Tax Policy Update: Seven-Day Sprint to July 4 Signing of The One Big Beautiful Bill

Tax Policy Update For The Week Of July 7

• The seven-day sprint leading to the July 4 signing of the “One Big Beautiful Bill”
• Tax increases left on the cutting room floor
• July 9 trade deadline and possible action under Section 891
• The OBBBA’s legislative history and future Treasury guidance

On July 4, President Trump signed into law H.R. 1, the One Big Beautiful Bill Act (OBBBA), containing the legislative priorities of the White House and congressional Republicans.

The Path To The One Big Beautiful Bill

Upon winning the trifecta of the White House, Senate, and House in November, Republicans were determined to enact legislation advancing their priorities on national defense, immigration and border security, energy, and taxes. Republicans realized they would not be able to accomplish their legislative objectives with bills needing Democrat votes to break the 60-vote filibuster in the Senate. Thus, Republicans decided early on to enact priority legislation through the budget reconciliation process, which only needs a majority in the Senate. This echoed the recently well-tread reconciliation pathway around the Senate filibuster taken by the majority party to enact legislation uniformly opposed by the minority party. This includes President Biden’s 2021 American Rescue Plan Act (ARPA) and 2022 Inflation Reduction Act (IRA), President Trump’s 2017 Tax Cuts and Jobs Act (TCJA), and President Obama’s 2010 Health Care and Education Reconciliation Act of 2010.

In discussions that started in November 2024, Senate Republicans, including Senate Majority Leader Thune (R-SD) and Senate Budget Committee Chairman Graham (R-SC), and House conservatives preferred a two-bill approach. The first reconciliation bill would address the non-tax issues, while tax would be left for a second reconciliation bill later in 2025. The two-bill proponents argued that it would take Republicans some time to work out how to address tax issues. They argued that defense and immigration were more urgent and enacting a first reconciliation bill on defense and immigration would create momentum for dealing with the more politically complex tax issues. They worried Republicans would get bogged down in negotiations on tax, which might never get resolved, and lose the opportunity to enact any priority legislation while President Trump was at the peak of his influence at the beginning of his term.

Most House Republicans, led by Speaker Johnson (R-LA) and Ways and Means Committee Chairman Smith (R-MO), advocated for wrapping all the items into one reconciliation bill. They argued that it would be very difficult to enact two reconciliation bills. They believed nearly every House Republican would vote for one big bill containing at least some of their top priorities, even if most had reservations about parts of the bill. If defense and immigration were addressed in a first bill, it would be much harder to get through a second bill later in the year, especially as a newly elected President’s influence is typically strongest during the first few months after taking office.

One-bill proponents pointed to the experience of Democrats in 2021 and 2022. The House approved President Biden’s first set of priorities in a reconciliation bill, the ARPA, on February 27, 2021, which was quickly followed by Senate passage of an amended bill on March 6, House passage of the Senate bill on March 10, and President Biden’s signing the bill into law on March 11. But the ARPA left many Democrat priorities for a second bill. The House passed Build Back Better, a reconciliation bill containing the next set of Democrat priorities on November 19, 2021. But with a narrow Democrat majority in the Senate, Senators Manchin (D-WV) and Sinema (D-AZ) refused to vote for the bill after inflation spiked at the end of 2021. It took until August 16, 2022, for Democrats to enact the IRA, but they had to drop many priorities from Build Back Better in order to get the support of Senators Manchin and Sinema.

Following the November 2024 elections, President Trump initially indicated that he preferred the one-bill approach but would ultimately go along with whatever congressional Republicans chose. Eventually, House Republicans convinced President Trump. On January 4, Speaker Johnson told House Republicans that he had persuaded President Trump to back “one big beautiful bill.”

And so was born the name of President Trump’s signature piece of legislation to start his second term in office.

