Source: Congressional Research Services
Republicans know that expiration isn’t a viable political option, yet extending these rates is expected to cost more than $4 trillion over the next decade. Add promises President Trump made on the campaign trail or has made since his inauguration – such as eliminating taxes on tips; overtime and social security; increasing defense and border spending and making some auto loan interest payments deductible – and the cost of the bill is expected to skyrocket.
Republicans have tight margins in the Senate and House with room to lose only three votes, or the bill will not pass either chamber. Deficit hawks are concerned about the cost of the bill, especially since the final text must include a debt ceiling increase, something several House Republicans have never voted for in the past. In exchange for support, these lawmakers are pushing for the final bill to include $2 trillion in deficit reduction.
On the opposite side of the debate are Republicans in swing seats, many from blue states where tax rates are higher; these members are focused on raising the cap on state and local income taxes (SALT) that can be deducted from federal taxes – something that will add to the cost of the bill. These members are also fearful that Democrats will have success touting spending cuts in the bill during the 2026 midterm campaign, potentially costing them their seat and the House majority.
The House Energy and Commerce and Agriculture Committees are expected to oversee some of most controversial spending cuts to Medicaid and the Supplemental Nutritional Assistance Program, respectively. Republicans have said they can cut spending without harming those who rely on the programs, but as the saying goes, "the devil is in the details."
Republicans do have a few other tools at their disposal to reduce the cost of the bill. While there isn’t a precedent for money raised from tariffs to be used in a formal costing exercise for the bill, they can, at the very least, point to it as additional revenue, further ameliorating the concerns of deficit hawks. And, as in the past, Republicans can use dynamic scoring to reduce the perceived cost of the bill. Dynamic scoring allows Congress to project higher tax revenue derived from expected higher economic growth resulting from tax cuts.
Republicans can also raise revenue by altering some tax provisions: Rumored targets are eliminating the carried interest tax treatment, allowing the top tax income bracket to revert to 39.6%, and capping state and local income taxes that corporates can deduct from their federal taxes. Each of these options will have vocal opponents, with some already speaking out, and it isn’t clear if any of them will make it in a final bill.
Clearly the picture is complicated, and the outcome of these complex negotiations is uncertain. Expect to hear more details throughout May and June, and potentially July, if, or more likely when, delays materialize.
Looking in a crystal ball today, we expect the expiring tax provisions to be extended – even the top bracket. But as Congress weighs the deficit and debt, the outlook for additional tax cuts is less certain.
Whatever is in the final passed legislation, congressional Republicans are hoping that the market views it as stimulative, particularly for main street, which has been navigating higher uncertainty among sweeping changes since January 20.
The takeaways
- Plan for 2026: Whatever changes are passed may not take effect immediately after Congress passes the bill. Evaluate any changes, and makes adjustments for the rest of 2025 in anticipation of the amended tax code, which will kick in on January 1.
- Bond markets: The tax bill will include a debt ceiling increase that is necessary for the US Treasury to continue making payments; bond markets could face instability if Congress takes too long to pass the bill and pushes up against the borrowing deadline, which is tentatively expected sometime this summer. To date, bond markets have been resilient while the US expands its deficit. It is not yet clear if the US will approach a tipping point if the deficit continues to expand from this or other bills in the future.
- Equity markets: Markets expect a continuation of 2017 tax rates, and potentially additional cuts. More tax cuts than expected could spur equities; fewer cuts could pull them down.
- Educate clients: Clients may hear misinformation or be the target of scams. Warn them not to interact with any inbound calls about changes to Social Security or Medicare.
In other political news
- Restructuring trade and tariff implementation: The Trump administration surprised markets with its announcement on reciprocal and base tariffs in early April. It has also launched sectoral tariffs on aluminum, steel and autos and, in the coming months, is very likely to place tariffs on pharmaceuticals, semiconductors, critical minerals, lumber and copper. The administration is now negotiating with trade partners in the hopes of signing memorandums of understanding, and eventually trade deals, to avoid enacting reciprocal tariff rates as high as previously proposed on “Liberation Day.” Yet, it’s also very likely that tariffs will remain a feature of this administration’s economic policy. Expect volatility in the near term until markets understand the approach.
- Sweeping executive orders and legal challenges: President Trump signed nearly 140 executive orders (EOs) in his first 100 days in office. For comparison, Biden and Trump 1.0 each signed fewer than 40 EOs in the same period. In response, more than 100 legal challenges are now underway on EOs covering everything from immigration to trade and government reform. The appeals process will take time but could overturn or uphold some of the administration’s key policy priorities. It’s unlikely we will see an immediate market reaction to rulings, but rulings that expand deportations or government firings could have sectoral or regional impacts in the medium to long term.
- Prioritizing deregulation: The Senate has been making quick work to confirm President Trump’s appointees to oversee various agencies. Lee Zeldin, new EPA administrator, and Chris Wright, Secretary of Energy, are expected to oversee deregulation in energy markets. SEC Chair Paul Atkins, and the soon-to-be confirmed Vice Chair of Supervision at the Fed, Michelle Bowman, are expected to lead a deregulatory push for financials. It takes time to repeal regulations, but these sectors are likely to see an upside as they benefit from deregulation.
