One Big Beautiful Bill: The Latest on Trump’s Flagship Legislation

In May, the House of Representatives narrowly passed the “One Big Beautiful Bill Act” (OBBBA), President Trump’s flagship tax and spending legislation. The bill now awaits Senate review, with the goal of reaching the president’s desk by July 4. The OBBBA is moving through a process known as budget reconciliation. Unlike most Senate legislation, which can be stalled by a filibuster requiring 60 votes to end debate, reconciliation bills can pass with a simple majority vote, enabling Congress to expedite budget-related legislation.

It is important to note that Senate rules limit the reconciliation process to mandatory spending only, such as Medicaid. Discretionary cuts—like those identified by DOGE—must be implemented through the rescissions process, which also requires a 51-vote majority.

Tax Cuts and Extensions

Many lawmakers, including some Republicans, have criticized the bill for not cutting spending more aggressively. However, the OBBBA fulfills several of President Trump’s campaign promises. Chief among them is the extension of major provisions from the 2017 Tax Cuts and Jobs Act (TCJA), preserving the current individual tax brackets and the larger standard deduction. These provisions are currently set to expire at the end of 2025, which would result in higher tax rates for many Americans in 2026.

Another OBBBA provision that delivers on a campaign promise is the exclusion of tips and overtime pay from federal income tax between 2025 and 2028, although these earnings are still subject to Social Security and Medicare payroll taxes. Under the House version of the bill, interest on auto loans would be deductible through 2028—but only for vehicles assembled in the United States. Another key promise, eliminating taxes on Social Security benefits, was not included because changes to that program are prohibited under the reconciliation process.

Debate in the House

Much negotiation took place in the House before the bill ultimately passed. While the 1,100-page legislation covers many areas, debates largely centered on three key issues: State and Local Tax (SALT) caps, clean energy, and Medicaid.

• SALT Caps. Raising the SALT deduction is an important issue for Republican representatives from high-tax states, such as New York and New Jersey. GOP members from these states fought to increase SALT caps from $10,000 to the eventually agreed-upon $40,000. Although a few representatives pushed for raising the cap, most GOP members favored keeping the $10,000 SALT limit, expressing concerns that a higher cap would reduce tax revenue and disproportionately benefit high-income earners in predominantly Democratic states.
• Green Energy Incentives. Clean energy tax credits, introduced under the Biden-era Inflation Reduction Act (IRA), were another major topic of debate. Some Republican lawmakers sought an accelerated phase-out of these credits; however, studies have shown that most clean energy investment—both before and after the IRA—has benefited Republican states or districts.^[1] Unsurprisingly, cuts to these credits met pushback from many Republicans aiming to protect spending that benefits their constituents. The House bill also includes revisions such as repealing select electric vehicle tax credits and tightening the timeline for clean energy projects. To receive credits, projects must begin within 60 days of the bill’s passage and finish by the end of 2028―a significant change from the IRA’s original phase-out period that extended into the 2040s.
• Medicaid Work Requirements. To encourage workforce participation, Republican House members pushed to implement work or community engagement requirements for able-bodied adults aged 19 to 64 who don’t have dependents and receive Medicaid or related assistance programs. These new requirements are scheduled to begin in December 2026, three years earlier than originally planned. This stipulation remains highly controversial, as many argue it could lead to millions of Americans losing their coverage. Others believe these requirements, which specify 80 hours of working or volunteering per month, would help individuals move toward financial independence rather than long-term reliance on government assistance, decrease abuse of these programs, and promote community engagement that can positively impact mental and physical health.

What Might Happen in the Senate

Most experts expect moderate Republican Senators to oppose early termination of renewable energy credits and Medicaid work requirements. Other lawmakers have stated that they will not support the bill unless it incorporates further spending cuts and does not include the provision on artificial intelligence (AI) regulation, which many view as giving unchecked regulatory authority to the federal government. Top Senate Republicans have indicated that the SALT cap is not a priority for them, suggesting the House’s attempt to lift the cap may stand.

A quirk in the reconciliation process known as the Byrd Rule may lead to Senators challenging many elements of the House’s bill, including Medicaid work requirements, AI regulations, and judicial power. The rule is designed to remove provisions from legislation that have little or no impact on the deficit. If the Senate passes a changed version of the bill, it will have to return to the House for final approval.

CBO Score and Deficit Debate

The Congressional Budget Office (CBO) estimates the OBBBA would increase the federal deficit by $2.4 trillion over 10 years. However, proponents of the bill argue that the CBO has made several erroneous assumptions.

The first assumption by the CBO is that the TCJA will expire, so extending the tax cuts counts as lost revenue. This viewpoint means that even though tax rates will simply continue at their current levels, extending the TCJA would result in an “increased” deficit.

Earlier this year, the CBO projected that real gross domestic product (GDP) would grow at an average annual rate of 1.8% over the next decade. The Trump administration argues that this estimate is too low, projecting that growth will be higher, which would result in lower deficits. Of course, the economic environment is always uncertain, as are future policy decisions. If the administration pursues further deregulation, it may reveal that the CBO’s projections were overly pessimistic—opening the door to greater economic growth and higher revenue.

Finally, the CBO’s forecast does not factor in continued revenue from tariffs, which it estimates could reduce the federal deficit by $2.8 trillion over the next decade. While the CBO may be underestimating GDP growth, it could be overestimating tariff revenues—even though recent collections have been substantial. For example, tariffs in the month of May brought in $23 billion, up from $6 billion in May of last year. However, we believe that a combination of court challenges, trade negotiations, and potential policy changes by future administrations could result in lower realized tariff revenue than the CBO currently projects. Although we have seen evidence that the administration is willing to lower tariff rates for countries that negotiate in good faith with the U.S., future tariff policy remains highly uncertain.

Market Implications and What to Watch

While some lawmakers and analysts worry about large deficits continuing, what seems almost certain is that the bill will undergo revisions in the Senate.

Despite the headlines, stocks rose after the bill passed the House and are now positive for the year, having recovered all their Liberation Day losses and then some. Some observers have worried that if lawmakers do not take the debt and deficits more seriously, investors may lose faith in the U.S. fiscal situation, causing interest rates to rise and further straining the federal budget. However, that fear has yet to materialize, with yields mostly range-bound and bond auctions seeing strong demand since Trump’s announcement of reciprocal tariffs.

The One Big Beautiful Bill Act aims to deliver on a variety of the president’s prominent campaign promises. Despite the trillions of dollars hanging in the balance and numerous switches being flipped, it appears the overall economic ramifications of the OBBBA will be modest. Tariff policy will likely have a greater impact than this legislation over the next few years.

Though debates continue and the Senate will likely make changes, the bill’s passing remains a “when” rather than an “if.” It is likely to be the most significant legislation passed during Donald Trump’s second term, especially if congressional control changes after next year’s midterm elections. Uncertainty and confusion around the bill’s fiscal impact have understandably sparked concern. While markets appear to be taking it in stride, we will continue monitoring the legislation’s progress and keep clients informed of any market-moving developments.

For more insights and real-time reflections, follow Brian McClard, Chief Investment Officer, on X (formerly Twitter).

 

[1]www.bloomberg.com/graphics/2024-opinion-biden-ira-sends-green-energy-investment-republican-districts/

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