Summary
- General Legislative Overview – Appropriations and Health Care to Start the Year
- Congress enters 2026 facing unfinished appropriations work, with funding negotiations complicated by ongoing partisan disagreements.
- The lapse of the Covid-era ACA premium tax credits continues to be a major source of political and legislative friction.
- Any reconciliation legislation in 2026 is expected to center on health care, with tax provisions likely to be relatively narrow in scope.
- While broader tax policy divides remain, there is still a path to a limited bipartisan tax package focused on discrete issues such as digital assets, gambling losses, and certain forms of individual tax relief.
- After enactment of the OBBBA and other legislation, traditional tax extenders are far less central, as most significant expirations were made permanent.
- Developments at the OECD and the G-7 have dampened prospects for near-term U.S. legislation on Pillar Two, with digital services taxes likely addressed through trade and diplomatic channels.
- Treasury remains focused on advancing the Administration’s deregulatory agenda and implementing the OBBBA through a pared-down guidance agenda, with the scope of regulatory action likely influencing whether Congress steps in legislatively.
The legislative tax outlook for 2026 is uncertain and mostly depends on larger political developments, even as Treasury steadily continues issuing guidance to implement the One Big Beautiful Bill Act (OBBBA) and advance President Trump’s deregulatory agenda. Members of Congress in both parties are switching into more active campaign mode, with the November 2026 mid-term elections now less than ten months away.
OBBBA advanced numerous tax priorities of President Trump and congressional Republicans, most prominently dealing with the cliff created by the scheduled 2025 expiration of key components of the 2017 Tax Cuts and Jobs Act (TCJA) by generally making those provisions permanent. From the perspective of most congressional Republicans, there are no tax matters of similar urgency in 2026. It appears Republicans believe that enactment of the OBBBA will help them show they delivered on 2024 election promises to improve the economy and provide Americans with tax relief.
Moderate Republicans would like to extend the Covid-era increased tax credits for certain health insurance premiums, while conservatives are aiming to advance much broader health care reforms. And even without broader big picture political interest, the members of the tax writing committees are always interested in amending the Tax Code, even if the changes are not dramatic.
Congressional Democrats have made the Covid-era health tax credits a priority, and may again use funding the government as a leverage point to force Republicans to extend the credits. As November draws closer, Democrats will campaign on criticizing the OBBBA tax and spending cuts, and instead advocate a more progressive tax system, such as the expanded refundable credits enacted for 2021 and 2022 in the American Rescue Plan Act, and reversing the cuts to green energy tax incentives in the OBBBA.
Despite disagreement on some big picture tax policy issues, there are also some areas of bipartisan agreement. Depending on the larger political dynamic, the leaders of the tax writing committees might negotiate and enact a 2026 bipartisan tax package.
Thus, tax legislation could get enacted this year in a partisan budget reconciliation bill or on a bipartisan basis.
Treasury is focused on OBBBA implementation and other issues in the 2025–2026 Priority Guidance Plan. The Plan is much slimmed down from prior versions, only including projects Treasury and the IRS believe they can actually accomplish during the year.
General Legislative Overview – Appropriations and Health Care to Start the Year
Appropriations
Congress returns this week, as it faces a January 30 deadline at which time the continuing resolution (CR) enacted in November to fund nine of the twelve categories of the federal government will expire. The veterans affairs-military construction, agriculture-FDA, and legislative appropriations categories are funded through this fiscal year, ending on September 30, 2026.
On December 20, the House and Senate Appropriations Committee Chairs, Sen. Collins (R-ME) and Rep. Cole (R-OK), announced they had reached agreement on the topline funding levels for each remaining category. The two did not announce those levels, but said they would not exceed last year’s. However, the deal does not include Democrats, whose votes will be necessary to pass the bill in the Senate, and perhaps the House.
Earlier this week, appropriators agreed on a package funding Interior, Energy and Water, and Commerce-Justice-Science that the House is expected to take up and approve on Thursday, followed by the Senate. This would leave six appropriations categories, including two that are usually the most controversial, Labor-HHS and Defense.
IRS funding, part of the Financial Services category, is one of the major areas of dispute in the appropriations process. The House bill, marked up by the Appropriations Committee in July and reported in September, would provide $9.5 billion, a 23% cut. The proposal released by the Senate Appropriations Committee in November would provide the IRS with $11.8 billion. The House bill would provide the IRS more in technology and operations support, $3.75 billion compared to $3.2 billion. The Senate proposal would provide $3.2 billion for taxpayer services compared to $2.78 billion in the House bill. The most pronounced difference is over enforcement, with the Senate proposal keeping funding flat compared to $3 billion in the House bill, a 45% cut. The differences between the parties are even more pronounced than this comparison because Senate Democrats heavily criticized the Senate Appropriations Committee bill for cutting IRS funding, which helps explain why the Committee has not marked up the proposal.
