Bush II's January 23, 2007 State of the Empire Speech

Commentary by Timothy Horrigan © 2007

President Bush with Cheney and Pelosi

Bush II's 2007 State of the Union speech came just a couple of weeks after his “21,500 Troops Speech” which called for a “surge” of a little more than 20,000 more troops in Iraq. (This oddly small number was chosen for the simple reason that no more troops were available.)

His Dubyaness decided to divert attention away from the quagmire in Iraq by addressing domestic priorities for the first time in his 6-plus-year reign. The weekend before the speech, he issued an extraordinarily poorly received health care plan. He would offer a $7,500 tax deduction to singles and $15,000 to families if they bought any health insurance from any source. This would be funded by making what his spokespersons described as “gold-plated” and “Bentley” employer-provided plans (i.e., policies which cost more than $15,000/year.) The theory is that the tax deduction would create a surge of demand for individual health insurance polices, which the health insurance industry would meet by supplying affordable plans. (There are a few bugs in the plan, beginning with the fact that a tax deduction is of no use to low-paid workers who pay little or no federal income tax already, and ending with the fact that health insurers aren't meeting the demand which is already out there.)

It is not clear what the purpose of this plan is, since the Congress is highly unlikely to pass it. Perhaps Bush II is merely laying the groundwork for attack ads in 2008. Or, perhaps he is mollifying the lobbyist for the health insurance industry. (It is interesting that his spokespersons speak about the “success” of Medicare Part D, which is in fact an extraordinarily unpopular and ineffective program.)

Briefing on Bush II's Proposal

(oddly, the two briefers asked not to be identified in news stories but they were identified on the WhiteHouse.gov web site)

Original URL: http://www.whitehouse.gov/news/releases/2007/01/20070122-7.html

January 22, 2003 Briefing

For Immediate Release
Office of the Press Secretary
January 22, 2007

Press Briefing on the President's State of the Union Health Care Initiative
White House Conference Center

Julie Goon, Special Assistant to the President for Economic Policy
Katherine Baicker, Council of Economic Advisors

3:59 P.M. EST

MR. FRATTO: Good afternoon. Thanks for coming on relatively short notice. We wanted to give you all an opportunity to dig in a little bit to the health proposals that President Bush alluded to in his radio address this weekend, and make sure that you have an opportunity to talk to some of our policy experts and to get a little bit deeper into it so that we're all on the same page.

We're excited about the proposals the President put forth and will put forth tomorrow night in his State of the Union address. We've asked Julie Goon, who is with the National Economic Council and a health care policy expert, and Kate Baicker is a member of the Council of Economic Advisors, to give a fuller briefing on both -- we're going to talk about both proposals. I'm going to ask Julie to come up first to frame up the issue in the context of President Bush's -- the way he views health care and health care reform. And then we'll ask Kate to get in a little bit more deeply on the tax proposal and how that will affect health care and health care reform.

So, Julie, do you want to come up and lead us off?

MS. GOON: Thanks, Tony, and thanks to all of you who are here today.

I think I just want to start out by saying the President has had a whole series of health policies that continue to remain the foundation of the things that we are doing in the health care area, including the work that is going on with respect to transparency and getting more information available to consumers; the work with respect to health information technology and health savings accounts, trying to make insurance more portable across state lines, et cetera.

But in looking at the coming year and recognizing that this is the year that the state Children's Health Insurance Program is up for reauthorization, that this is a good year to really refocus and re-target on a lot of the ideas that people have had about how to provide for more insurance coverage for people who don't have access to that coverage right now.

The President felt that it was important that we ensure that affordable coverage is available in the states, that is why an important piece of what he's going to be talking about tomorrow has to do with the Affordable Choices Initiative that will help states who make basic private affordable health insurance available in their states, provide additional help to those states to help subsidize insurance coverage for people who are poor and who are uninsurable at this point.

And I think Secretary Leavitt has been very instrumental in pulling this initiative together. He's been talking to a lot of governors who have come forward with their own ideas. We'll be doing more of that over the next several weeks, and the President will be talking about that, as well, in the State of the Union. And it's part of the fact sheet on health care that came out today.

Complementary to that is the need to address some of the biases in the tax system and reform the tax code to realign those incentives to provide for more of a reason for people to purchase health insurance coverage. As many of you know, right now you have a tax benefit for the purchase of health insurance coverage if you purchase it within the employment setting. If you have to buy health insurance in the non-group setting you do not get that same kind of tax advantage.

And so the tax reform proposal that the President will put forward in the State of the Union levels the playing field between insurance coverage purchased inside the employer market and outside the employer market, and does it in a fairly innovative and creative way, in a way I think that we haven't seen before, and Kate will be able to talk in more specific detail about that. But, essentially, it puts in place a standard uniform deduction for the purchase of health insurance coverage. So if you purchase coverage, you get this deduction, and it's the same for everybody.

This is an immediate benefit to people who don't have insurance now who have wanted to purchase it but haven't been able to do so because of the cost of health insurance coverage and because they don't get this tax benefit. It's an immediate benefit to people who have purchased coverage in the non-group market already, and it helps a majority -- millions of Americans who currently have insurance coverage through their employer -- will get additional tax benefit as a result of this change in policy.

There have been a lot of people who have been concerned that doing something like this doesn't necessarily improve the market for health insurance, and I would just like to point to our experience over the last couple of years in the Medicare Part D program. As many of you remember, when that debate started, folks didn't think there would be people who would be interested in offering prescription drug coverage in the Medicare program. A number of companies came forward to do so. Initially the actuaries estimated that the cost of that coverage would be fairly high, and would grow. And as all of you know, when seniors and other beneficiaries got a look at the choices that were available to them, what was in those benefit packages and what the costs were, as a result of their choices, we have a very competitive market in Medicare Part D, and the average premium is down 40 percent from what it was anticipated to be when that program first started.

So getting back to the specifics on the tax piece, why don't I turn it over to Kate, and then we're both available to answer more questions on this. Thank you.

MS. BAICKER: Thanks. So Julie did a great job laying out the big landscape of what we'd like to do, and then I'm going to be the geek and try to explain how it actually works. So any clarifying questions would be most welcome.

As you know, right now when you get insurance through your employer, that insurance isn't subject to taxation, so it's part of your compensation that you're getting income and payroll tax-free. And that means that people have a really strong incentive to get more generous employer policies to cover all the health care they might want to consume because if you go out into the health care marketplace to buy a doctor's office visit, you're usually paying for that with after-tax dollars. But if you get that covered by your employer-provided plan, it's covered with pre-tax dollars, and that's a big discount. And that's a lot of the reason why we see such generous first-dollar coverage in the employer market as the norm, unlike other industries, like auto insurance or home owner's insurance.

So what this proposal would do is change the system to level the playing field in two ways. It will level the playing field for people who are buying insurance on their own, relative to those who are getting it in the employer market, or through their jobs. And it will level the playing field for people who want to get basic policies with lower premiums, and then pay for routine care out of pocket relative to people who want to get more generous, deluxe, gold-plated plans. Right now the most generous tax benefits are reserved for people with the most generous employer-provided health insurance.

What this plan would do is give a flat, standard deduction for anybody who purchases any kind of health insurance, no matter how much the health insurance costs and no matter where they get it. It would be $15,000 for people purchasing family policy, $7,500 for people purchasing single policies. So if your employer is giving you insurance through your job, you get the standard deduction. If you go buy health insurance on your own, you get the standard deduction. If your policy costs $5,000, you still get $15,000 of compensation tax-free. If your policy costs $20,000, you still get $15,000 of compensation tax-free, using the family example.

So who does this help, who does this hurt, what's the total cost? It's revenue-neutral over the whole health care system and over the 10-year budget window. Anybody who doesn't have insurance right now has a really strong incentive to go get insurance. Right now an insurance policy on the individual market or the non-group market, if you're just going to get your own family policy, the average cost of one of those policies right now is about $5,200.

Take a family earning $60,000 in the 15-percent income tax bracket, 15-percent payroll tax bracket, if they are currently uninsured and they go buy insurance, under the current system it costs them $5,200 today. Under this system in 2009, once it phases in, they get $15,000 of compensation tax-free. They're paying 30 percent marginal tax rate on that, so that's $4,500. That's a huge chunk of the cost of an insurance policy out there. So it makes insurance much more affordable for those people.

