07 July 2025

What to expect in Washington (July 7)

President Trump on Friday signed H.R. 1 into law, which extends Tax Cuts & Jobs Act (TCJA) provisions beyond 2025 and cuts mandatory spending, fulfilling a large swath of the Administration's domestic agenda in a package that was a primary focus for the first half of the year and going back to last year's elections. The Senate vote July 1 and House vote July 3 were both preceded by overnight sessions for policy changes — in the Senate at least, to win the vote of Senator Lisa Murkowski (R-AK) — and the ultimately successful convincing of reluctant members by GOP leaders and the President.

House Speaker Mike Johnson (R-LA) had implored the Senate to move its version closer to the House-passed bill, including with a greater savings to tax cuts ratio and the more modest Medicaid changes to appease moderates, but Senate leaders had to instead focus on gaining the requisite votes of their own GOP members. Freedom Caucus members crafted a list of demands and threatened to revolt over being "jammed" by the Senate — whose members had left for the holiday, leaving the Senate bill as the only option for President Trump's target for the bill to be enacted by July 4 — but ultimately voted in favor. The self-imposed deadline proved to be a powerful incentive for members to vote in favor, with deft handling of the bill by GOP leaders in both chambers.

As was the case with the TCJA, the bills in each chamber were similar but the final law adopts more of the Senate's policy details, including:

  • Permanency of the TCJA pre-cliffs — on bonus depreciation, IRC Section 163(j) interest deductibility, and IRC Section 174 R&D expensing — and increased amounts for the standard deduction and Child Tax Credit, all of which were temporary under the House bill
  • Maintaining the IRC Section 199A pass-through deduction at 20% rather than 23% under the House bill
  • Differences in international provisions that set the base erosion and anti-abuse tax (BEAT) rate at 10.5% and global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) rates both at 14%
  • Some differing approaches to Inflation Reduction Act (IRA) energy credit modifications, including a longer phaseout for wind and solar energy

Permanency of the tax cuts makes them less vulnerable to being changed. A July 3 opinion essay in the New York Times said the law "does reset the base line. Mr. Trump's first-term tax cuts were structured to expire after a certain number of years to limit their official cost. That's how President Bush's tax cuts were structured as well. But when President Obama negotiated with a Republican Congress over their extension, he could demand that the upper-bracket cuts expire on schedule, knowing that if the negotiation failed, the entire package would expire. The Republican bill would make Mr. Trump's tax cuts permanent, depriving the next Democratic president of that leverage."

The law also included permanent extensions of some traditional tax extenders unrelated to the TCJA, including the CFC look-thru rule, new markets tax credit, and cover over of tax on distilled spirits, negating the need to address those provisions in a separate package.

Still, there are cliffs built into the law, including for the President's tips and overtime provisions in effect through 2028 and the increased state and local tax (SALT) deduction cap, to $40,000, which is effective through 2029 (after which the cap drops to $10,000 permanently, coupled with permanent preservation of the full pass-through entity tax election for all pass-through businesses). Politico reported July 5, "The most politically explosive cuts to Medicaid and the nation's largest food program, for instance, are set to take effect in 2028. Meanwhile, Trump's most popular tax cuts and a key deduction prized by blue-state Republicans are set to sunset in 2028 and 2029, respectively." The temporary nature of the provisions has the effect of "teeing them up to be the subject of fierce political battles in the 2026 midterms and the 2028 presidential election," the report said.

Aside from details of the IRA energy tax credit modifications and overall tax-cut-to-deficit-reduction ratio, much of the consternation among reluctant members during the late-stage consideration of the bill was over Medicaid changes that could cause people to lose coverage and how they would be received in members' districts. Republicans in districts that rely heavily on Medicaid are likely to be hit with opposition ads in the runup to the midterm elections.

A story in the July 5 Washington Post said the law "could help Democrats win back the House in the 2026 midterm elections … " Republicans "still have an opportunity to shape public perception of the [law] because more than a third of Americans had no opinion of it and two-thirds said they had heard either little or nothing about it," the story said. "So, both parties are racing to define it. Republicans are touting new tax breaks for seniors and service workers. Democrats are attacking the bill as a giveaway to the rich that will lead to millions of low-income Americans losing their health care."

A story in the July 5 Wall Street Journal said, "Control of Congress in next year's elections could turn in part on how voters come to see the [law]. As the two parties prepare to spend millions of dollars to shape their impressions, Republicans have some advantages: Voters might be skeptical of the package, but many know little about it, suggesting they are open to persuasion." The story said, "One challenge for the GOP is that relatively few people benefit from provisions such as 'no tax on tips,' while the broadest-based tax provision — the continuation of tax cuts enacted in 2017 — doesn't create a change that most voters can feel." Additionally, "[t]he early Democratic investment is evidence the party believes the legislation will generate enough voter anger to put relatively safe Republican seats in play … "

In an indication of Democratic arguments against the new law, House Ways and Means Committee member Tom Suozzi (D-NY) said on Face the Nation July 6, "It's going to do a lot of things that are going to hurt a lot of people in our country. The biggest one … is increase the deficit enormously in the country. And what that does is, that creates inflation, that keeps interest rates high, that makes it hard for people to buy homes, makes it hard for them to borrow money to do the things that they want to do. In addition, it's going to knock a bunch of people off of health care."

The bill also provided the Trump administration with a global tax win in compelling the G7 to reach an agreement for the US tax system to co-exist 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 agreement reached with other nations was aided by removal of new Section 899 retaliatory tax proposal from the bill.

Trade — President Trump's 90-day pause on the additional country-specific tariff rates on countries with which the US has large trade deficits and trade barriers ends on Wednesday, July 9. Asked about the President's suggestions that letters would be sent to other nations warning of new tariffs to take effect August 1 in what could amount to a further pause on tariffs decisions, Treasury Secretary Scott Bessent said on Fox News Sunday July 6, "I don't think it's a bit of a pause because I think what's happened is, there's a lot of congestion going into the home stretch and, as part of the trade team. What's great about having President Trump on side is, he's created maximum leverage. So, by telling our trading partners that they could boomerang back to the April 2nd date I think it's really going to move things along the next couple of days and weeks." Still, he said on CNN that August is not a new deadline.

Asked on Face the Nation whether the Administration expects to get any more deals done with trading partners by Wednesday, National Economic Council Director Kevin Hassett said, "I think the headline of the news is that there are going to be deals that are finalized. There are a whole number that [USTR] Jamieson Greer has negotiated with foreign governments. And then there are going to be letters that are sent to countries saying, 'Here's how we think it ought to go because the deals aren't advanced enough.'"

The President said late July 6 regarding the issue, "I think we'll have most countries done by July 9th … either a letter or a deal."

Congress — The House is out of session this week. The Senate will reconvene on Tuesday, July 8 at 3 p.m., with a vote related to a Department of Energy nomination at 5:30 p.m. Upcoming business for Congress in the wake of the OBBBA enactment includes the annual appropriations process and consideration of cryptocurrency issues.

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Contact Information

For additional information concerning this Alert, please contact:

Washington Council Ernst & Young

Document ID: 2025-1392