RB: This is DC Dynamics, a podcast about what’s coming up in US tax policy, with a look to the past as our guide. I’m Ray Beeman and I have the honor and privilege of leading our fantastic and growing group at Washington Council EY. After months of development, and maybe years of anticipation, President Trump back on July 4 signed into law the One Big Beautiful Bill Act (OB3), a Republican-only reconciliation law that featured extensions of expiring Tax Cuts & Jobs Act provisions. The 2025 tax cliff had been on the horizon ever since the day the TCJA was signed into law by President Trump 1.0 in 2017 and also was eyed as a vehicle for many other outstanding tax issues. The major headline beyond the expiring provisions is the rollback of many Inflation Reduction Act energy tax credits. Enactment of one of the largest tax bills in history – but not the largest – may create the impression that Congress is done with tax legislation for a while. But that is not the case.
- Some provisions were knocked out of the bill because of the reconciliation rules; some were changed or omitted during Senate consideration; some tax extenders and other bipartisan provisions were left out of the bill altogether; and SECURE 3.0 retirement policy provisions were intentionally saved for a later bill. Senate Finance Committee Chairman Mike Crapo (R-ID) has said there were 200 tax proposals that were left out of the first reconciliation bill, underscoring the vast reach of the tax system and the evergreen demands for legislative tax changes.
Two paths
- Now there are two paths Republicans can take to enact additional legislation this year:
- They can do another reconciliation bill that House Speaker Johnson sees being completed “late in the fall”
Or - A potential package of bipartisan priorities that could be attached to a year-end legislative vehicle, like a spending bill which we’ve seen happen many times in the past but not recently
- It has historically been common for government funding to be patched beyond September 30 and then extended through a long-term spending bill at year end. This often has provided a vehicle for tax and other items. There are tax and health items that expire at the end of 2025, and members from both parties want to roll back the 90% gambling deduction limitation in the OB3 bill and restore the limit to 100% before it takes effect next year, and that could be one driver for action by year’s end.
- But first things first. Lawmakers are going to be busy this month, given the government funding deadline right around the corner on September 30. Because the appropriations process is just getting off the ground, Congress will almost certainly need to enact a temporary continuing resolution to extend government funding. That will require the support of Democrats to clear the 60-vote threshold in the Senate, because you cannot use the reconciliation process to actually fund the government.
- It’s perhaps an understatement to say that there has been some distrust among Democrats following the July 24 Republican-only enactment of legislation to rescind money that Congress already had appropriated in prior bipartisan spending bills. That said, the Senate was able to agree on a three-bill appropriations package before the August recess, and the two sides will need to reach agreement to temporarily fund the government and complete the appropriations process through the next fiscal year.
- While a year-end spending bill could provide a potential vehicle for tax and other legislation, the potential for contentious relationships between Republicans and Democrats regarding temporary and long-term extensions of government funding threatens goodwill that will be necessary for a bipartisan package of agreed-upon priorities on tax, health, trade and potentially other issues. Already, Democrats say they cannot rely on a bipartisan agreement if it can be simply rolled back later by Republicans, and many members are still speaking out against the Medicaid cuts in OB3.
Second Big Beautiful Bill?
- Taking a closer look at the Republican-only path, another reconciliation bill will be available to Republicans in the fall because, with the enactment of OB3 using the FY25 budget resolution, they can now turn to the FY26 budget resolution as the vehicle for a second bill. This next effort is seen as likely to propose barring states from using their own funds to provide Medicaid to illegal immigrants, which was dropped from the prior bill and cited by members as a continuing goal. Speaker Johnson wants to address other issues cut out of the OB3 and, while he hasn’t listed specific tax provisions, these could include third-party litigation reform that was included in the House version of the bill but was dropped out in the Senate. Some members also want to revisit an increase in the Section 199A passthrough deduction to 23%, as the House version of the OB3 proposed before it was simply extended at the current rate.
- Additionally, President Trump said July 22 that he is considering proposing no tax on home sales capital gains. Currently, an individual taxpayer may exclude from gross income up to $250,000 (or $500,000 joint filing) of gain realized on the sale or exchange of a principal residence, an amount that is not indexed for inflation.
- Now, on international tax issues, OB3 provided the Trump administration and Republican tax writers with a global tax win in compelling the G7 to issue a statement calling for the US system to coexist with Pillar 2 in a side-by-side system that would fully exclude US-parented groups from the Undertaxed Profits Rule (UTPR) and the Income Inclusion Rule (IIR) for both domestic and foreign profits. That statement was aided by the removal of the new Section 899 retaliatory tax proposal from the bill in the period between House and Senate consideration. But the terms of the statement from the G7 are not completely specific and binding, and members like Rep. Ron Estes (R-KS) on the Ways and Means Committee say they need to “trust but verify” that other nations are complying.