So anybody who is uninsured right now is a big winner under the proposal. So are people who are buying insurance on their own. If you're out there and you've already purchased your own non-group insurance or your own insurance not through your job, for the most part you're getting no tax benefit. So this is a pure win for you. Your tax bill goes down.

Now, what about people getting insurance through their jobs right now? Anybody getting a policy under the standard deduction, a family policy of less than $15,000, or an individual policy of less than $7,500 would immediately see a lower tax bill. That's because they would get a standard $15,000 deduction for a family, but then they would have to count as taxable income their insurance policy, but it would be lower than the $15,000, so their tax bill would go down.

That's 80 percent of the policies offered in the employer market. So as of January 1, 2009, when this policy gets implemented, we hope, if you look at all the policies offered in the employer market, 80 percent of them would be under that standard deduction. So those policies would be subject to lower taxes.

Twenty percent of the policies, the ones that are left, are actually higher than the standard deduction. And that means that if people didn't change their behavior at all, their tax bills would go up because they would be taxed on the extra amount above the standard deduction. So if your policy for your family costs $20,000, you get the standard $15,000 deduction -- that leaves $5,000 extra taxable income that you'd have to pay income and payroll taxes on that you don't now. So those 20 percent of people might see their tax bills go up. On the other hand, they have some time between now and then to change their compensation packages.

One of the things that we think is inefficient about the way our tax system treats health care is the strong subsidy for more generous employer-provided policies relative to everybody else -- people buying insurance on their own or people getting less-generous policies. This would give people a chance as they're negotiating contracts with their employers to take more of their compensation in the form of wages and less in the form of health benefits. So that 20 percent has some recourse between now and then.

The other way that helps keep the whole package revenue neutral is that the $15,000 or $7,500 would be indexed to CPI, not general health care costs, and one of the goals of this policy is really to rationalize our health care spending so that we're getting higher-value, more efficient care, and we hope in the long run that that substantially brings down the trajectory of growth in national health spending overall, because people will be purchasing higher-value plans, they'll be allocating their health care dollars more efficiently. We think that will bring down national health spending both immediately, as people change the quantity of health insurance versus wages that they take in their compensation packages, and even more in the long run, as there's an incentive to develop a more rational, efficient health care system, more cost-effective technology, more provider competition.

So that's the bare bones, but I bet that there are questions.

Q When you talk about the cost of your insurance policy being $15,000 or $7,500, are you just counting the employer side or is it the employee and employer side?

MS. BAICKER: So the deduction, the standard deduction has nothing to do with how much your health insurance costs under this proposal. That's the part that's hard to get your mind around because it's so different from how it works right now.

So if you -- no matter how much your health insurance costs, no matter how much is spent on your health insurance by you and your employer, you get a $15,000 deduction for your family. Now is that a win or a loss for you? It depends on how much you were spending before, and really it depends on how much you were spending with pre-tax dollars before. Now, for everybody the employer portion is pre-tax. For most people in big firms, the employee contribution is pre-tax, too, because you're doing it through a cafeteria plan or an FFA. For some people, their employee share towards their employer premium was already being taxed.

So when we think about the tax benefit that you get because of the standard deduction, that doesn't depend at all on how much your health insurance policy costs. But when you think about how much that is relative to what you're paying now, you want to think about how much of your premium now is getting paid with pre-tax dollars. For most people, that's the employer plus the employee share. For some people, it's just the employer share.

Q If I want to know if I'm over the threshold and I'm going to be taxed, I add what I'm throwing in, plus what my employer is throwing in?

MS. BAICKER: So let me put it another way, your taxable income, if this policy is implemented, will be your wages and anything your employer is paying for health insurance. You're already paying your share out of your wages, so your total taxable income is the check that you get, plus whatever your employer has paid directly to the health insurance company. You may have to give back some of your check for the health insurance. And then you get to take off of that $15,000. And so for 80 percent of policies that $15,000 is more than what was getting pitched in. But for some people, it might be less.

Q The figure I saw was that in '05, most employer-provided health policies were running $11,000-plus.

MS. BAICKER: I believe today in '07, the average employer policy is $11,500 --

MS. GOON: For a family.

MS. BAICKER: For a family, or I think the average family policy overall, so it incorporates the mix of the number of people in the family. Then the policy gets implemented -- this proposal will be implemented in 2009 -- the $11,500 average today, if you were to inflate that up to 2009 so that you could compare it to the $15,000 would be more like $13,600. And that's the number that we used to figure out the 80 percent-20 percent breakdown.

Q But you're saying -- since we're dealing here with marginal tax rates based on a $15,000 deduction.

MS. BAICKER: All the calculations were done in 2009 dollars.

Q The assumption then is that a family of four is going to be able to find a $5,000 health plan and not the $13,600 --

MS. BAICKER: No, there's no assumption like that -- no, no, no.

Q I'm sorry, I misunderstood then. I thought you said that --

MS. BAICKER: I gave some examples, and I hope that those weren't taken as the general rule, so let me --

Q A $15,000 tax deduction, assuming a 30-percent tax bracket, gives you $4,500 to pay for your health plan.

MS. BAICKER: Exactly. Right, and so then I gave as a benchmark for you a comparison for what the average individual market policy costs. But that doesn't mean everybody would find it for that. I was just trying to give you a sense of how far that would go for a family that's on their own. So one of the groups that we're concerned about, the uninsured; we're concerned about families who are going out on their own to buy health insurance; and then we're concerned about people getting insurance from their employer, and I tried to give you some statistics for each group.

Q Let me ask one other question if I can. It seems like there are some people at the bottom end of the scale who make too much to qualify for Medicaid and not enough to benefit from the tax deduction. How large a group is that?

MS. BAICKER: That's why the two proposals that Julie talked about dovetail so nicely, and I'll turn back to her in a second. But I'll remind you that it's income and payroll taxes. So some of the -- think about families who are earning too little to pay income taxes, too much or with the wrong family structure to be on a public program. They're still getting the payroll tax benefit, which is substantial.

Q Social Security and Medicare?

MS. BAICKER: Right, and that's 15 percent, so they're still getting 15 percent of $15,000 or 15 percent of $7,500 for an individual, even if they have no income tax liability. That said, there are going to be some groups for whom that's not enough to get them a health insurance policy because somebody is sick, because they're very low income. And for those groups, the Affordable Choices Initiative is there to help fill in the gaps.

MS. GOON: And as Kate said, that's why these two policies are so complementary. A lot of states have been looking at their options to try and use the flexibility that was given to them in the Deficit Reduction Act, to do waivers in their Medicaid programs, to look at subsidizing coverage beyond the Medicaid eligibility groups, et cetera. And the Affordable Choices Initiative is a way that we want to help states who want to make insurance affordable for their citizens by ensuring that we are providing additional federal help towards that end as long as the state is committed to making basic affordable health insurance available in that state.

Q I have a question on the phase-in period. What do you have in mind? I presume the deductions would be lower in the earlier year?

MS. BAICKER: The deductions would start at $15,000 for a family, $7,500 for an individual in '09, when it took effect, and then they would be indexed to CPI, so they would grow gradually over time.

Q So you're assuming it starts in 2009, I'm sorry, I misunderstood. And also --

MR. FRATTO: That's the phase in. There's no, sort of --

MS. BAICKER: There is nothing until 2009, and then it's here.

Q And then the other question, is this perhaps an indirect way of trying to encourage more health savings accounts, since it seems like a lot of people's encouragement here is to buy high-deductible standard policies, which often can be paired with HSAs?

MS. BAICKER: Certainly HSAs are a great step in this direction, and this is an even bigger step towards leveling the playing field and removing some of the weird disincentives to getting basic insurance and paying for routine care out of pocket. What this really does is give people the flexibility to structure plans that work best for them.

So you can think about -- you could get a lower premium by having a higher deductible, by having a smaller panel of physicians covered, by having more cost sharing throughout the distribution of spending, by all sorts of different ways. And those policies would be on equal footing if you got them in the group market or the non-group market. So it really frees up a lot of parameters for people. That said, HSAs are a great thing and remain in the tax code.

Q One other question. For those that are uninsured now, it's arguable that some of them, because they don't have insurance, or have preexisting conditions that might be rejected, or they might have to pay quite a bit more for a standard policy, and how does your plan address --

MS. GOON: Well, this gets back, again, to the Affordable Choices Initiative with the states, and working with the states to encourage better funding of uninsurable risk pools, which many states have, some states don't; but working with the states to really identify how best to target additional subsidies to people who need insurance in that state. In many cases, it will be people who have preexisting conditions, in other cases it will be more of the poor.