Prior Action On The OBBBA’s Tax Provisions

House

The first full version of the tax provisions in the OBBBA was released by the Committee on Ways and Means in an Amendment in the Nature of a Substitute (AINS) on May 12 (described in this S&C 2025 U.S. Tax Reform memo) and marked up by the Committee the following day. The Committee had released a “skinny” version of the tax provisions the prior Friday. At the beginning of the May 13 mark-up, Democrats argued that the AINS was so different from the base bill that it was not germane. Committee determinations of germaneness are made by the Chairman, subject to a Committee vote. Unsurprisingly, Committee Republicans supported Chairman Smith’s upholding the germaneness of the AINS.

The Committee mark-up continued overnight before the Committee voted to favorably report the AINS on the morning of May 14. House Republicans made further revisions to the bill (described in S&C’s 2025 U.S. Tax Reform – House Passes Tax Reform Bill) before barely passing the legislation 215-214-1 on May 22.

Senate

The Senate Finance Committee released its first draft of the OBBBA’s tax provisions (described in this S&C 2025 U.S. Tax Reform memo) on June 16. There were some conflicting statements by Republicans as to whether the SFC would hold a mark-up on the OBBBA, but it ultimately declined to do so.

A Dramatic Seven-Day Finale For The OBBBA’s Enactment

The July 4 White House signing ceremony capped an action-packed seven days in Washington that began with Chairman Graham releasing a Manager’s Amendment (whose tax provisions were described in S&C’s Tax Policy Update for Week of June 30) to the bill early on the morning of Saturday, June 28.

The Senate voted to start debating the bill on June 28 by a vote of 51-49, but critical comments by various Republican Senators left some doubt as to whether the bill would receive enough votes to pass the Senate. Senators Thom Tillis (R-NC) and Rand Paul (R-KY) joined all Democrats in voting no. President Trump promptly declared that he would support a primary challenger against Senator Tillis, who announced shortly thereafter that he would not run for reelection. As the Democrats declined to waive the reading of the bill, the Senate clerks spent the end of Saturday night and most of Sunday reading the bill aloud, before Senate debate could begin.

Although the Manager’s Amendment reflected many changes to the House bill necessary to garner 50 voters, Republicans needed more time for further negotiations before they would be ready to vote the bill out of the Senate. Reporters in the Senate press gallery noted many intense discussions on the Senate floor taking place on the four days beginning on Saturday.

The Senate began voting on the bill on the morning of June 30 in a marathon “vote-a-rama” session lasting over 24 hours. The Senate’s rules and customs allow unusually wide latitude for Senators to offer amendments to a budget reconciliation bill, and the vote-a-rama included roll call votes on 40 amendments, motions to commit and motions to waive portions of the Congressional Budget Act, along with six voice votes.

The budget reconciliation rules in the Senate are quite complex and are generally adjudicated by the Senate Parliamentarian, Elizabeth MacDonough. The largest unresolved issue coming into the week was whether the Parliamentarian would allow a current policy baseline to be used to score the bill, which would allow the expiring provisions of the 2017 TCJA to be made permanent. The current policy baseline assumes that temporary tax cuts are permanent so that extending them does not increase the deficit. This is important because the budget reconciliation rules do not allow a bill to increase the deficit beyond the 10-year budget window. Senate Republicans all voted for a procedural motion effectively providing that Chairman Graham’s decision to use a current policy baseline is not subject to a ruling by the Parliamentarian. This allowed Republicans to make the expiring TCJA provisions permanent, rather than having to sunset the provisions at or towards the end of the 10-year budget window.

A key part of the Democrat criticism of the OBBBA is that it makes permanent (unless changed by future legislation) the top individual income tax rate of 37%, including on the wealthiest Americans. In response to a proposal by Senator Alsobrooks to amend the bill to let the pre-TCJA 39.6% rate go back into effect for those with an annual income of at least $10 million, Senator Tillis, despite his opposition to the OBBBA, took to the Senate floor to oppose the motion. Tillis spoke about his experience growing up in a trailer park and, like the country singer Jelly Roll, being given the opportunity to lift himself out of poverty by the economic growth spurred by President Reagan’s lowering of the highest marginal tax rates. Senator Tillis and other Republicans were similarly unconvinced by proposals to let the 39.6% rate apply to those with annual income of at least $100 million by Senator Mark Kelly (D-AZ), $500 million by Senator Chris Murphy (D-CT), or $1 billion by Senator Angus King (I-ME).

