State of Union: Economy is key

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NEW YORK (CNNMoney.com) -- The state of the slowing economy and how to energize it - now and beyond - will be a focal point of President Bush's State of the Union address Monday night.

Bush, in his last year of office, is unlikely to make any new economic proposals, as he has done in past addresses. Last year, for instance, he called for a change in how the government taxes money used to buy health insurance, and he asked Congress to set a goal of reducing American gasoline consumption by 20 percent over 10 years. He is expected to at least make mention of those proposals and urge lawmakers to pursue them further.

"I think there will be a pretty significant emphasis on what they're doing in the immediate term to shore up the economy," said Scott Hodge, president of the Tax Foundation, a research group advocating for a simpler tax code and lower taxes. "There's so much anxiety in the markets and in business. I think he'd want to assure people they've taken the appropriate actions."

This year, before discussing the war in Iraq, Bush will promote and call for swift passage of the $150 billion economic stimulus package brokered between House leaders and Treasury Secretary Henry Paulson.

The stimulus deal may face some resistance in the Senate. Some Democratic senators are unhappy that their House colleagues gave up on the party's push to extend unemployment benefits in addition to offering consumer rebates and business tax breaks.

The economic proposal, announced last week, also includes two housing measures intended to make it easier for consumers to obtain mortgages or refinance expensive subprime loans.

Beyond the stimulus plan. The president will also use the stimulus package as a launching-off point to call once again on lawmakers to permanently extend the tax cuts he engineered in 2001 and 2003 that will otherwise expire in three years. White House Press Secretary Dana Perino said Bush will factor an extension into his 2009 proposed budget, which will be released Feb. 4.

The administration had originally wanted such measures included in the stimulus plan. Proponents and critics of making the tax cuts permanent acknowledged that adding them to a short-term stimulus package could delay its passage because of the fierce disagreement between Democrats and Republicans over the issue.

Critics questioned how much such a move would stimulate the economy in the short-term. Proponents, however, said investors and businesses would feel more confident making investments today if they knew what their tax bill will be tomorrow.

"The best thing we can do to deal with uncertainty in the economy is make the tax cuts we passed permanent," Bush said in a speech to congressional Republicans on Friday.

Bush may also use the State of the Union address to push for other measures intended to ease the housing downturn, some experts said.

"Look for a pitch for tax-related provisions, such as opening the door for states to use tax-free bonds to help homeowners refinance out of unaffordable subprime [adjustable-rate mortgages]," said Jaret Seiberg, senior vice president at the Stanford Group, a Washington policy research firm.

Seiberg added that he believes Bush may endorse a real estate industry plan to offer $5,000 tax credits to first-time home buyers.

Reducing wasteful spending. The White House on Monday said the president will warn lawmakers that he will veto any spending bill that doesn't cut earmark spending in half. Earmarks funds for lawmakers' special projects that may benefit only their constituencies, and they're typically not openly debated before passage.

In an attempt to make congressional spending more transparent, Bush will also issue an executive order to federal agencies requiring them to ignore earmarks not spelled out in legislation.

Congress passed more than 11,700 earmarks for a total of $17 billion in fiscal year 2008, the White House noted. Democrats note that nearly half of those earmarks were sponsored by Republicans and were endorsed by the White House.

Giving business a hand. Another measure the president may push for is lower corporate tax rates - a campaign led by Treasury Secretary Henry Paulson.

The stimulus proposal announced last week also includes tax breaks for businesses to spur them to invest in plants and equipment.

"I'm surprised how readily the House agreed to the business tax breaks in the stimulus package. That may empower proponents of lower corporate taxes," said Greg Valliere, chief political strategist at the Stanford Group.

Right now the top income tax rate for corporations is 35 percent. Proponents of lowering it say it puts the United States at a competitive disadvantage since the majority of economically developed countries have lower corporate tax rates. U.S. companies benefit from bigger tax breaks but have to spend time and money to take advantage of them.

"[Bush] could try to put out a marker," said Hodge of the Tax Foundation.

At a conference of CEOs last summer, Paulson asked panelists whether they'd like to see the corporate tax rate lowered to 27 percent from 35 percent and preferences such as the research and development credit eliminated.

Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, last fall proposed a major tax overhaul that included lower corporate tax rates. There is little consensus, however, between Democrats and Republicans about how low corporate tax rates should be.

But Bush is not likely to do more than lay out the big picture of his agenda on Monday. "I expect broad statements and no specifics," said Clint Stretch, managing principal of tax policy at Deloitte Tax. More telling, he said, will be the president's 2009 budget proposal.