Q How will this affect retirees who have supplemental coverage, A, and when does it become revenue-neutral? Is it revenue neutral immediately, or does that come with the indexing?

MS. BAICKER: So question one, it treats all people with private health insurance the same way. So it doesn't matter where you're getting it -- if you're buying it on your own, if it's through a former employer or a current employer, as long as you have at least catastrophic coverage or better, then you get the standard deduction. So retirees are given the same benefits from the tax code as everybody else. So it really levels the playing field for them.

As for revenue-neutral, it's revenue-neutral over the 10-year window together. So in the early years, it's a revenue loser, and in the later years, it's a revenue winner.

Q When does it become a revenue winner?

MS. BAICKER: I don't have that in front of me. Roughly in the middle. But I'll check. But there's a -- I think it's roughly in the middle, but I'll have to check that for you.

Q Do you know what it's going to cost the first year?

MS. BAICKER: Again, I don't have that whole stream in front of me. We can get that information for you. And that will be in the budget.

Q Is this in any way part of a long-term philosophy to wean people off of employer-provided plans that have become so burdensome for employers?

MS. BAICKER: This is part of a long-run philosophy to level the playing field, and to really let people pick the mix of compensation that's best for them. People like getting their insurance through their employer, and they're going to continue getting their insurance through their employer for a lot of people. Some people may go to the non-group market once this playing field is more level for them, and they have that option. And a lot of people who are not getting any insurance are going to have options open to them that weren't open before. But it's definitely part of a long-run philosophy to level the playing field and let people change their compensation mix accordingly.

Q Does this administration believe that employer-provided care has become overly burdensome for business?

MR. FRATTO: That's a decision for -- that's not a question for us. What this reform does is remove inequities in the tax code, where you have a certain part of America that receives a 100 percent benefit, and another portion of our citizens that receives zero or near zero benefit through the tax code. We think about it as tax reform that levels the playing field and provides a basic, standard benefit to all Americans.

How it affects businesses -- there are dynamics there that will work out between businesses and their employees. I could tell you businessmen who -- business owners who are in the administration, people who -- people like Secretary Paulson and Al Hubbard and others who have run businesses feel that their employees want employer-provided health coverage and they want to provide it because it's their way of attracting the best talent. And so there are incentives here that we can't predict -- that's going to be decided between businesses and their employees.

MS. BAICKER: And just one thing to add on. The health care system overall, because of the inefficiencies that are built in, is a big burden on all of us. It's a big burden on employees and employers and taxpayers and the federal budget. And something needs to be done to rein in health care spending because we're not getting value for our dollars. So this proposal will be a big step in the direction of getting more bang for the buck for our health care spending, because I think nobody in the country can afford to keep spending more and more and more money on a health care system that's broken.

Q This will be a tax hike for some people?

MS. BAICKER: This is revenue-neutral tax reform. There are always going to be some winners and some losers, but the people who might initially be losers have options.

Q Maybe this follows on her question, maybe I didn't quite get the answer. Can you explain, how does this affect Medicare recipients, and also people with Medicare but who buy supplemental policies? I just didn't quite grasp the --

MS. GOON: If you buy supplemental policies right now, I don't think you get any tax benefit from that, because you're doing it all in after-tax dollars.

MS. BAICKER: This is for purchasers of private health insurance.

Q So, in other words, let's say you're a retiree, but you also have, like -- you're buying AARP insurance --

MS. GOON: So I'm retiree on Medicare?

Q A retiree on Medicare, but you're also buying AARP. Do you get the deduction, or not?

MS. GOON: I think we have to get back to you on that, but I don't think this speaks to this supplemental insurance. It's traditional --

Q Primary health insurance?

MS. GOON: Yes, primary health insurance. And Medicare is taking care of that for those beneficiaries.

Q I wonder -- I'm just doing some quick back-of-the-napkin math here -- at what point does the average cost of a family plan cross over that $15,000 barrier and the deduction there no longer is as effective as if it were under the -- two or three years --

MS. BAICKER: At $15,000.

Q Yes, but how long does that take? Two or three years --

MS. BAICKER: Oh, the average policy get to $15,000? A few years after 2009. I can sort of do a back of the envelope, that if it goes from $11,500 to $13,600 between now and 2009, then I'm going to say --

MS. GOON: I think we'd want to get back to you on that.


MR. FRATTO: Just to be clear, any projections on that are relatively static projections, right?

MS. GOON: Right.

MS. BAICKER: Absolutely.

MS. GOON: They don't take into account changes in the health care marketplace that we expect to occur as a result of this policy.

Q Do you think they'll ever cross that?

MS. GOON: I didn't say that.

Q How large do you expect that impact to be on the health care marketplace, though?

MS. BAICKER: There are a number of channels through which this will affect health care consumption. Immediately it will affect quantities that people consume because they'll be changing their mix of compensation and their choice of health care plan. It will affect prices through provider competition. And then in the long run, it will affect the development of more cost-effective health technology. And that's your real bang for the buck.

Putting all of that together, our best guess is that within the medium-term, you're talking about lowering health expenditures, a share of GDP, by about half a percentage point, and that's a lot of money.

MR. FRATTO: And if there's any question as to whether the health care delivery system, in terms of selling health policies, acts in any way like a market today, ask yourselves right now -- and I won't ask for a show of hands -- but if anyone here knows what the value of your policy is, what you pay for health care. I'd say very few of you have any -- and I don't know, either. Very few of us have any idea of what our health policies cost.

So that's compensation that we're receiving from our employees that we have zero transparency on. It doesn't show up in your W2 form; you have no idea of what that share of your compensation is.

And I'll ask a second question -- is when was the last time you were sitting at home eating dinner with your family and received an annoying phone call from a health insurer trying to market you a health care plan? This just doesn't happen today because there isn't the market for it. Insurance companies are not out there trying to sell you the best policy at the best price.

Q But they are trying to sell employers? Clearly --

MR. FRATTO: That's right.

Q -- it's an aggressive market.

Q Do you want us to get annoying phone calls? (Laughter.)

MR. FRATTO: Exactly. (Laughter.)

Q I get them from you all the time, Terry. (Laughter.)

Q What is the cost of this over five years?

MS. BAICKER: I don't have the year-by-year breakdown. So it's revenue-neutral over the 10-year window and it's a loser in the first five years, and a winner in the second five years -- or at the beginning and at the end, but I don't know exactly where the break-even point is.

Q What about for the next budget? I mean, what is the number that's going to show up there?

MS. BAICKER: It does not affect the 2012 budget -- deficit. So that maybe the tipping point --

Q -- deficit, is the question.

MS. BAICKER: I think it's a revenue loser in the short run, and a revenue winner in the long run.

Q What is the figure that's going to --

MS. BAICKER: I'll have to get that for you. I don't have that number in my head.

Q You're saying that this is going to be a boon or help 80 percent of the people -- how much? What are your calculations about what that means in terms of money coming back to people?

MS. BAICKER: I have -- well, I can tell you a couple of numbers which are not exactly the number you want, unfortunately, but they're close. The family who is purchasing insurance on their own, how much are they going to get back on average? They're going to get back $3,650 on average, roughly. So that's not the -- so their tax bill is going to go down by $3,650 because of this policy. Because they're buying health insurance on their own right now and they're not getting any tax benefit. So that's one group.

Another group, people who are uninsured right now, but that we guess would -- we project would go get insurance because of the policy, they're going to get a tax benefit of around $3,350.

The last one that you wanted to know is what's the average benefit for that 80 percent of employers, and I don't have that one. So I'll get that one.

MR. FRATTO: Do you want to talk about the share in the quintiles --

MS. BAICKER: Yes. So here's another -- here's a statistic that also speaks to that indirectly. If you look at the distribution across the income distribution -- so how much of a tax benefit does the lowest quintile get versus the highest quintile because of the policy? About -- the top quintile, the top 20 percent of income has a slight tax increase because of this. The other four quintiles, first, second, third, fourth, have a tax decrease.

So it's budget neutral overall, but it makes the tax code slightly more progressive than it was before, so it's a slight increase for people at the high end of the income distribution, and a slight tax decrease for everybody else.

Q What is the average tax increase then?

MS. BAICKER: I do not have the average tax increase handy, but the percent increase for the top quintile is .1 percent, a tenth of a percent. And then the -- for the top quintile. And then for the other quintiles, it looks like it averages around negative .3 percent. But we'll get you the dollar figure.