On July 1, Chairman Graham submitted a final “perfecting” amendment to the OBBBA. The changes to tax provisions from the Senate Manager’s Amendment were relatively limited. Senate Minority Leader Schumer, following a bipartisan partisan tradition, stripped the name off the bill shortly before the Senate vote on final passage on the grounds that the portion of the bill containing its title does not meet the Senate’s Byrd procedural rules for inclusion in a reconciliation bill. The Senate voted to 51-50 to pass the bill, with Vice President Vance casting the tie-breaking vote. Senator Collins (R-ME) joined Senators Tillis and Paul and all Democrats in voting against final passage.

The House Rules Committee convened on the afternoon of July 1 to consider the Senate measure. In a hearing that ran nearly 12 hours and did not finish until very early Wednesday morning, the Rules Committee voted 7-6 to send the Senate-passed bill to the House floor. Foreshadowing the drama of the following 30 hours, Reps. Roy and (R-TX) and Norman (R-SC) joined all Democrats on the Committee in voting against the rule.

Thunderstorms that delayed flights around the United States raised some questions as to whether action on the House floor would have to be delayed. The first House procedural vote on the Senate-passed bill was prolonged but because of concerns by House Republicans about the bill, not because of the weather. The House approved the procedural motion to proceed to the bill on Wednesday 212-211 after the vote was held open for a record length of time.

The House vote on the rule under which the OBBBA would be considered began about 9:30 p.m. on the evening of July 2. Five House Republicans initially voted against the rule and another eight refused to vote, demanding that the House instead take its time and make changes to the Senate bill. After much late-night drama, including phone calls from President Trump to wavering members, all Republicans voted for the rule except for Rep. Brian Fitzpatrick (R-PA), with the vote finally ending at 3:30 a.m.. This made passage of the bill seem inevitable, but not before one final demonstration of House Democrats’ vehement opposition.

Time for debate on final passage was set by the rule for two hours, with time equally divided between the Budget Committee and the Ways and Means Committee, and between Republicans and Democrats. But House custom allows the Speaker and the Majority and Minority Leaders a “magic” minute under which each may speak for an unlimited amount of time. Minority Leader Rep. Hakeem Jeffries (D-NY) began speaking in opposition to the bill at 4:52 a.m. and set a record for the longest speech on the House floor, not finishing until over nine hours later at 1:25 p.m.. The final 218-214 House vote in favor of the OBBBA was a bit of an anticlimax with Reps. Massie (R-KY) and Fitzpatrick joining all House Democrats in opposing the bill.

The Senate floor action did not start until over a month after the House passed the bill. But it turned out the time was used very effectively as White House and congressional Republicans made major progress in “pre-clearing” the Senate changes with the House. Senate Republicans needed to make enough changes to the bill to find the votes to pass the bill through the Senate, but not so many changes that the House would not accept the Senate version of the bill. Refusal of the House to pass the Senate-passed version would have required a conference or other mechanism of reconciling the different versions, which might have been very time consuming. The White House and congressional Republicans decision to double down on “One Big Beautiful Bill” instead of trying to pass separate bills proved to be a successful strategy.

Impact of the Budget Reconciliation Senate Byrd Rules

In general, under the Senate rules for reconciliation bills (named after former Senator Byrd), each provision in a budget reconciliation bill must have an impact on revenue or spending that is more than “merely incidental” compared to the policy goals of the provision. Exactly what this means is much more art than science and is interpreted according to the Senate’s history and traditions.

There are several sets of Byrd rule vetting. The first takes place before a bill is sent over from the House to determine whether the bill may even be considered under the Senate’s reconciliation rules. Even provisions passing that test might ultimately not meet the Byrd requirements for inclusion in the final bill. In recent years, most of the vetting and adjudication has taken place prior to debate on the Senate floor and the vote-a-rama. Any challenges to provisions changed after the vote-a-rama are considered by the Parliamentarian in the final stages before Senate vote on final passage.

