to reiterate what he has done already and to focus on some aspects of fiscal policy. It seems unlikely that we are going to get a comprehensive fiscal plan tomorrow night. As noted above, we expect the president propose changes in the composition of federal spending and potentially some sort of infrastructure initiative. We do not expect the president to offer new details on his objectives for tax reform. Importantly, whatever Trump proposes will still have to work its way through Congress.
1 Article II, Section 3, clause 1 requires that the president “shall from time to time give to the Congress Information
of the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and
expedient.” What we know at the president’s annual “State of the Union Address” fulfills this constitutional
requirement. Since Ronald Reagan, incoming presidents have also laid out policy proposals in major addresses
2 At this point, it is not entirely clear how the new administration is working with Republican leaders in Congress.
President Trump and others in the administration have said that they are working with congressional leaders on
these issues, but congressional leaders are working on their own proposals for the “repeal and replacement” of
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