Q If we have 47 million uninsured Americans now, at the end of your five-year window, if it starts in '09, what's the uninsured number then?

MS. BAICKER: So there are two pieces of this policy. From the tax proposal we think upwards of 3 million or more newly insured people. But then that's one piece. Then there is the Affordable Choices Initiative.

MS. GOON: Yes, and I don't think that they've got complete estimates on the number of uninsured. They think that will pick up. It depends on, again, how these negotiations go with the states and what they expect to do. But initial estimates were fairly significant, and we'll get that to you.

Q Can you help me clarify the competition -- is the idea that people will move out of their employer-offered plans --

MS. BAICKER: The idea is that right now people face a dulled incentive to figure out what the highest value of care is, because the tax system subsidizes only care that you get through an employer insurance plan and not care that you purchase out-of-pocket. So it pushes you into a first-dollar insurance coverage plan where you pay for even routine care with a really low co-pay, which means you don't ask the doctor how much it costs. It costs you $10.

I know -- has anyone ever tried to ask the doctor, how much does this visit cost? They can't even tell you, they don't know. So this would add forces of competition and people evaluating which providers are the highest value providers, which insurance plan is the highest value plan for me, because it's no longer subsidized relative to wages. And that also works really well with the President's information executive order, getting better information about prices, about quality, about different providers, cost-effectiveness. You need that information to help people make better decisions and to get higher value out of the system.

MR. FRATTO: Let me -- because this question came up a couple times -- let's just be very clear on that point also. The shortest answer is, no. Are you asking, is there a bias in the administration towards trying to get people off of employer-provided health care? Flat-out no. In no way. What we have are people receiving employer-provided benefits that are subsidized through the tax code, and those on the other side of the room here who are receiving no benefits. And the effort is to try to provide a standard equitable share of the benefit.

Q But would it be fair to say there is a bias toward encouraging employees to buy a high deductible, lower premium policy?

MS. BAICKER: There's a bias now against that, that we're trying to remove. We're trying to level the playing field.

MS. GOON: And as Kate had indicated, there may be lower cost plans that rely on other techniques -- smaller panels of doctors, more utilization review. It provides a bias towards people looking at the cost of their coverage and trying to determine if what they've got is really what they need for their situation.

Q Can you say how much revenue this raises from the 20 percent who would --

MS. BAICKER: That, again, I don't have with me except to say that it's revenue-neutral. So that is exactly equal to the revenue given out to everybody else once you have the indexing. I don't have that handy.

MR. FRATTO: You're asking for a year-by-year breakdown. And we'll work with our friends at Treasury. I know that they're going to do some work on this also, and we'll see at some point over the next couple days if we can have it. But as Julie mentioned, this will show up in the budget.

Q Is there a tax impact, then, on employers?

MS. BAICKER: No, so that's a good clarifying question. There's some confusion over that, so let me try to explain it as best I can. And then you can ask again and then I can try again. Right now employers don't pay taxes on the wages that they pay their employees, or the health insurance benefits. Those are all cost of business. They're not taxed. That remains the same. So nothing changes there.

What changes is that the health insurance premiums that they pay on your behalf becomes taxable income to you just like any other form of wages, so it's treated just like --

Q There's a tax break basically. There's a tax break for the employer, and you're doing a tax break for the individual. So it's a double tax break.

MS. GOON: The tax break for the employer remains the same.

MS. BAICKER: So as far as the employer is concerned, everything is the same except they now treat this premium that they were paying for you just like they treat the wages that they paid you. So it shows up on your W2. It's FICA -- payroll taxes are due on it and income taxes are due on it. But you get to take the first $15,000 of your compensation -- if you have a family plan -- tax-free. So for 80 percent of the policies offered by employers, that's going to be -- that $15,000 is going to be more generous than the add-on of the premium that you're getting paid.

Q Do you have a projection for the average savings from someone buying insurance on their own? Did you mention a projection for the person whose employer is now providing insurance?

MS. BAICKER: That was the question that was asked that I could not answer, so I'm going to get a number for you, and have to get back to you.

Q Can I just clarify -- you're saying 3 million out of the 47 million will be benefited under this tax change?

MS. BAICKER: That will be the net increase in the number of insured people just from the tax piece alone, then layered on top of the affordable choices initiative.

Q And why is that uninsured number so intractable in response to changes in the tax code?

MS. BAICKER: Some of the people are not earning any money, some of the people are sick, some of the people are choosing not to take up insurance. So because it's a very heterogeneous group of people who are uninsured, it's hard to find one magic bullet. It takes a system of policies to address their diverse needs, and they have different needs in different states. And that's part of the reason to rely on state initiatives to address the specific needs of that uninsured group. So this picks up a lot of people, but you really need some targeted programs.

Q Can you explain again how this becomes revenue-neutral? What happens in that five years?

MR. FRATTO: Ten years.

MS. BAICKER: The main thing that changes is that the $15,000 or $7,500 initial exclusion is indexed by inflation, not by projected health costs. So if people did not change their behavior at all, the exclusion would be going up like this, and premiums would be going up like this. And so more people would be finding their premiums higher than the $15,000 over time if they didn't change their behavior.

So that's -- the baseline, when you decide whether something is revenue-neutral or not, you're comparing it to the status quo. And in the status quo, health care costs are rising, rising, rising, whereas in this system the exclusion grows at a lower rate, grows at CPI -- inflation -- and we think people will change their behavior, although that -- to the extent they change their behavior it just looks even better than that. But because the $15,000 exclusion grows more slowly than health expenses would if we didn't do anything, in the beginning you spend a little bit more money and in the end you get a little bit more money back.

MR. FRATTO: There's also a market impact here that we think will have an affect on the future pricing of health care policies, and that's the fact that the benefit is where it is; that you have a benefit that is -- you have a $7,500 standard deduction for individuals, $15,000 for families. There is an incentive for those marketing health insurance to get within that number and to trend towards CPI, because that's what -- the people they're marketing it to, whether they're getting it through their employers or buying it on their own, will want to have the full benefit. And so they're going to try to market plans that fit within the benefit.

MS. GOON: And again, you can look at the Part D experience, and that's exactly what happened in the second year of bids in Part D, is that people who were at the high end of those policies brought down their premiums.

Q That just makes the whole program more expensive, right? I mean, it's the 20 percent who are over 15 come under whatever the standard is, and it can get more expensive.

MS. BAICKER: Because your tax benefit is flat, and so your tax benefit is the $15,000 exclusion for the families, $7,500 for individuals. We don't expect that people are taking compensation cuts because of this; they're changing their mix of compensation between wages and health insurance. But under this system, wages and health insurance are both taxable. So people may -- we expect that health spending will go down, because people will say, wait a minute, now that you're not subsidizing my health insurance relative to my other wages, I'd like my next raise to come in the form of cash, not in the form of more expensive health benefits. But both of those would be taxable under this system.

So that mix of compensation will no longer affect tax revenues and will no longer affect an individuals' well being, and that's the great thing about it, is that people will no longer distort their compensation towards health insurance, because we're pushing them towards it. We won't be doing that anymore.

Q I'm wondering, if the idea is to have insurers target their plans to the $7,500 and $15,000, isn't the other incentive there for them to increase co-pays or to lower the benefits they're providing in order to meet that mark, just as much as it is to improve the efficiency and delivery?

MS. BAICKER: So this is a good question, because it highlights again the incentive properties of this proposal. Now there's an incentive for insurers to put together more generous packages, because we're subsidizing health insurance relative to everything else. Once we stop subsidizing health insurance relative to anything else, there's no need to -- there's no reason they'd anchor on the $15,000 or the $7,500, they would put together plans that were cheaper and cheaper and cheaper until people found a plan that they really liked.

So there's no tax reason to stick at $15,000 any more than there is at $10,000 or $5,000. It's all the same. There's no marginal subsidy of health insurance relative to anything else, there's just a strong incentive to get any health insurance package, but then there's no incentive to pick one over the other. So what we expect is for insurers to put together packages that best suit the needs of the people enrolling in them.

So for you, you might like a really high deductible, and then no co-pays. And you might like 10-percent cost sharing up to $20,000. And you might like first-dollar coverage for everything because you hate writing the checks. You all have different preferences and needs, and the insurers wouldn't be pushed in one direction or the other. So we'd expect to see insurers competing on value of the package, and they have a lot of tools that they can access to put together a package that's highest value for you.