The Senate Budget Committee majority and minority coordinates the Byrd adjudication, which is one of the few remaining parts of the official legislative process that continues to take place behind closed doors. In the week before the Manager’s Amendment was released, Senate Budget Committee Ranking Member Senator Merkley (D-OR) issued several statements noting provisions Democrats had successfully Byrded out of the bill.

Using a current policy baseline, provisions extending or making permanent the expiring portions of the TCJA would be scored as having no impact on revenue. Thus, to comply with the Byrd rules, each of the provisions was at least somewhat modified so that it increased or decreased revenue relative to the current policy baseline.

The provision creating Scholarship Granting Organizations (SGOs) under the Tax Code and allowing certain contributions to such organizations to qualify for 100% federal income tax credits exemplifies the inscrutability of the Byrd process. The SFC draft allowed SGOs in any state and created an annual volume cap of $4 billion for the amount of contributions qualifying for the 100% tax credit. The provision did not pass Byrd vetting. Some thought that this outcome was likely because the Parliamentarian would consider the provision as most analogous to a provision Byrded out of the TCJA, which would have allowed deductions for tuition covering religious education as an intangible religious benefit for which a deduction is not disallowed.

However, the Manager’s Amendment contained a new iteration of the provision passing muster under the Byrd rule under which SGO status must be approved by the state in which the SGO operates. In addition, the 100% tax credit was allowed for annual contributions of up to $1,700 per taxpayer in place of a national volume cap.

The provision also provided some insight into JCT scoring assumptions, which said that the iteration in the Manager’s Amendment would decrease revenue by a roughly similar amount ($25.930 billion) as the previous version ($26.046 billion).

Score of the Bill From the Joint Committee on Taxation

Using a traditional current law baseline, the Joint Committee on Taxation (JCT) estimated that over the 10‑year budget window of 2025-2034, the House-passed bill would decrease revenue by $3,798.3 billion, and the final bill would decrease revenue by $4,750.0 billion. But using a current policy baseline, JCT estimated the final bill would decrease revenue by $715.2 billion over the same time period.

Brief Overview of the OBBBA

The central component of the OBBBA is to make permanent the TCJA provisions expiring at the end of this year. Republicans also wanted to provide tax cuts to average Americans beyond the TCJA. In addition, the bill addresses President Trump’s campaign promises on tax issues, including:

• Tips
• Overtime
• Interest on loans for purchases of cars
• Social Security (through an increased deduction for seniors)
• Lower rate on manufacturing in America (through 100% expensing for qualified production facilities)

The individual tax provisions in the TCJA did not generally take effect until 2018. Although Treasury adjusted the withholding tables in early 2018 to take into account those changes, tax returns for 2018 were not due until April 15, 2019. This was after the 2018 midterm elections in which Republicans lost control of the House. This time around, Republicans made some key OBBBA provisions for individuals effective for 2025, including a higher child tax credit and a higher standard deduction.

Under the OBBBA, a couple filing jointly with two children for 2025 will have no federal income tax liability unless their income exceeds $72,141. Absent the OBBBA, a couple with $72,141 would have Federal income tax liability of $580 for 2025.

Although the TCJA provided tax cuts to the vast majority of Americans starting in 2018, some taxpayers received tax increases, especially those in states with high state and local taxes (SALT) because of the TCJA’s $10,000 limitation on the SALT deduction. Republicans from these states successfully pushed to increase that limitation to $40,000 for 2025-2029 in order to address this issue in the OBBBA. The increased limitation phases out for taxpayers with income between $500,000 and $600,000. For joint filers with at least three children, the SALT phaseout overlaps with the 5% child tax credit phaseout. This creates an income bubble starting at $501,050 (in 2025) at which the marginal federal income tax rate is 50.5% (that reaches all the way to $600,000 for those with five children).

