Obama’s Budget: Industry Winners and Losers

by Wendy Simmons | April 11, 2013 1:51 pm

After unveiling his 2014 budget yesterday, President Barack Obama was immediately attacked by both the right and the left.

Conservatives are appalled that Obama continues to seek more revenue (higher taxes) and liberals are incensed that he has endorsed a benefit cut to Social Security recipients.

Optimists might see this as an opportunity for everyone to coalesce around that elusive “grand bargain” that many centrists have dreamed of. But a more realistic assessment of Obama’s budget suggests that there will not be an agreement anytime soon.

But several of the included ideas have had bipartisan support in the past, and a brief look at Obama’s budget will help to clarify the parameters of negotiation.

Losers

Finance

Apparently the Dodd-Frank reforms didn’t do enough to punish the financial sector for the 2008 crash. Obama’s 2014 budget levies a new tax on financial service companies that were “bailed out” with TARP funds in 2008. The fee is projected to raise about $59 billion.

Obama has also proposed a new method of taxing derivatives. This proposal would require investors to pay taxes on unrealized gains from derivatives. In other words, it would require investors to use mark-to-market accounting for tax purposes.

The idea is to prevent sophisticated investors from indefinitely avoiding taxes, but would likely create major disruption in the options markets and increase the cost of owning mutual funds[1]. (Investors should keep a special eye out for this change, as the idea originated with Republicans on the House Ways and Means Committee.)

The budget also targets private-equity investors and hedge fund managers. As the 2012 presidential election made clear (remember Mitt Romney?), partners in private-equity firms enjoy a remarkably low tax burden because their profits are taxed as capital gains and not ordinary income. The political classes have been chattering about this for a couple of years now, but Obama includes it specifically in his proposed tax reforms.

Other proposed tax reforms include limiting the amount of deductions that top earners can take, and imposing the “Buffett rule” — mandating at least a 30% tax rate on annual income in excess of $1 million.

Agriculture

The administration proposes an overhaul in the way the U.S. provides food aid to the developing world. Under the current system, we buy food from American farmers and ship that food overseas. Obama proposes to stop that practice [2]and, instead, buy food directly from farmers in the countries we are aiming to help. This would reduce costs to the U.S. significantly while supporting farmers in the developing world.

Of course, cutting American farmers out of this loop would have a major impact on agribusiness and its associated industries, including shipping and packaging companies. Lobbying efforts by the ag industry have been intense in an attempt to prevent this reform from taking place.

Other cuts proposed to agriculture include reductions in farm subsidies and crop insurance. These types of budget cuts have been proposed — but never implemented — by both Republicans and Democrats for years. Obama suggests these cuts would save $37.8 billion.

Pharma

Drug companies were considered major beneficiaries of Obamacare. Now the president is asking them to give something back. He proposes that pharmaceutical companies increase the rebates given to low-income Medicare recipients, treating them similarly to Medicaid patients. The rebates would mean a major loss for big pharma.

Oil, gas, coal

Not surprisingly, Obama’s budget eliminates a variety of tax breaks and deductions for fossil fuel companies. Company profits would likely take a hit, and consumers would also see prices rise as the effects of higher taxes trickle down.

Winners

Many of Obama’s proposed increases will benefit children and low-income Americans. He wants to guarantee preschool for all 4-year–olds from low- and moderate-income families, make the Earned Income Tax Credit permanent and raise the federal minimum wage to $9 per hour.

Obama’s 2014 budget proposal also includes an increase in funding for infrastructure, manufacturing and research.

 Infrastructure

Obama’s 2014 budget increases funding for some infrastructure improvements, including highways and rail. If implemented, a boost in monies for large-scale transit improvements would be a boon for some segments of the construction industry. He also wants to create a National Infrastructure Bank, which would bring public and private money together in order to finance large-scale public works projects. The idea has gained bipartisan support.

Manufacturing

While Obama claims to place a high priority on supporting the rebound of the manufacturing industry, his actual budget blueprint only increases it modestly. According to Annie Lowery at The New York Times:

“Despite the prominence that manufacturing gets in Mr. Obama’s budget — the word ‘manufacturing’ appears 88 times, whereas ‘Medicaid’ appears 66 — his proposed figures are small given the scale of the American economy. The manufacturing ‘hubs’ proposal asks for $1 billion. A proposal to strengthen communities with manufacturing bases would get $113 million. A Commerce program increase would get $25 million.”

Still, a modest boost is better than a spending cut.

Science

The budgets of the National Institutes of Health and the National Science Foundation would see a boost in this plan. Federal funding of basic science and research has been shown to create overall gains for the economy, as new discoveries are made that lead to better health and new products. However, the precise beneficiaries are hard to predict.

Bottom Line

President Obama’s 2014 budget is ambitious, and it’d be naive in this political climate to expect it to sail through the halls of Congress unchallenged. Still, the unaltered document is useful because it lays out his administration’s priorities — even if they never come to pass. It’s a long time till Jan. 20, 2017 … investors would be wise to note the winners and losers listed above.

Endnotes:
  1. increase the cost of owning mutual funds: http://www.ft.com/intl/cms/s/0/14cbdc4e-a228-11e2-ad0c-00144feabdc0.html#axzz2QA6sKwRn
  2. stop that practice : http://www.ft.com/intl/cms/s/14cbdc4e-a228-11e2-ad0c-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F14cbdc4e-a228-11e2-ad0c-00144feabdc0.html%23axzz2QA6sKwRn&_i_referer=http%3A%2F%2Finvestorplace.com%2F%3Fpost_type%3Dipm_invpol%26p%3D333206%26preview%3Dtrue

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