The House bill funding the State Department and related appropriations, marked up and reported in July, would eliminate American funding of the OECD (constituting about 15% of the OECD main budget). The Senate Appropriations Committee still has not released its version of the bill. In recent years, the Senate has overridden House objections to funding the OECD, but it is not clear whether the Senate will change course under the new Republican majority. It also remains to be seen whether the side-by-side released by the OECD on January 5 will change Congress’s willingness to provide funding.
Health Care
The Covid-era increased tax credits for health insurance premiums under the Affordable Care Act (ACA) expired at the end of 2025. Partisan disagreement over whether to extend those increased tax credits, and if so whether modifications should be included, resulted in a government shutdown from September 30 through November 12.
Democrats support making permanent the increased credits, or at least extending them for several years. Most Republicans argue that the increased credits should be limited to the Covid-era for which they were enacted. The issue is part of a much deeper dispute about the ACA and health care policy. Some Republicans support a temporary extension of the credits with reforms, such as limiting income eligibility.
House Speaker Johnson (R-LA) has said the House will focus on health care policy during the first portion of 2026, floating the possibility of another budget reconciliation bill as a legislative vehicle. The House and Senate Budget Committee Chairmen, Rep. Arrington (R-TX), who is not running for reelection and very eager to help enact another signature piece of legislation, and Sen. Graham (R-SC), have been enthusiastic about using the budget reconciliation process again to enact major changes to health care policy and other Republican priorities. Other Republicans, including Committee on Ways and Means Chairman Jason Smith (R-MO), have voiced skepticism about this path.
To start 2026, the House will vote this week on a bill that would extend for three years the increased ACA tax credits, after four House Republicans joined all House Democrats to sign a discharge petition on December 17, to bring the bill to the House floor. Although the bill now seems very likely to pass the House, Senate Majority Leader Thune (R-SD) has said he will not bring the bill to the Senate floor.
On December 17, the House passed H.R. 6703, the “Lower Health Care Premiums for All Americans Act,” on an almost straight party line basis, containing various health care provisions including pharmacy benefit management services, and association health plans. The bill does not address the ACA credits. It does not appear that the Senate has any plans to take up the bill. Various Senators have been holding discussions about a compromise package that would combine an extension of the credits with income limitations and other reforms.
President Trump has been critical of the ACA credits, along with the ACA more generally, arguing the credits should be changed to provide subsidies directly to individuals instead of to insurance companies. Some White House officials have been advocating a complete health care overhaul through reconciliation. Democrats have said that President Trump will nonetheless eventually yield because of political fallout from the expiration of the credits. The ACA credits are unlikely to be extended unless President Trump decides to back a compromise. Another government shutdown is possible if agreement is not reached.
There was an unusually high level of intra-party political tension to close out 2025 in both parties. On December 30, President Trump issued the first two vetoes of his second term. H.R. 131 would address drinking water pipelines in Colorado, while H.R. 504 would address tribal land control by the Miccosukee Tribe in Florida. The House is set to vote this week on overriding the vetoes.
Tax Policy
Tax Legislation – Reconciliation
A budget reconciliation bill addressing health care issues may also include tax provisions. Considering the breadth of the OBBBA, most Republican tax priorities have already been enacted so the tax provisions of a 2026 reconciliation bill would likely be much more limited in scope.
One possible prominent tax provision would be to legislate on President Trump’s call for sending rebate checks to Americans below certain income levels, relating to increased tariff revenue. The Supreme Court may strike down tariffs imposed by President Trump under the International Economic Emergency Powers Act (IEEPA). It is unlikely this would cause Congress to legislatively increase tariffs. But President Trump may instead impose tariffs under other authorities Congress has granted the President, such as those provided in the Tariff Act of 1930, the Trade Expansion Act of 1962, and the Trade Act of 1974. Whichever way the Supreme Court rules, President Trump and congressional advocates such as Sen. Hawley (R-MO), may use the Supreme Court decision to focus on the rebates.
President Trump has also called for eliminating capital gains on sales of primary residences, and eliminating U.S. taxation of Americans living abroad.
The corporate alternative minimum tax (CAMT) enacted in the 2022 Inflation Reduction Act will prevent some companies from taking the full benefit of OBBBA tax provisions, such as (the partially retroactive) reversal of R&D amortization, and incentives for manufacturing in the U.S., including the revised foreign-derived deduction-eligible income (FDDEI) and expensing for qualified production property (QPP). If Treasury does not use its regulatory authority under CAMT to alleviate these effects, Republicans may attempt to do legislatively.
Tax Legislation – Bipartisan
In addition to the ACA credits, Democrats are prioritizing restoration of the green energy credits cut back by the OBBBA, and refundable tax credits (such as the child tax credit) that were expanded for 2021 and 2022 by the American Rescue Plan Act.
Republicans are very unlikely to reverse OBBBA green energy tax provisions, but there could be overlap between President Trump’s support of tariff rebates and Democratic support for increasing refundable tax credits.