The Senate generally prioritized making tax provisions permanent. For example, the enacted bill makes permanent the changes to 100% bonus depreciation, the business interest expense deduction, and the deduction for domestic R&D expenditures that the House-passed bill would have only extended through 2029 (at a combined cost of $460 billion compared to the House bill within the 10-year budget window). However, notable exceptions to permanency include the new provisions on tips, overtime, car loan interest, seniors, and qualified production facility expensing.

Although Democrats strongly disagreed with the spending cuts in the OBBBA, many of the OBBBA’s tax provisions have bipartisan support. The main areas of disagreement were limiting tax credits for some immigrants, not letting tax rates increase for those making more than $400,000, and pare backs of the IRA green energy tax incentives. Although Democrats have other tax priorities not included in the bill, including significantly increasing the refundability of tax credits and increasing taxes on the wealthy, many Democrats support a good number of the provisions in the bill and will likely not seek to reverse them when they come back to power.

Tax Increases Left on the Cutting Room Floor

The enacted bill does not include many anticipated tax increases, including some provisions contained in the House-passed bill. Examples include:

• Top individual income tax rate
• Top corporate income tax rate
• Excise tax on stock purchases
• Carried interest
• Goodwill for sports teams (in House bill only)
• Private foundation excise tax (in House bill only)
• Limit on SALT for certain pass-through entities – sometimes known as PTET (in House bill only)

Renewable Energy Provisions

One faction of Republicans wanted to completely repeal the green energy tax incentives contained in the IRA, including prohibiting tax credits after 2024 for property previously placed in service. Other Republicans wanted much more modest changes. In order to attract the votes of conservatives, the House-passed bill pared back the incentives more significantly than the bill as reported by the Committee on Ways and Means. In certain respects, the restrictions were eased by the Senate. The biggest changes to the tax provisions in the final Senate amendment to the bill decreased the revenue generated by the OBBBA’s restrictions of the clean energy production and investment credits by almost $18 billion.

International Tax . . . and Trade

Other than new Section 899, the House-passed bill contained very small changes to international tax provisions. The Senate ultimately dropped Section 899, but made several important changes included in the enacted bill to the TCJA’s international tax rules.

Section 899

The final version of the bill removed Section 899 at the request of Treasury Secretary Bessent as part of an agreement at the G-7 under which American-parented companies will be excluded from the OECD’s Pillar 2. The SFC draft had slightly softened certain aspects of Section 899, but retained the heart of the provision targeting inbound investment from countries imposing “unfair” taxation on Americans and American companies.

The G-7 statement does not provide details of how exactly the carveout will be implemented. It also remains unclear whether the agreement is conditioned upon U.S. tax rates or other tax rules. The G-7 statement favorably noted the changes to the U.S. rules being considered under the OBBBA but did not state that the agreement was conditioned upon those changes being enacted and not being subsequently changed.

It also remains to be seen whether countries around the world that have enacted UTPRs will be willing to follow the G-7 agreement.

BEAT

The BEAT rate is currently 10%, but was scheduled to increase to 12.5% after 2025 under the TCJA. The OBBBA raises the BEAT rate to 10.5% starting in 2026. The House-passed bill would have raised the rate to 10.1%, while the SFC Draft would have raised the rate to 14%. The final bill does not adopt other significant changes to the BEAT contained in the SFC draft, including a high-tax exception for base erosion payments subject to a tax rate of at least 18.9%, lowering the base erosion percentage threshold from 3% to 2%, removing the preference for certain tax credits (energy, LIHTC), and treating certain capitalized interest expenses as base erosion payments.

GILTI and FDII Renaming and Modifications

The OBBBA removes the QBAI haircut from both GILTI and FDII, significantly increasing the income taxed under both regimes. Correspondingly, FDII has become Foreign-Derived Deduction Eligible Income (FDDEI), and GILTI has become Net CFC Tested Income (NCTI). The removal of QBAI from FDII, which was effectively aimed at encouraging the location of IP-intensive businesses in the United States fits neatly with the new policy focus on increasing manufacturing in America.