MR. FRATTO: At the best price.

MS. BAICKER: At the best price.

Q I had a couple questions. So the President is going to acknowledge that he would be raising the taxes on 20 percent of the public, do you know how many people that is?

MS. BAICKER: That's not quite right.

Q Okay, okay. And then the second question is, wouldn't this be encouraging people to get -- both the people, the 20 percent to get less quality health care than they're getting now so that they're not paying extra taxes? And overall, wouldn't that be true on everybody because everybody would be saying, well, if I get the very least health care I possibly can get, then I can get more cash in terms of my taxes, therefore, and aren't you sort of doing a race to the bottom in terms of how much coverage people would be getting?

MS. BAICKER: So let me first correct a small factual thing and then answer the bigger question overall. So the 20 percent is -- let me put the 20 percent in context again. Twenty percent of employer policies offered now are above that standard deduction. So it's not 20 percent of people, everybody in the whole country. It's 20 percent of employer policies, so --

Q Do you know how many people that is?

MS. BAICKER: That is about, ballpark, 30 million.

Q So 30 million people in this country, their taxes would go up?

MS. BAICKER: If they didn't change their behavior. But people will have time to think about what mix of compensation they want. And this goes to your second question about race to the bottom, which is right now, we've rigged it so there's a race to the top. We've said we're subsidizing you more if you get a more generous employer-provided insurance relative to anything else you could consume. So people have been pushed in that direction.

When you remove that push, people are going to pick what they like best. If you ask people, would you like the absolute cheapest health insurance policy you can find? I bet most people will say, no, I want a high value policy that gives me the mix of financial protection that I want, and I'm going to trade off what my family wants to do with that money: Do I want to put it towards health insurance? Do I want to put it towards other family priorities? And you expect insurers to compete to give people the best plan at the lowest price for what those people want. And I don't think people want the minimum insurance. I think people want good insurance at a reasonable price, and right now we're just pushing them up towards first-dollar coverage plans. And when you remove that push, they're going to choose what works out best for them.

MS. GOON: And there's an assumption, too, that the most generous policy is the highest quality. And I don't think that that's ever been borne out.

Q But you are saying -- I mean, with the $7,500, with the $15,000, if a person says, oh, geez, I'd rather get the tax break, and I'll gamble on having the lowest possible health insurance I can get, they do that, and that way they're getting more money back from --

MS. BAICKER: But, see, the amount of money they get back is a flat amount. It's the $15,000 standard deduction for a family no matter how much their health insurance costs, that's the tax benefit that they get. So then they decide how much do I want to spend on health insurance based on all the things I could spend my money on.

MR. FRATTO: And just to be clear, there's a significant part of the population today that are gambling on buying no health insurance or being under-insured today because they can't afford it, and they certainly can't afford it relative to those who receive the benefit through their employers. And this gives them an added incentive to be appropriately insured, or insured at all, which today they're not.

Q So just quickly, if we could talk just a little about the other part of this plan, the President wants to redirect funds away from institutions, I guess, towards states to help people get insurance. How much money is going to be set aside for that component? And how many people do you think will be insured ultimately at a result of that effort?

MS. GOON: Well, I think that more of those details will be available in the budget when it comes out. But it's dependent on how the states react. A lot of states have come forward already with proposals that would do similar things to what is being proposed in the Affordable Choices Initiative. It is to be hoped that most states will look at this as an opportunity to really take on the federal help that would come to help reform their insurance marketplace in their state and help subsidize coverage for the people that are currently uninsured in their states.

Q You don't have, like, an order of magnitude? I mean, a ballpark figure, what you think the government will be --

MS. BAICKER: I don't have it with me, no. And I think, as I said, you'll see more of that in the budget when the budget comes out. And I could --

MR. FRATTO: We have to leave something for after the President actually announces this, Sheryl.

Q -- and the numbers of people that you would expect would be insured? Will it be more than the 3 million?

MS. GOON: I don't know the answer to that, and we'd have to get back to you.

Q Because if it's not, it, frankly, doesn't -- it doesn't seem like you're really making that much of a dent in the problem. It's sort of an admission that this problem of the uninsured is intractable, can't really be solved.

MR. FRATTO: I think we are being -- I want to use caution to say this, but I think we're being conservative in our estimates going forward on this. I think we want to be very careful on our estimates. And we certainly don't want to oversell, because a lot of us believe that it will have a greater impact than what -- than the numbers that we've shown you.

MS. BAICKER: That's exactly right.

Q Is the 3 million, and that this other component will be greater than that?

MR. FRATTO: Greater than the 3 million that Kate mentioned?

MS. GOON: Yes, again, I don't know what the numbers are. But I think these two policies working together we think are going to have a substantial impact on getting people insured that currently do not have insurance coverage.


Q Within this proposal, you are subsidizing health care purchased outside the employer-based system, and, to some degree, taxing care provided or insurance provided within that system. Is it right to look at this as a step on the road away from the employer-based system, and would that be a good thing, given the strain that's under, especially given the competitive pressures on American companies?

MS. BAICKER: So, keep in mind that we're leveling the playing field between the employer market and the individual non-group market. So it's not that we're taxing one to pay for the other. People should get the same tax benefit, no matter where they get their insurance.

That said, we've seen over the past many years a slow erosion of employer offering, and it's really important that the people who turn to the non-group market, whether it's from the group market or from being uninsured, have a really well functioning individual market to turn to. Part of that is giving them the resources they need to go get that private insurance, such as through changes to the tax code. Part of it is through taking care of the chronically ill or low income people who can't afford to buy into that market, through state regulatory reforms, through risk pooling, and that's the other piece of it. So those two pieces go together to ensure that the non-group market that people are increasingly turning to is there for them.

Q But is it the view of the administration that over time, it would be a good thing to move away from the group market and toward a more individual system?

MR. FRATTO: No, we're seriously agnostic on that. That comes down to businesses and their employers and what they feel is the best compensation package for them.

This is -- there's been a focus on taxing a portion of this population out there. And I think -- if we want to look at it in terms of taxation, what we're doing today is we're taxing the entire populace to provide a benefit for a select group of Americans, where the potential tax benefit they receive today is limited only by the sky. You could have the most expensive health insurance policy that can be conceived, and it will be subsidized by the tax code as it exists today. And all we're saying is that there is a reasonable limit there. If we were subsidizing cars, I don't know where the limit would be, but the limit wouldn't be at the Bentley, it would be something more reasonable. And that's what this is doing, and it applies to benefit across the spectrum to all Americans.

So there's sort of a backward look at this, at looking at what it does in terms of a tax hit on a certain population, where there has been a tax hit on a large part of the population today to provide that 100 percent benefit. We're providing an equal benefit that's fairly shared by all Americans, having the sole requirement of buying a basic health insurance plan for themselves and their families, and that's all.

And we're going to end it there. Thank you.

END 4:49 P.M. EST

So-called “Fact Sheet” on Bush II's Proposal

Original URL: http://www.whitehouse.gov/news/releases/2007/01/20070122-3.html

For Immediate Release
January 22, 2007

Setting the Record Straight: President Bush's Standard Deduction for Health Insurance Would Save Money for More Than 100 Million Americans

"So in my State of the Union Address next Tuesday, I will propose a tax reform designed to help make basic private health insurance more affordable – whether you get it through your job or on your own."

– President George W. Bush, 1/20/07

Senate Democrats: "President Bush's Health Insurance Proposal Amounts To A Tax Hike For The Middle Class."  (Press Release, Senate Democratic Communications Center, 1/22/07)

Senate Democrats: The President's Proposal Will Not "Encourage The Uninsured To Purchase Health Coverage On Their Own."

Senate Democrats: "The Nation's Health Insurance Crisis Has Worsened."

# # #

The Speech Itself

President Bush with Cheney and Pelosi

Bush II backed off his health care proposals, and he used his domestic proposals as a leadin for reiterating his determination not to extricate himself and our troops from the quagmire in Iraq. Once again, he took controversial stands in favor of democracy and against evil.

For Immediate Release
Office of the Press Secretary
January 23, 2007

President Bush Delivers State of the Union Address
United States Capitol
Washington, D.C.

9:13 P.M. EST

THE PRESIDENT: Thank you very much. And tonight, I have a high privilege and distinct honor of my own -- as the first President to begin the State of the Union message with these words: Madam Speaker. (Applause.)

