29 January 2025

What to expect in Washington (January 29)

The Trump administration's order halting federal aid and subsequent related developments are creating confusion in Washington and threatening to derail any bipartisan comity surrounding the next government funding deadline on March 14. On January 27, the White House Office of Management and Budget (OMB) issued a memorandum directing federal departments and agencies to "temporarily pause all activities related to obligation or disbursement of all Federal financial assistance." It said each agency must complete a comprehensive analysis of all of their Federal financial assistance programs to identify programs, projects, and activities that may be implicated by any of the President's executive orders.

The memo quickly prompted questions on scope. In response, OMB issued an FAQ, which states that the freeze does not apply to "direct benefits to individuals," such as student loans and mandatory programs like Social Security, Medicare, Medicaid and SNAP. The FAQ also states, "Funds for small businesses, farmers, Pell grants, Head Start, rental assistance, and other similar programs will not be paused." Instead, it directs federal agencies who believe these programs may be operating in conflict with the executive orders to consult with OMB on how best to wind down the programs "without a pause in the payments."

A spreadsheet distributed to agencies for their reviews asks whether specific programs, in addition to violating Trump executive orders, provide funding related to illegal immigration, activities overseas, climate plan, "undue burden on the identification, development or use of domestic energy resources (including through funding under the Inflation Reducing Act of 2022 and the Infrastructure Investment and Jobs Act), DEI, environmental justice, equity-related grants, etc. Treasury items listed for review include not only a host of recently enacted energy-related and other credits, but the entire list of congressionally enacted — and in many cases longstanding — tax expenditures, such as the mortgage interest deduction, the IRC Section 199A pass-through deduction (which was enacted in the Tax Cuts and Jobs Act), the deduction for foreign derived intangible income (FDII, also enacted in the TCJA), expensing of research and experimentation expenditures (which already was repealed in the TCJA), and the R&D Credit. All agencies that provide Federal financial assistance are required to complete the spreadsheet and submit it to OMB by February 7.

"The Treasury Department will need to offer justification for scores of tax incentives and other programs, under a new demand from the White House budget office," Politico reported. While the order "sparked widespread frustration and confusion Tuesday," the White House "attempted to dampen the uproar on Tuesday, clarifying that the pause is not 'across-the-board' but limited to the sort of 'DEI,' 'green new deal' and other programs that Trump had targeted in a series of executive actions last week." While the second memo sought to clarify the situation, Punchbowl News reported, "It's unclear what will happen to a large number of tax credits and deductions that were included in the first release of OMB instructions. The Treasury Department wasn't included in the second memo. 'I still don't have any clarity,' Senate Finance Committee Chair Mike Crapo (R-Idaho) said."

Tax Notes reported this morning, "Although not the same as a federal loan or grant, many of the credits, such as those for electric vehicle purchases and solar panel installation, would seem to meet the definition of an assistance program that goes directly to individuals. But it's also possible that the credits were implicated by Trump's executive order calling for termination of the 'Green New Deal,' Trump's term for the IRA energy provisions that references a separate, broader Democrat-led climate proposal that has never been taken up."

The funding freeze was scheduled to take effect January 28 at 5:00 PM ET. However, the American Public Health Association and other affected nonprofits filed suit earlier in the day to block the action and a federal district judge has temporarily blocked enforcement pending further judicial review. The administrative stay lasts until 5 p.m. on Monday, February 3.

Practical effects were already being felt. "The online portal through which state Medicaid departments receive federal funding stopped working Tuesday, according to state officials," the New York Times (NYT) reported. "The outage at least temporarily jeopardized payments the federal government legally owes Medicaid programs, which serve tens of millions of low-income Americans and cover the cost of treating those patients in hospitals and clinics."

The Administration's review appears to reflect dual goals of dismissing progressive ideology from federal government programs and curbing spending. "Some of President Trump's top advisers think the U.S. budget process has become so contorted — allowing the budget to become so bloated — that they need to wrest parts of it from Congress's control to make changes that are long overdue … " said an analysis in the January 29 Wall Street Journal (WSJ). "In his second term, Trump and Republicans are looking to push through new tax cuts and border spending using a special budget process that allows them to pass the package without Democratic help. Some GOP lawmakers also are pushing for deep spending cuts, but it isn't clear if they will get traction. The signal Trump is sending now, though, is that he is willing to freeze money that Congress has already allocated if it doesn't fit with the administration's priorities."

