Tax Reform Returns after President Obama's State of the Union Address
February 2, 2026
During the annual State of the Union Address, President Obama outlined a detailed tax reform plan as part of a major policy push to support the middle class. Although it is not a complete tax overhaul, it would constitute a significant reallocation of tax burdens through closing a series of loopholes, raising certain rates, and creating new taxes altogether. However, Democrats will be quick to point out that it is not a tax hike, as the plan also calls for creating new loopholes with the newly generated revenue.
Obama’s tax hikes would include a rise in the capital gains tax rate up to 28 percent, a new tax of .07 percent on the liabilities of large banks, stopping inherited investments from being taxed according to appreciation since inheritance rather than since purchase, capping tax free retirement accounts at $3.4 million, and gutting the tax benefits of a 529 college savings account. This last part of the plan seemed incongruous with Obama’s focus on taxing the rich more, and faced harsh criticism from both parties as soon as it was announced. The president quickly dropped that provision of his plan. He also referenced certain corporate tax reform measures in his speech, such as establishing a minimum worldwide rate, but did not lay out a comprehensive plan.
To balance the revenue from these tax hikes, Obama’s plan calls for several new cuts and loopholes. These include an expansion of the earned income tax credit, a new similar tax credit for families with two earners, enlarging the child and dependent care tax credit, creating tax credits for business that offer auto-enroll retirement accounts, exempting student loan forgiveness from an income tax, and consolidating various college tax credits. Ultimately, this plan does not represent a major hike in taxes, but rather a redistribution of revenue in favor of the middle class. However, it is important to remember that only Congress has the authority to change tax laws, so any tax reform brought to a vote needs Republican support.
In the hyper-partisan gridlock that currently characterizes the federal government, tax reform has actually emerged as a surprising area of bipartisan agreement. Coming out of the 2014 Midterm elections, in which Republicans won majorities in both houses of Congress, both parties signaled an appetite for legislation that would change and simplify the federal tax code, specifically regarding taxes on businesses and corporations. But the individual tax plan that Obama outlined in his State of the Union speech breaches on territory that does not enjoy bipartisan support, but falls rather starkly on party lines. Immediately after its announcement, conservatives blasted the policy with well-worn lines like “class warfare” and “attack on the middle class”.
The plan itself appears dead on arrival in the Republican Congress, although as of yet no legislation has even been drafted for debate. Speaker of the House John Boehner’s office came out specifically against the plan’s intention to increase the top-rate capital gains tax, while Senate Banking Committee Chairman Richard Shelby blasted its provisions to increase taxes on so-called 529 college savings plans, which has since been scrapped.
While the entirety of the President’s plan will almost certainly fail to make it through Congress, some of its individual pieces enjoy Republican support. For example, conservative lawmakers like Rep. Paul Ryan, policy guru of the House GOP, support the plan’s expansion of the Earned Income Tax Credit, a program long-favored by both parties. Some Republicans also signaled support for the plan’s increased child-care tax breaks.
There is also worry that the President’s plan will endanger support from both parties for other kinds of tax reform that emerged during the Midterm elections. Senate Majority Leader Mitch McConnell indicated this week that his caucus still wants Congressional action on corporate tax reform, but that the President’s forays into individual tax reform threaten the possibility of any bipartisan tax legislation. Still, corporate tax reform appears to be on the table for this new Congress, with both Democrats and Republicans leaders like Paul Ryan maintaining their support for a bipartisan push that reforms the tax code for business, even if its leaves out any reform of the income and capital gains taxes. Nearly all Democrats and Republicans agree that the US corporate tax rate, which at 35% is the highest in the developed world, needs to be lowered. Furthermore, members of both parties have signaled support for legislation that curbs the rate of corporate inversions that restructure American corporations to pay fewer taxes in the US.
Looming over the debate to reform the tax code is the specter of the 2016 presidential election. Democratic supporters are hopeful that Obama’s plan garners favor with middle-class voters, who are disenchanted with Republican policies that favor the wealthy. By forcing the issue, Democrats are hoping to force Republicans into an unfavorable position; either Republicans acquiesce to their tax proposal, or they risk being painted as a party that favors only the wealthy. The Republican Congress has to take meaningful action on tax reform, or they risk falling into the trap set by Democrats.
Though it appears that Obama’s tax plan will never be implemented, it has brought the issue of tax reform back into the spotlight, and given Democrats an opportunity to affirm their support for the middle class while challenging Republicans to do the same. With the 2016 elections on the horizon, it remains unclear whether meaningful tax reform will be seriously considered or whether this just amounts to posturing towards each party’s base. One thing is clear—tax reform is a necessity, but it is still a long way off.
Further Reading:
bipartisan agreement
support the plan’s expansion of the EITC
Contributions by Ben Mandel, Will Kirkland, and Sam Houskeeper