This week (May 26-30)

Congress: The House and Senate are out of session for the Memorial Day recess.

This Week in Tax Policy won't be published while Congress is out this week, though Tax Alerts will be issued as events warrant.

Last week (May 19-23)

Reconciliation tax bill: After passage of the One Big, Beautiful Bill Act (OBBBA) by the House early Thursday morning, the focus is now on how the Senate will change the GOP-only budget reconciliation bill to extend Tax Cuts & Jobs Act (TCJA) provisions expiring at the end of 2025 and cut mandatory spending, and how long it will take the Senate to produce their version. Republican leaders deftly passed the bill out of the House by the narrowest of margins (215-214), balancing the interests of various factions of members, some of whom felt deficit reduction provisions (both tax increases and spending cuts) were too little and others who thought they were too much. Speaker Mike Johnson (R-LA) and others relied upon a manager's amendment of changes, including to energy credits and Medicaid; the influence of President Trump, who visited with House Republicans on Tuesday then hosted a group of conservatives; then cutting off negotiations after weeks of debating specifics and months of laying the groundwork.

The Inflation Reduction Act (IRA) provisions cut off several energy-related credits in short order, including for EVs and energy efficient homes, and include new changes that replace the 2029—2032 phaseout schedule for clean electricity credits (IRC Sections 45Y and 48E) with termination of the credits for facilities that have not begun construction 60 days after date of enactment and have not been placed in service by December 31, 2028. "It still eliminates the electric vehicle tax credits after this year, except for vehicles produced by automakers that have sold fewer than 200,000 tax credit-qualified cars, which will be eligible for one additional year. It still terminates tax credits for residential energy efficiency, rooftop solar, and new, energy-efficient homes. And it still ends the clean hydrogen tax credit at the end of this year," Heatmap reported of the bill. "But for the clean electricity subsidies, the revised text nixes the previously proposed three-year phase-down schedule and bluntly cuts off any project that doesn't break ground within 60 days of the bill's passage — basically the same deal handed to the hydrogen industry."

Republican leaders struck a deal with high-tax state Republicans, mostly from New York, that increases the state and local tax deduction (SALT) cap to $40,000 per household for incomes under $500,000, with the cap and income threshold set to grow 1% each year, resolving an issue that had long vexed the prospects for passing the reconciliation bill in the now-220-212 House.

International changes in the manager's amendment were seen as trying to head off Byrd Rule objections in the Senate reconciliation process, with modest tweaks to rates under the three major TCJA provisions:

• Global intangible low-taxed income (GILTI) deduction reduced from 50% (10.5% rate) to 49.2% (10.668% rate)
• Foreign-derived intangible income (FDII) deduction reduced from 37.5% (13.125% rate) to 36.5% (13.335% rate)
• Base erosion and anti-abuse tax (BEAT) rate increased from 10% to 10.1%

The underlying tax package makes many TCJA provisions permanent, with enhancements to some, including an IRC Section 199A deduction of 23% and temporary increases in the standard deduction and Child Tax Credit. It relies on revenue offsets addressing issues including sports team amortization, higher education endowment taxes, private foundation taxes, unrelated business income, an executive compensation aggregation rule, fraud, waste, and abuse provisions for health care and COVID programs, earned income tax credit reforms, etc. There has been significant attention on the revenue the House generates from immigration-related tax provisions. On international tax, a new IRC Section 899 combines and modifies two prior bills on global tax retaliation.

Recently posted EY Alerts include:

• New IRC Section 899 would increase tax rates and expand BEAT for certain inbound taxpayers (see Tax Alert 2025-1085)
• House reconciliation bill would modify provisions affecting tax-exempt entities (see Tax Alert 2025-1126)
• House-passed tax bill contains provisions affecting compensation and benefits, including eliminating taxes on tips and overtime (see Tax Alert 2025-1120)
• New 5% excise tax proposed for remittance transfers (see Tax Alert 2025-1108)

The temporary, generally five-year extensions of TCJA pre-cliffs on bonus depreciation, IRC Section 163(j) interest deductibility, and IRC Section 174 R&D expensing could be made permanent by the Senate, which has $5.3 trillion in leeway for tax cuts under the budget resolution rather than the $4 trillion the House afforded itself. "We were under $4 trillion, but the Senate is at $5.25 trillion," Ways and Means Chairman Jason Smith (R-MO) said Thursday, Bloomberg Government reported. "They care about a lot of provisions that we care about," he said of items like R&D and bonus depreciation. "I would expect the Senate to modify that."

Senate outlook: There has been some speculation that the bill may skip the committee process in the Senate, and Majority Leader John Thune (R-SD) said this week, "I'm a regular order guy. I think you can improve the product … But obviously, depending on what happens in the House and the timeline we have to work with, getting committees up and going and doing their thing takes a while — and how ready the product is for prime time … There are certain things the Senate wants to have its imprint on." He also said House and Senate committees have been working closely to try and identify potential Byrd Rule violations. Congress is out next week for Memorial Day. The Administration has set a July 4 target for enactment of the bill, the debt limit increase it would provide probably needs to be in place before the August recess, and reconciliation instructions will expire September 30. Senate Republicans have already begun coordination with House members, but the process is expected to take some time. Similar to the narrow leeway for defections House leaders faced, the Senate can only lose the votes of three GOP members. Finance Committee Chair Mike Crapo (R-ID) said senators will have to comb through everything in the House bill, Punchbowl News said this morning in a report that cited other members as saying the Senate would make significant but not drastic changes. "I don't think we'll tear down the whole house," said Senator Markwayne Mullin (R-OK), a Trump ally and former House member. "We may go in and repaint some of the interior walls and maybe some of the interior decorations. We'll make sure we put our fingerprints on it." The same outlook is shared by more moderate members, "You can kind of see the writing on the wall here. You've got Republicans in the House that have been able to move something out. You've got a Republican majority here, and you have a president who very clearly wants this to pass," said Sen. Lisa Murkowski (R-AK) in a Semafor report this morning. "Some GOP senators want to try for deeper spending cuts, even as Senate Republicans also insist that some tax cuts temporarily extended by the House be made permanent … " the Wall Street Journal said in a report that noted some Republicans want deeper Medicaid cuts while others are wary of significant changes to the program, including Sens. Josh Hawley (R-MO) and Jim Justice (R-WV). "At the same time, individual Republican senators will also try to protect home-state priorities, such as renewable-energy projects whose planning would be upended by a provision in the House-passed bill that would rapidly phase out tax credits."