In his day, the late Congressman Thomas D'Alesandro, Jr. from Baltimore, Maryland, saw Presidents Roosevelt and Truman at this rostrum. But nothing could compare with the sight of his only daughter, Nancy, presiding tonight as Speaker of the House of Representatives. (Applause.) Congratulations, Madam Speaker. (Applause.)

Two members of the House and Senate are not with us tonight, and we pray for the recovery and speedy return of Senator Tim Johnson and Congressman Charlie Norwood. (Applause.)

Madam Speaker, Vice President Cheney, members of Congress, distinguished guests, and fellow citizens:

The rite of custom brings us together at a defining hour -- when decisions are hard and courage is needed. We enter the year 2007 with large endeavors underway, and others that are ours to begin. In all of this, much is asked of us. We must have the will to face difficult challenges and determined enemies -- and the wisdom to face them together.

Some in this chamber are new to the House and the Senate -- and I congratulate the Democrat majority. (Applause.) Congress has changed, but not our responsibilities. Each of us is guided by our own convictions -- and to these we must stay faithful. Yet we're all held to the same standards, and called to serve the same good purposes: To extend this nation's prosperity; to spend the people's money wisely; to solve problems, not leave them to future generations; to guard America against all evil; and to keep faith with those we have sent forth to defend us. (Applause.)

We're not the first to come here with a government divided and uncertainty in the air. Like many before us, we can work through our differences, and achieve big things for the American people. Our citizens don't much care which side of the aisle we sit on -- as long as we're willing to cross that aisle when there is work to be done. (Applause.) Our job is to make life better for our fellow Americans, and to help them to build a future of hope and opportunity -- and this is the business before us tonight.

A future of hope and opportunity begins with a growing economy -- and that is what we have. We're now in the 41st month of uninterrupted job growth, in a recovery that has created 7.2 million new jobs -- so far. Unemployment is low, inflation is low, and wages are rising. This economy is on the move, and our job is to keep it that way, not with more government, but with more enterprise. (Applause.)

Next week, I'll deliver a full report on the state of our economy. Tonight, I want to discuss three economic reforms that deserve to be priorities for this Congress.

First, we must balance the federal budget. (Applause.) We can do so without raising taxes. (Applause.) What we need is impose spending discipline in Washington, D.C. We set a goal of cutting the deficit in half by 2009, and met that goal three years ahead of schedule. (Applause.) Now let us take the next step. In the coming weeks, I will submit a budget that eliminates the federal deficit within the next five years. (Applause.) I ask you to make the same commitment. Together, we can restrain the spending appetite of the federal government, and we can balance the federal budget. (Applause.)

Next, there is the matter of earmarks. These special interest items are often slipped into bills at the last hour -- when not even C-SPAN is watching. (Laughter.) In 2005 alone, the number of earmarks grew to over 13,000 and totaled nearly $18 billion. Even worse, over 90 percent of earmarks never make it to the floor of the House and Senate -- they are dropped into committee reports that are not even part of the bill that arrives on my desk. You didn't vote them into law. I didn't sign them into law. Yet, they're treated as if they have the force of law. The time has come to end this practice. So let us work together to reform the budget process, expose every earmark to the light of day and to a vote in Congress, and cut the number and cost of earmarks at least in half by the end of this session. (Applause.)

And, finally, to keep this economy strong we must take on the challenge of entitlements. Social Security and Medicare and Medicaid are commitments of conscience, and so it is our duty to keep them permanently sound. Yet, we're failing in that duty. And this failure will one day leave our children with three bad options: huge tax increases, huge deficits, or huge and immediate cuts in benefits. Everyone in this chamber knows this to be true -- yet somehow we have not found it in ourselves to act. So let us work together and do it now. With enough good sense and goodwill, you and I can fix Medicare and Medicaid -- and save Social Security. (Applause.)

Spreading opportunity and hope in America also requires public schools that give children the knowledge and character they need in life. Five years ago, we rose above partisan differences to pass the No Child Left Behind Act, preserving local control, raising standards, and holding those schools accountable for results. And because we acted, students are performing better in reading and math, and minority students are closing the achievement gap.

Now the task is to build on the success, without watering down standards, without taking control from local communities, and without backsliding and calling it reform. We can lift student achievement even higher by giving local leaders flexibility to turn around failing schools, and by giving families with children stuck in failing schools the right to choose someplace better. (Applause.) We must increase funds for students who struggle -- and make sure these children get the special help they need. (Applause.) And we can make sure our children are prepared for the jobs of the future and our country is more competitive by strengthening math and science skills. The No Child Left Behind Act has worked for America's children -- and I ask Congress to reauthorize this good law. (Applause.)

A future of hope and opportunity requires that all our citizens have affordable and available health care. (Applause.) When it comes to health care, government has an obligation to care for the elderly, the disabled, and poor children. And we will meet those responsibilities. For all other Americans, private health insurance is the best way to meet their needs. (Applause.) But many Americans cannot afford a health insurance policy.

And so tonight, I propose two new initiatives to help more Americans afford their own insurance. First, I propose a standard tax deduction for health insurance that will be like the standard tax deduction for dependents. Families with health insurance will pay no income on payroll tax -- or payroll taxes on $15,000 of their income. Single Americans with health insurance will pay no income or payroll taxes on $7,500 of their income. With this reform, more than 100 million men, women, and children who are now covered by employer-provided insurance will benefit from lower tax bills. At the same time, this reform will level the playing field for those who do not get health insurance through their job. For Americans who now purchase health insurance on their own, this proposal would mean a substantial tax savings -- $4,500 for a family of four making $60,000 a year. And for the millions of other Americans who have no health insurance at all, this deduction would help put a basic private health insurance plan within their reach. Changing the tax code is a vital and necessary step to making health care affordable for more Americans. (Applause.)

My second proposal is to help the states that are coming up with innovative ways to cover the uninsured. States that make basic private health insurance available to all their citizens should receive federal funds to help them provide this coverage to the poor and the sick. I have asked the Secretary of Health and Human Services to work with Congress to take existing federal funds and use them to create "Affordable Choices" grants. These grants would give our nation's governors more money and more flexibility to get private health insurance to those most in need.

There are many other ways that Congress can help. We need to expand Health Savings Accounts. (Applause.) We need to help small businesses through Association Health Plans. (Applause.) We need to reduce costs and medical errors with better information technology. (Applause.) We will encourage price transparency. And to protect good doctors from junk lawsuits, we passing medical liability reform. (Applause.) In all we do, we must remember that the best health care decisions are made not by government and insurance companies, but by patients and their doctors. (Applause.)

Extending hope and opportunity in our country requires an immigration system worthy of America -- with laws that are fair and borders that are secure. When laws and borders are routinely violated, this harms the interests of our country. To secure our border, we're doubling the size of the Border Patrol, and funding new infrastructure and technology.

Yet even with all these steps, we cannot fully secure the border unless we take pressure off the border -- and that requires a temporary worker program. We should establish a legal and orderly path for foreign workers to enter our country to work on a temporary basis. As a result, they won't have to try to sneak in, and that will leave Border Agents free to chase down drug smugglers and criminals and terrorists. (Applause.) We'll enforce our immigration laws at the work site and give employers the tools to verify the legal status of their workers, so there's no excuse left for violating the law. (Applause.)

We need to uphold the great tradition of the melting pot that welcomes and assimilates new arrivals. (Applause.) We need to resolve the status of the illegal immigrants who are already in our country without animosity and without amnesty. (Applause.) Convictions run deep in this Capitol when it comes to immigration. Let us have a serious, civil, and conclusive debate, so that you can pass, and I can sign, comprehensive immigration reform into law. (Applause.)

Extending hope and opportunity depends on a stable supply of energy that keeps America's economy running and America's environment clean. For too long our nation has been dependent on foreign oil. And this dependence leaves us more vulnerable to hostile regimes, and to terrorists -- who could cause huge disruptions of oil shipments, and raise the price of oil, and do great harm to our economy.

It's in our vital interest to diversify America's energy supply -- the way forward is through technology. We must continue changing the way America generates electric power, by even greater use of clean coal technology, solar and wind energy, and clean, safe nuclear power. (Applause.) We need to press on with battery research for plug-in and hybrid vehicles, and expand the use of clean diesel vehicles and biodiesel fuel. (Applause.) We must continue investing in new methods of producing ethanol -- (applause) -- using everything from wood chips to grasses, to agricultural wastes.

