Obama’s State of the Union Hints at Tax Reform

Among those sitting in the box with First Lady, Michelle Obama, for the President’s State of the Union speech tonight will be Wendell Weeks, chief executive of glass maker Corning, an iconic American exporter that garners nearly three-fourths of its sales overseas. A mention by the President of a temporary holiday on the 35 percent repatriation tax for multinationals surely would get Weeks on his feet.

It might also add give reason for Ursula Burns, CEO of another classic American company, Xerox, to cheer because her company gets nearly half of its profits from overseas. GE CEO Jeff Immelt, who was just named chair of the President’s council on jobs, runs a company which has 54 percent in foreign sales, according to data gathered by Strategas Research.

While the President certainly won’t lead his speech with a corporate tax break proposal, investors and pundits ready to read between the lines tonight believe Obama may hint at some sort of corporate tax "reform." An obvious first step in that direction would be a relaxation of this repatriation tax because the President could spin it as a way to bring more cash home for companies to build plants and hire workers.

"He will mention it, but very broadly stating the current structure makes US companies less competitive in the global markets," said Andrew Busch, chief currency and policy strategist at BMO Capital Markets.

The United Kingdom today may have given the President even more wiggle room to stray from his base with a push to policies that foster corporate spending growth. The U.K. reported today an unexpected dip in fourth quarter GDP, as it administered austerity measures.

The trying-to-be austere European Union actually has a much lower average corporate tax rate than the U.S. at about 24 percent, according to Strategas. The corporate tax rate in the U.S. is 40 percent.

"He’s already demonstrated a willingness to stray from his base," said Jim Iuorio of TJM Institutional Services. "He will mention corporate tax reform. He has moved to the middle and he seems quite comfortable there."

Policy newsletter the DC Tripwire points out that "White House officials continue to signal interest in a tax code overhaul, especially corporate taxes." They point out that Treasury Secretary Tim Geithner met with the CFOs of Honeywell, Cisco, Johnson & Johnson, Coca-Cola, Wal-Mart, Exxon, PepsiCo, Microsoft, Procter & Gamble, Bank of America, Caterpillar, Disney and Eli Lilly a week ago.

This multinational group points one back reforming the tax on foreign profits. There was a repatriation tax holiday put in place in 2004. The 25 companies that repatriated the most funds (as a percent of their market capitalization) that year outperformed the S&P 500 by 14 percentage points in 2005, according to Strategas.

"Don’t expect this to be a rally speech for corporate America," said Stephen Weiss of Short Hills Capital. "Rather, that will be the read-through as every point he makes will lead to jobs and America’s competitiveness."

To be sure, many traders and investors believe that after extending the Bush tax cuts and finally moving his popularity in an upward trajectory, the President will not specifically hint at something so bold (to his base at least) as a tax break for companies.

"I would be shocked," said Dennis Gartman of The Gartman Letter. "Were the President to take on corporate tax reform, that would send his base into fits of hysteria. Tonight he’ll talk about ‘investments’ in the future, and that means spending."

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John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team.