The Senate doesn't have any high-tax state Republicans who prioritize the SALT cap increase. Republicans there may recognize the provision as a necessary evil given its importance to passing the bill through the House, or they could try to change the provision. "There's not a single [Republican] senator who is impacted by SALT," Senate Majority Whip John Barrasso (R-WY) said at an event in Washington Wednesday, MarketWatch reported. "That's an area where we understand their situation, but we don't have that same pressure or problem. We have other issues with other members that we've got to focus on." Given the budget resolution instruction to Senate Finance Committee that it use a current policy baseline, any increased cap on the SALT deduction above the current $10,000 level would be a revenue loser, whereas the House current law baseline permits any cap at all to be treated as a revenue raiser, which is the case in the House-passed bill.

Other House provisions could be changed due to Senate opposition, particularly the IRA energy tax credit rollbacks. Senators Thom Tillis (R-NC), Lisa Murkowski (R-AK), John Curtis (R-UT), and Jerry Moran (R-KS) wrote to Leader Thune in April calling for maintaining a stable and predictable tax framework in the interest of promoting domestic energy development. More recently, since the House bill was released, Senator Kevin Cramer (R-ND) said the proposal to phase out technology-neutral clean electricity tax credits beginning in 2029 would hamper newer technologies like advanced nuclear reactors and geothermal that are not ready to be deployed at large scale. "They definitely need more time … We'll have to change that."

The general contours and revenue demands of the reconciliation bill are of concern to at least one Republican Senator, Ron Johnson (R-WI), who wants a return to pre-2019 spending levels and has bemoaned the fact that the bill won't be revenue neutral and could increase the deficit by $4 trillion. "I'm hoping now we'll actually start looking at reality," he said in a May 22 Politico report, after House passage, adding that all members have spending aspirations, but the nation just can't afford it. "Johnson said there are sufficient votes to block the bill if his party doesn't bend in his direction on spending reductions, including setting up a bicameral process for going 'line by line' to find a total of roughly $6.5 trillion in cuts over the coming decade," the report said. He additionally said he couldn't be pressured with the threat of a primary challenge like some House Republicans could. And Senator Rand Paul (R-KY) continues to oppose the major increase in the debt limit that the reconciliation bill includes.

Tips: One issue addressed in the House bill, no tax on tips, was approved unanimously as a Senate bill May 20. The No Tax on Tips Act was sponsored by Senator Ted Cruz (R-TX) and brought up for unanimous consent approval by Senator Jacky Rosen (D-NV), whose state has a large number of service industry workers. No Senator objected. "Nevada has more tipped workers per capita than any other state. So this bill would mean immediate financial relief for countless hard working families," Senator Rosen said.

A Congressional Research Service description of the bill said:

• "Under the bill, the new tax deduction for tips is limited to cash tips (1) received by an employee during the course of employment in an occupation that customarily receives tips, and (2) reported by the employee to the employer for purposes of withholding payroll taxes. (Under current law, an employee is required to report tips exceeding $20 per month to their employer.)
• Further, an employee with compensation exceeding a specified threshold ($160,000 in 2025 and adjusted annually for inflation) in the prior tax year may not claim the new tax deduction for tips.
• Finally, the bill expands the business tax credit for the portion of payroll taxes that an employer pays on certain tips to include payroll taxes paid on tips received in connection with barbering and hair care, nail care, esthetics, and body and spa treatments. (Under current law, an employer is allowed a business tax credit for the amount of payroll taxes paid on certain tips received by an employee in connection with providing, delivering, or serving food or beverages.)"

IRS: During the May 20 Senate Finance Committee hearing on his nomination to be IRS Commissioner, former Rep. Billy Long (R-MO) pledged to pursue a culture shift to increase IRS employee access to the agency's leadership and improve morale. Democrats asked questions about his personal business dealings with tribal tax credits and his use of campaign funds. Senator Marsha Blackburn (R-TN) asked about remote work for IRS employees, and Rep. Long described lengthy wait times for IRS customer service. Democrat Maggie Hassan (D-NH) also described the agency's customer service woes, and others questioned how that could be remedied with a reduced workforce. Rep. Long's response to questions from Senator Elizabeth Warren (D-MA) regarding presidential interference with the IRS weren't sufficient to satisfy her and Senator Warren said he should not be anywhere near the leadership of the IRS. He later said he wouldn't accept politicization and weaponization of the agency. "It's not going to happen on my watch," he said. Rep. Long was agreeable to Senator Todd Young's (R-IN) call for IRS modernization legislation. Senator James Lankford (R-OK) noted the reintroduction of Office of Information and Regulatory Affairs (OIRA) review of tax regulations during the second Trump administration, to ensure regulations are issued on a timely basis and with proper oversight. Long said a cost-benefit analysis and consistency are required.