We made a lot of progress, thanks to good policies here in Washington and the strong response of the market. And now even more dramatic advances are within reach. Tonight, I ask Congress to join me in pursuing a great goal. Let us build on the work we've done and reduce gasoline usage in the United States by 20 percent in the next 10 years. (Applause.) When we do that we will have cut our total imports by the equivalent of three-quarters of all the oil we now import from the Middle East.

To reach this goal, we must increase the supply of alternative fuels, by setting a mandatory fuels standard to require 35 billion gallons of renewable and alternative fuels in 2017 -- and that is nearly five times the current target. (Applause.) At the same time, we need to reform and modernize fuel economy standards for cars the way we did for light trucks -- and conserve up to 8.5 billion more gallons of gasoline by 2017.

Achieving these ambitious goals will dramatically reduce our dependence on foreign oil, but it's not going to eliminate it. And so as we continue to diversify our fuel supply, we must step up domestic oil production in environmentally sensitive ways. (Applause.) And to further protect America against severe disruptions to our oil supply, I ask Congress to double the current capacity of the Strategic Petroleum Reserve. (Applause.)

America is on the verge of technological breakthroughs that will enable us to live our lives less dependent on oil. And these technologies will help us be better stewards of the environment, and they will help us to confront the serious challenge of global climate change. (Applause.)

A future of hope and opportunity requires a fair, impartial system of justice. The lives of our citizens across our nation are affected by the outcome of cases pending in our federal courts. We have a shared obligation to ensure that the federal courts have enough judges to hear those cases and deliver timely rulings. As President, I have a duty to nominate qualified men and women to vacancies on the federal bench. And the United States Senate has a duty, as well, to give those nominees a fair hearing, and a prompt up-or-down vote on the Senate floor. (Applause.)

For all of us in this room, there is no higher responsibility than to protect the people of this country from danger. Five years have come and gone since we saw the scenes and felt the sorrow that the terrorists can cause. We've had time to take stock of our situation. We've added many critical protections to guard the homeland. We know with certainty that the horrors of that September morning were just a glimpse of what the terrorists intend for us -- unless we stop them.

With the distance of time, we find ourselves debating the causes of conflict and the course we have followed. Such debates are essential when a great democracy faces great questions. Yet one question has surely been settled: that to win the war on terror we must take the fight to the enemy. (Applause.)

From the start, America and our allies have protected our people by staying on the offense. The enemy knows that the days of comfortable sanctuary, easy movement, steady financing, and free flowing communications are long over. For the terrorists, life since 9/11 has never been the same.

Our success in this war is often measured by the things that did not happen. We cannot know the full extent of the attacks that we and our allies have prevented, but here is some of what we do know: We stopped an al Qaeda plot to fly a hijacked airplane into the tallest building on the West Coast. We broke up a Southeast Asian terror cell grooming operatives for attacks inside the United States. We uncovered an al Qaeda cell developing anthrax to be used in attacks against America. And just last August, British authorities uncovered a plot to blow up passenger planes bound for America over the Atlantic Ocean. For each life saved, we owe a debt of gratitude to the brave public servants who devote their lives to finding the terrorists and stopping them. (Applause.)

Every success against the terrorists is a reminder of the shoreless ambitions of this enemy. The evil that inspired and rejoiced in 9/11 is still at work in the world. And so long as that's the case, America is still a nation at war.

In the mind of the terrorist, this war began well before September the 11th, and will not end until their radical vision is fulfilled. And these past five years have given us a much clearer view of the nature of this enemy. Al Qaeda and its followers are Sunni extremists, possessed by hatred and commanded by a harsh and narrow ideology. Take almost any principle of civilization, and their goal is the opposite. They preach with threats, instruct with bullets and bombs, and promise paradise for the murder of the innocent.

Our enemies are quite explicit about their intentions. They want to overthrow moderate governments, and establish safe havens from which to plan and carry out new attacks on our country. By killing and terrorizing Americans, they want to force our country to retreat from the world and abandon the cause of liberty. They would then be free to impose their will and spread their totalitarian ideology. Listen to this warning from the late terrorist Zarqawi: "We will sacrifice our blood and bodies to put an end to your dreams, and what is coming is even worse." Osama bin Laden declared: "Death is better than living on this Earth with the unbelievers among us."

These men are not given to idle words, and they are just one camp in the Islamist radical movement. In recent times, it has also become clear that we face an escalating danger from Shia extremists who are just as hostile to America, and are also determined to dominate the Middle East. Many are known to take direction from the regime in Iran, which is funding and arming terrorists like Hezbollah -- a group second only to al Qaeda in the American lives it has taken.

The Shia and Sunni extremists are different faces of the same totalitarian threat. Whatever slogans they chant, when they slaughter the innocent they have the same wicked purposes. They want to kill Americans, kill democracy in the Middle East, and gain the weapons to kill on an even more horrific scale.

In the sixth year since our nation was attacked, I wish I could report to you that the dangers had ended. They have not. And so it remains the policy of this government to use every lawful and proper tool of intelligence, diplomacy, law enforcement, and military action to do our duty, to find these enemies, and to protect the American people. (Applause.)

This war is more than a clash of arms -- it is a decisive ideological struggle, and the security of our nation is in the balance. To prevail, we must remove the conditions that inspire blind hatred, and drove 19 men to get onto airplanes and to come and kill us. What every terrorist fears most is human freedom

-- societies where men and women make their own choices, answer to their own conscience, and live by their hopes instead of their resentments. Free people are not drawn to violent and malignant ideologies -- and most will choose a better way when they're given a chance. So we advance our own security interests by helping moderates and reformers and brave voices for democracy. The great question of our day is whether America will help men and women in the Middle East to build free societies and share in the rights of all humanity. And I say, for the sake of our own security, we must. (Applause.)

In the last two years, we've seen the desire for liberty in the broader Middle East -- and we have been sobered by the enemy's fierce reaction. In 2005, the world watched as the citizens of Lebanon raised the banner of the Cedar Revolution, they drove out the Syrian occupiers and chose new leaders in free elections. In 2005, the people of Afghanistan defied the terrorists and elected a democratic legislature. And in 2005, the Iraqi people held three national elections, choosing a transitional government, adopting the most progressive, democratic constitution in the Arab world, and then electing a government under that constitution. Despite endless threats from the killers in their midst, nearly 12 million Iraqi citizens came out to vote in a show of hope and solidarity that we should never forget. (Applause.)

A thinking enemy watched all of these scenes, adjusted their tactics, and in 2006 they struck back. In Lebanon, assassins took the life of Pierre Gemayel, a prominent participant in the Cedar Revolution. Hezbollah terrorists, with support from Syria and Iran, sowed conflict in the region and are seeking to undermine Lebanon's legitimately elected government. In Afghanistan, Taliban and al Qaeda fighters tried to regain power by regrouping and engaging Afghan and NATO forces. In Iraq, al Qaeda and other Sunni extremists blew up one of the most sacred places in Shia Islam -- the Golden Mosque of Samarra. This atrocity, directed at a Muslim house of prayer, was designed to provoke retaliation from Iraqi Shia -- and it succeeded. Radical Shia elements, some of whom receive support from Iran, formed death squads. The result was a tragic escalation of sectarian rage and reprisal that continues to this day.

This is not the fight we entered in Iraq, but it is the fight we're in. Every one of us wishes this war were over and won. Yet it would not be like us to leave our promises unkept, our friends abandoned, and our own security at risk. (Applause.) Ladies and gentlemen: On this day, at this hour, it is still within our power to shape the outcome of this battle. Let us find our resolve, and turn events toward victory. (Applause.)

We're carrying out a new strategy in Iraq -- a plan that demands more from Iraq's elected government, and gives our forces in Iraq the reinforcements they need to complete their mission. Our goal is a democratic Iraq that upholds the rule of law, respects the rights of its people, provides them security, and is an ally in the war on terror.

In order to make progress toward this goal, the Iraqi government must stop the sectarian violence in its capital. But the Iraqis are not yet ready to do this on their own. So we're deploying reinforcements of more than 20,000 additional soldiers and Marines to Iraq. The vast majority will go to Baghdad, where they will help Iraqi forces to clear and secure neighborhoods, and serve as advisers embedded in Iraqi Army units. With Iraqis in the lead, our forces will help secure the city by chasing down the terrorists, insurgents, and the roaming death squads. And in Anbar Province, where al Qaeda terrorists have gathered and local forces have begun showing a willingness to fight them, we're sending an additional 4,000 United States Marines, with orders to find the terrorists and clear them out. (Applause.) We didn't drive al Qaeda out of their safe haven in Afghanistan only to let them set up a new safe haven in a free Iraq.