- House Ways and Means Chairman Jason Smith (R-MO) also has said tax writers could revive the Section 899 so-called “revenge tax” if adequate progress is not made with other countries on implementing the side-by-side system or other countries charge new levies that lawmakers deem too punitive.
- But as with just about every other reconciliation bill we’ve ever seen, it will not necessarily be smooth sailing for a second GOP-only reconciliation bill, particularly since two reconciliation bills being enacted in the same Congress has happened only one other time, and that was the 117th Congress, which enacted both the American Rescue Plan Act and the Inflation Reduction Act. Since being signed into law on July 4, Republicans and their allies have been promoting the benefits of the OB3, including with constituent events and messaging campaigns during the August recess. Democrats, meanwhile, have been highlighting Medicaid cuts and potential energy cost increases resulting from the bill. The motivation for Republicans behind the first bill was clear: to prevent a broad tax increase at the end of 2025, cut spending and pull back the IRA along the way, and increase the federal debt limit. The policy aim for a second reconciliation remains undefined, aside from Republican leaders in Congress suggesting they have unfinished business.
- Now there isn’t unanimity on what Republicans on what they want out of a second package. Some, including Senator Ron Johnson (R-WI), have eyed a second reconciliation bill for cutting spending to the degree that was not possible in the first bill. Other members, though, will resist further spending cuts beyond those already enacted this year. But the cost of the next bill will certainly be an issue, especially after OB3 came in at a net cost of $3.4 trillion.
Health issues
- In what is somewhat of a bipartisan issue, lawmakers also must decide whether to allow the Affordable Care Act’s enhanced Premium Tax Credits to expire at the end of this year. The tax credits reduced premiums for individuals above 100% of the federal poverty level who purchase coverage on the exchange marketplaces. This has been traditionally a Democratic issue, but there is pressure to extend the credits among some Republicans, which could be a major issue in the midterm elections next year. Republican leaders say they probably want some changes to curb the cost of the credits and impose income limits, including Ways and Means Chairman Smith, who has said he is aiming for a bipartisan tax, trade and health care package to pass by the end of the year.
- Additionally in health care, lawmakers are discussing how to address a list of health care extenders that are set to expire at the end of the fiscal year on September 30, including community health center funding; the National Health Services Corps; Medicare telehealth flexibilities; several hospital programs, including funding for Medicare dependent hospitals; and more.
Bipartisan priorities
- Now on bipartisan tax issues, Senator Catherine Cortez Masto (D-NV) of the Senate Finance Committee on July 10 unsuccessfully sought consent for Senate passage of her bill to reinstate that prior gambling loss limitation, which she said is required because OB3 “changed the tax code to only allow a 90% deduction on gambling losses.” Ways and Means Chairman Smith has said the Senate change was a “bad decision” that he wants to reverse, possibly in a broader bipartisan package later this year.
- Also, OB3 included permanent extensions of some traditional bipartisan tax extenders unrelated that were unrelated to the TCJA, like the CFC look-through rule, New Markets Tax Credits and cover over of tax on distilled spirits, negating the need to address those provisions in a separate package. However, other tax extender provisions were not addressed, including the Work Opportunity Tax Credit (WOTC), Empowerment Zone tax incentives, seven-year recovery period for motorsports entertainment complexes, and special expensing rules for certain film, television and live theatrical productions under code Section 181.
- And Republicans and Democrats on the Ways and Means Committee both want to take the lead on cryptocurrency tax issues. There already is a bill in the Senate, and there is a common set of issues to be addressed, including a de minimis rule, staking, wash sales and other issues.
- Finally, there is the bipartisan Taiwan tax relief legislation that was held over from the last Congress.
So as you can see, there are still many tax policy goals for Congress hanging out there, and they generally can be passed either on a Republican-only basis or through bipartisan legislation. Of course, the 2026 midterm elections are starting to come into view and will increasingly influence legislative activity in Washington and the willingness of the parties to work together, not to mention determining whether there will be more GOP-only bills or divided government in the next Congress. But more on that later because we’ve already got plenty on our plates for right now. So continue to stay tuned and stay engaged and, with that, I’m Ray Beeman and this has been DC Dynamics.