There are a number of tax provisions on which bipartisan agreement could be reached and included in a bipartisan bill. For example, there is bipartisan and bicameral interest, shared by the White House, on digital asset taxation, with a bipartisan House discussion draft recently being released, as explained in more detail below. There is also bipartisan interest in reversing the OBBBA provision limiting gambling losses to 90% of gambling income. Other provisions could also be included, such as tax incentives for energy provisions with bipartisan support. And there is Democratic support for eliminating (or at least limiting) capital gains on the sale of a primary residence. H.R. 1340, introduced by Rep. Panetta (D-CA) (and which has 94 bipartisan cosponsors) would increase the exclusion from $250,000 to $500,000 for single filers (twice that amount for joint filers) and index the exclusion amount to inflation.
Extenders
Earlier this century, there was a large set of perennially expiring tax provisions with very broad impact, such as the R&D credit and the individual AMT, that Congress would extend in lock-step every year or two. The number and prominence of these provisions created considerable political pressure to address them in bills that sometimes also served as vehicles for other tax provisions. Congress has enacted legislation steadily reducing these “extenders” starting with the 2015 PATH Act. The expiring provisions with a 2025 cliff enacted in the 2017 Tax Cuts and Jobs Act, and two-year provisions in the 2021 American Rescue Plan Act were notable exceptions to this trend.
The OBBBA made permanent the vast majority of tax provisions that had been scheduled to expire at the end of 2025. However, the OBBBA did not address the ACA tax credits, or the ARPA refundable credits that Republicans largely argued should remain expired following Covid. Last Congress, Chairmen Smith and Wyden reached a compromise on the ARPA provisions, along with TCJA business tax increases, that was passed by the Republican House by a very wide bipartisan margin. However, the bill was blocked by Senate Republicans (then in the minority) in the hopes (since realized) that Republicans would sweep the 2024 elections and address the provisions through reconciliation.
Other than IRA green energy tax provisions sunset by the OBBBA, provisions expiring in 2025 include the exclusion from gross income of discharge of indebtedness on a principal residence, the seven-year recovery period for motorsports entertainment complexes, and the work opportunity tax credit (WOTC). A per-barrel excise tax on domestic crude oil and imported petroleum products that funds the Oil Spill Liability Trust Fund that was reinstated in 2006 after previously expiring in 1994 expired at the beginning of 2026. A June 30, 2025 report by the Congressional Research Service found that the Trust Fund had a $9.6 billion balance at the end of FY 2024, which will make it difficult to convince Republicans to support reinstating the tax.
Although the provisions have critics, the motorsports deduction and WOTC are strong candidates for a bipartisan tax bill.
OECD Pillars and DSTs
On January 5, 2026, the OECD released the details of the side-by-side agreement announced by the G-7 on June 28, 2025, along with other rules on Pillar 2 in a document entitled, “Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package.” This would appear to make enactment of Section 899, which was taken out of the OBBBA as part of the G-7 announcement of a side-by-side system much less likely. However, it does remain to be seen whether Republicans believe the conditions for the side-by-side treatment, such as a corporate tax rate of at least 20% or a CAMT of at least 15%, infringe U.S. sovereignty and the role of Congress in enacting tax law under the Constitution.
The Trump administration appears to be dealing with DSTs on a separate track from Pillar 2, in the context of trade negotiations over digital technology services more generally. Tensions over these issues ratcheted up in late December with the United States Trade Representative threatening retaliation against EU companies. On December 23, the State Department imposed visa sanctions on five Europeans connected to regulation of digital media, accusing them of “organized efforts to coerce American platforms to censor, demonetize, and suppress American viewpoints they oppose.”
It remains to be seen whether Congress might also enact other legislation addressing interactions between Pillar 2 and the U.S. tax system. There are numerous policy considerations at play, including sovereignty, the competitiveness of American companies, and revenue. Possible issues include foreign tax credit, and modifications to other cross-border rules such as dual consolidated losses. The issues are enormously complicated, and Congress might instead defer to Treasury.
The Tax Regulatory Agenda
Treasury closed 2025 by continuing to grind out guidance on the OBBBA and other issues covered by the 2025-2026 Priority Guidance Plan. Tax guidance did not appear to be slowed down by the government shutdown or the deep cuts to the IRS earlier in 2025.
Although priorities change when administrations shift political control, reversal of Treasury’s positions on many issues, such as so-called partnership “basis shifting” transactions, corporate reorganizations, dual consolidated losses and the corporate alternative minimum tax, has been particularly marked. Critics accuse Treasury of exceeding its authority in order to benefit large corporations and wealthy taxpayers. Defenders counter that it was the Biden Treasury that exceeded its authority in order to increase taxes.
The extent of Treasury action in many of these areas will impact the desire in Congress to legislate, although Republicans might want to codify some guidance in some of these areas to make it harder to reverse. Taxpayer-friendly guidance could reduce the cost (as measured by the Joint Committee on Taxation) of addressing the underlying issues legislatively.