The people of Iraq want to live in peace, and now it's time for their government to act. Iraq's leaders know that our commitment is not open-ended. They have promised to deploy more of their own troops to secure Baghdad -- and they must do so. They pledged that they will confront violent radicals of any faction or political party -- and they need to follow through, and lift needless restrictions on Iraqi and coalition forces, so these troops can achieve their mission of bringing security to all of the people of Baghdad. Iraq's leaders have committed themselves to a series of benchmarks -- to achieve reconciliation, to share oil revenues among all of Iraq's citizens, to put the wealth of Iraq into the rebuilding of Iraq, to allow more Iraqis to re-enter their nation's civic life, to hold local elections, and to take responsibility for security in every Iraqi province. But for all of this to happen, Baghdad must be secure. And our plan will help the Iraqi government take back its capital and make good on its commitments.

My fellow citizens, our military commanders and I have carefully weighed the options. We discussed every possible approach. In the end, I chose this course of action because it provides the best chance for success. Many in this chamber understand that America must not fail in Iraq, because you understand that the consequences of failure would be grievous and far-reaching.

If American forces step back before Baghdad is secure, the Iraqi government would be overrun by extremists on all sides. We could expect an epic battle between Shia extremists backed by Iran, and Sunni extremists aided by al Qaeda and supporters of the old regime. A contagion of violence could spill out across the country -- and in time, the entire region could be drawn into the conflict.

For America, this is a nightmare scenario. For the enemy, this is the objective. Chaos is the greatest ally -- their greatest ally in this struggle. And out of chaos in Iraq would emerge an emboldened enemy with new safe havens, new recruits, new resources, and an even greater determination to harm America. To allow this to happen would be to ignore the lessons of September the 11th and invite tragedy. Ladies and gentlemen, nothing is more important at this moment in our history than for America to succeed in the Middle East, to succeed in Iraq and to spare the American people from this danger. (Applause.)

This is where matters stand tonight, in the here and now. I have spoken with many of you in person. I respect you and the arguments you've made. We went into this largely united, in our assumptions and in our convictions. And whatever you voted for, you did not vote for failure. Our country is pursuing a new strategy in Iraq, and I ask you to give it a chance to work. And I ask you to support our troops in the field, and those on their way. (Applause.)

The war on terror we fight today is a generational struggle that will continue long after you and I have turned our duties over to others. And that's why it's important to work together so our nation can see this great effort through. Both parties and both branches should work in close consultation. It's why I propose to establish a special advisory council on the war on terror, made up of leaders in Congress from both political parties. We will share ideas for how to position America to meet every challenge that confronts us. We'll show our enemies abroad that we are united in the goal of victory.

And one of the first steps we can take together is to add to the ranks of our military so that the American Armed Forces are ready for all the challenges ahead. (Applause.) Tonight I ask the Congress to authorize an increase in the size of our active Army and Marine Corps by 92,000 in the next five years. (Applause.) A second task we can take on together is to design and establish a volunteer Civilian Reserve Corps. Such a corps would function much like our military reserve. It would ease the burden on the Armed Forces by allowing us to hire civilians with critical skills to serve on missions abroad when America needs them. It would give people across America who do not wear the uniform a chance to serve in the defining struggle of our time.

Americans can have confidence in the outcome of this struggle because we're not in this struggle alone. We have a diplomatic strategy that is rallying the world to join in the fight against extremism. In Iraq, multinational forces are operating under a mandate from the United Nations. We're working with Jordan and Saudi Arabia and Egypt and the Gulf States to increase support for Iraq's government.

The United Nations has imposed sanctions on Iran, and made it clear that the world will not allow the regime in Tehran to acquire nuclear weapons. (Applause.) With the other members of the Quartet -- the U.N., the European Union, and Russia -- we're pursuing diplomacy to help bring peace to the Holy Land, and pursuing the establishment of a democratic Palestinian state living side-by-side with Israel in peace and security. (Applause.) In Afghanistan, NATO has taken the lead in turning back the Taliban and al Qaeda offensive -- the first time the Alliance has deployed forces outside the North Atlantic area. Together with our partners in China, Japan, Russia, and South Korea, we're pursuing intensive diplomacy to achieve a Korean Peninsula free of nuclear weapons. (Applause.)

We will continue to speak out for the cause of freedom in places like Cuba, Belarus, and Burma -- and continue to awaken the conscience of the world to save the people of Darfur. (Applause.)

American foreign policy is more than a matter of war and diplomacy. Our work in the world is also based on a timeless truth: To whom much is given, much is required. We hear the call to take on the challenges of hunger and poverty and disease -- and that is precisely what America is doing. We must continue to fight HIV/AIDS, especially on the continent of Africa. (Applause.) Because you funded our Emergency Plan for AIDS Relief, the number of people receiving life-saving drugs has grown from 50,000 to more than 800,000 in three short years. I ask you to continue funding our efforts to fight HIV/AIDS. I ask you to provide $1.2 billion over five years so we can combat malaria in 15 African countries. (Applause.)

I ask that you fund the Millennium Challenge Account, so that American aid reaches the people who need it, in nations where democracy is on the rise and corruption is in retreat. And let us continue to support the expanded trade and debt relief that are the best hope for lifting lives and eliminating poverty. (Applause.)

When America serves others in this way, we show the strength and generosity of our country. These deeds reflect the character of our people. The greatest strength we have is the heroic kindness, courage, and self-sacrifice of the American people. You see this spirit often if you know where to look -- and tonight we need only look above to the gallery.

Dikembe Mutombo grew up in Africa, amid great poverty and disease. He came to Georgetown University on a scholarship to study medicine -- but Coach John Thompson got a look at Dikembe and had a different idea. (Laughter.) Dikembe became a star in the NBA, and a citizen of the United States. But he never forgot the land of his birth, or the duty to share his blessings with others. He built a brand new hospital in his old hometown. A friend has said of this good-hearted man: "Mutombo believes that God has given him this opportunity to do great things." And we are proud to call this son of the Congo a citizen of the United States of America. (Applause.)

After her daughter was born, Julie Aigner-Clark searched for ways to share her love of music and art with her child. So she borrowed some equipment, and began filming children's videos in her basement. The Baby Einstein Company was born, and in just five years her business grew to more than $20 million in sales. In November 2001, Julie sold Baby Einstein to the Walt Disney Company, and with her help Baby Einstein has grown into a $200 million business. Julie represents the great enterprising spirit of America. And she is using her success to help others -- producing child safety videos with John Walsh of the National Center for Missing and Exploited Children. Julie says of her new project: "I believe it's the most important thing that I have ever done. I believe that children have the right to live in a world that is safe." And so tonight, we are pleased to welcome this talented business entrepreneur and generous social entrepreneur -- Julie Aigner-Clark. (Applause.)

Three weeks ago, Wesley Autrey was waiting at a Harlem subway station with his two little girls, when he saw a man fall into the path of a train. With seconds to act, Wesley jumped onto the tracks, pulled the man into the space between the rails, and held him as the train passed right above their heads. He insists he's not a hero. He says: "We got guys and girls overseas dying for us to have our freedoms. We have got to show each other some love." There is something wonderful about a country that produces a brave and humble man like Wesley Autrey. (Applause.)

Tommy Rieman was a teenager pumping gas in Independence, Kentucky, when he enlisted in the United States Army. In December 2003, he was on a reconnaissance mission in Iraq when his team came under heavy enemy fire. From his Humvee, Sergeant Rieman returned fire; he used his body as a shield to protect his gunner. He was shot in the chest and arm, and received shrapnel wounds to his legs -- yet he refused medical attention, and stayed in the fight. He helped to repel a second attack, firing grenades at the enemy's position. For his exceptional courage, Sergeant Rieman was awarded the Silver Star. And like so many other Americans who have volunteered to defend us, he has earned the respect and the gratitude of our entire country. (Applause.)

In such courage and compassion, ladies and gentlemen, we see the spirit and character of America -- and these qualities are not in short supply. This is a decent and honorable country -- and resilient, too. We've been through a lot together. We've met challenges and faced dangers, and we know that more lie ahead. Yet we can go forward with confidence -- because the State of our Union is strong, our cause in the world is right, and tonight that cause goes on. God bless. (Applause.)

See you next year. Thank you for your prayers.

END 10:02 P.M. EST

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The Forgotten Liars