GOP retreat — The House has been out this week due to the Republican retreat in Doral, FL, that included an address by President Trump and forward-looking comments by House Speaker Mike Johnson (R-LA), who hoped to craft a clearer blueprint for reconciliation.

In a Monday address at the meeting, President Trump said he is agnostic on structuring of the reconciliation process. "We don't want to get hung up on the budget process. We just want - whether it's one bill, two bills, I don't care. Let these guys — they're going to work it out — they're going to work it out one way or the other. But the bottom line, the end result is going to be the same," he said. "We want to have all of those benefits, and we want to keep people's taxes low and actually make them lower. And that's not just rich people, that's everybody. It's, frankly, proportionately, the lower scale much more so than a higher scale." He also called for action on campaign priorities: "no tax on tips, no tax on Social Security, and no tax on overtime."

In remarks at the retreat, Speaker Johnson confirmed plans for the House Budget Committee to begin marking up an FY2025 budget resolution when Congress returns next week. "When we get back, the Budget Committee will be marking up first week of February is the plan, marking up the budget to set the resolution to begin and unlock and open the reconciliation process. That will be where the lion's share of these campaign promises that we made are fulfilled," he said.

Punchbowl News reported that House Majority Leader Steve Scalise (R-LA) outlined some date targets:

  • Budget resolution consideration in February
  • Reconciliation in committee in March
  • Reconciliation on the House floor the first weeks of April
  • FY2026 appropriations in May
  • Debt ceiling in June

Trade — Regarding tariffs, President Trump said, "In the very near future we're going to be placing tariffs on foreign production of computer chips, semiconductors, and pharmaceuticals to return production of these essential goods to the United States of America."

Tax — A trio of stories discussed members' narrower tax priorities, in addition to extensions of TCJA provisions expiring at the end of 2025, and their view of President Trump's additional proposals.

A story in the January 27 WSJ said, "Republicans want big things in their sweeping tax-and-spending legislation this year. But dozens of individual lawmakers are pitching small things, too, further complicating party leaders' policy Jenga as they shape their plans. Because of the narrow House majority, any handful of members insistent on getting something have the power to play hardball, no matter how parochial their issue might seem."

Politico reported January 27, "House Republicans are privately wary about the price tag for all of Trump's demands, with some members estimating the entire array could reach $10 trillion. While the border policies in particular have wide support across the conference, Johnson's right flank is demanding any new spending be fully paid for with separate deep spending cuts. Some GOP members are privately dubious about how they're supposed to pay for other Trump demands, including his 'no tax on tips' push."

A story in the January 28 NYT said, "Even as Republicans have coalesced around broad fiscal policies like cutting spending and extending the tax cuts Mr. Trump enacted in 2017, many do not share his enthusiasm for several ideas he has proposed, including implementing broad tariffs and lowering the corporate tax rate. Those disagreements are at the heart of Republican leaders' efforts to piece together legislation carrying the bulk of Mr. Trump's domestic policy agenda — a massive bill cutting taxes, slashing spending and slowing immigration that they plan to fast-track over the objections of Democrats."

Supply chains — On January 27, Senate Finance Committee members Maria Cantwell (D-WA) and Marsha Blackburn (R-TN), plus Senator Lisa Blunt Rochester (D-DE) — all three are Commerce, Science and Transportation members — introduced the bipartisan Promoting Resilient Supply Chains Act (S. 257) to authorize the Department of Commerce "to strengthen American supply chains for critical industries and emerging technologies by working with the private sector and U.S. government partners to anticipate and prevent future supply chain disruptions before they happen."

On January 27, the Senate confirmed the nomination of Scott Bessent to be Treasury Secretary. The vote was 68-29, with 15 Democrats joining Republicans in support. He was sworn in on Tuesday.

Today, January 29 (10:00 a.m.), the Senate Finance Committee is set to hold a hearing to consider the nomination of Robert F. Kennedy, Jr., to be Health and Human Services Secretary.

President Trump is scheduled to address Congress on March 4 (an address to Congress in the first year of a presidency is not designated a State of the Union address).

The latest Tax Council (TTC)/EY Business Tax Policy Barometer, is attached below.

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Attachment

Tax Policy Barometer

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Contact Information

For additional information concerning this Alert, please contact:

Washington Council Ernst & Young

Document ID: 2025-0349