Under the TCJA, the effective tax rate on FDII and GILTI (after taking into account the 20% haircut to GILTI foreign tax credits) was set to increase from 13.125% to approximately16.4% after 2025. The OBBBA sets that rate at 14% (after taking into account the OBBBA’s decrease of the GILTI foreign tax credit haircut from 20% to 10%).

The OBBBA makes taxpayer friendly changes to the GILTI FTC expense apportionment rules with only directly allocable expenses reducing GILTI basket foreign source income, and not U.S. interest and R&D expenses.

The OBBBA reduces FDDEI in three respects by generally excluding: 1. income or gain from a sale or other disposition of property giving rise to rents or royalties; 2. certain types of passive income; and 3. only directly related expenses and deductions (including taxes) instead of allocable deductions.

Other International Changes

The OBBBA excludes GILTI and Subpart F income from “adjusted taxable income” used to compute the 30% expense deduction limit under Section 163(j). The Section 954(c)(6) look-thru rule is made permanent. Former Section 958(b)(4) [repealed by the TCJA] is restored. However, new Section 951B retains downward attribution for newly defined “foreign controlled United States shareholders” and “foreign controlled foreign corporations” in applying the Subpart F and GILTI inclusion rules. The allowance of one-month deferral for a CFC tax year is repealed. The rule for determining a U.S. shareholder’s pro rata share of a CFC’s Subpart F income (and similarly GILTI) for a CFC year is the portion of such income which is attributable to (i) the stock of the corporation owned by the shareholder, and (ii) any period of the CFC year during which the shareholder owned the stock, the shareholder was a U.S. shareholder, and the corporation was a CFC. For FTC limitation purposes, up to 50% of the total taxable income from the sale of inventory produced in the United States but sold through a foreign branch is treated as foreign source income. There is a 10% FTC haircut for foreign taxes paid with respect to the distribution of previously taxed earnings to U.S. shareholders attributable to previous GILTI inclusions.

Trade, DSTS . . . and Possible Use of Section 891

July 9 is the deadline for countries to negotiate new trade agreements with the United States or face higher tariffs. In April, President Trump announced a baseline reciprocal 10% tariff with much higher rates against most countries. He delayed onset of those tariffs until July 9. On Sunday, President Trump said that he would announce the new tariff rates on July 9, but that those tariffs would not come into effect until August 1. There are several outstanding court cases to be resolved on whether President Trump’s actions exceed his authority. Several lower courts have ruled against President Trump, but those rulings have been stayed, at least for now, pending appeal. It is possible the cases will eventually reach the Supreme Court.

Following pressure from President Trump, Canada announced that it would cancel its DST. However, other countries, most notably the UK and many EU countries, still have DSTs in effect. It remains to be seen whether the DSTs will be resolved in the context of the trade negotiations. Although Tax Code Section 899 was not enacted, President Trump might deem DSTs to be discriminatory and extraterritorial and exercise his authority under Section 891 to double tax rates against citizens and corporations of countries imposing DSTs on American companies.

OBBBA Legislative History and Coming Guidance From Treasury and the IRS

With the Senate Finance Committee not holding a mark-up and the bill’s enactment within days of the release of the Manager’s Amendment, the Joint Committee on Taxation did not release an explanation of the SFC draft or the OBBBA as enacted. The Ways and Means Committee Report will be the only contemporaneous comprehensive legislative history of the OBBBA’s tax provisions. There were important changes to the tax provisions subsequent to that Report. Thus, the JCT Blue Book description of the tax provisions enacted in the OBBBA will be the only detailed legislative history of the enacted bill (although courts generally consider the Blue Book to have less weight because it is not contemporaneous). The Blue Book often contains explanations and clarifications not present in the statutory text, and also typically identifies areas where there is a need for future legislation providing technical corrections.

The OBBBA contains several major regulatory projects for the Department of the Treasury and the Internal Revenue Service. The enacted law contains well over 60 references to guidance to be issued by the Secretary of the Treasury.

Taxpayers would be well-advised to start identifying issues that they believe Treasury should address in regulations or other guidance and/or that should be clarified in JCT’s Blue Book.