Today was a major victory for President Trump as his One Big Beautiful Bill Act (OBBBA) cleared its final hurdle before heading to the Oval Office for his signature. It represents a significant part of his second-term agenda.
Many republicans celebrated the bill’s passage as every democrat lamented it. One thing is for certain; The economy is sure to see some temporary stimulation as the money rains down from Washington.
Here are some of the key highlights of the OBBBA:
Changes affecting Individuals and Families:
1. Tax Cuts and The Effects:
- Boost to Take-Home Pay: A central aim of the bill is to provide significant tax relief. The White House’s Council of Economic Advisers (CEA) projects that annual real wages for workers could increase by as much as $7,200, and after-tax take-home pay for a typical family with two children could increase by as much as $10,900. These increases are driven by provisions like allowing deductions for tips and overtime pay, and a new deduction for older adults.
- Distributional Impact: While the bill aims to benefit working and middle-class Americans, some analyses, like that from the Tax Policy Center, suggest that the largest tax cuts, in absolute terms, will go to the highest income quintile. For example, in the first year, the lowest quintile might see a $150 tax break, the middle quintile $1,750, and the top quintile $10,950.
- Extension and Expansion of 2017 Tax Cuts: The bill makes permanent many of the tax cuts enacted during Trump’s first term in 2017.
- New Tax Breaks: It introduces new tax breaks, including allowing workers to deduct tips and overtime pay, and a $6,000 deduction for most older adults earning less than $75,000 a year.
- Child Tax Credit: The Senate version of the bill permanently increases the child tax credit to $2,200 (the House had proposed $2,500 but only until 2028). It also requires only one parent to have a Social Security number to claim the credit, a change from the initial House version.
2. Social Safety Net Cuts:
- Medicaid Cuts: The bill includes substantial cutbacks to Medicaid, largely by imposing new work requirements for some parents and older people, stricter sign-up rules, and lower federal reimbursements to states. Independent analysts suggest nearly 12 million people could lose health coverage by 2034 due to these proposed cuts.
- SNAP (Food Stamps) Changes: It introduces new work requirements for SNAP recipients, including those in their 50s and 60s, and fewer exemptions for parents.
3. School Choice: Supporters highlight the bill’s aim to deliver school choice to every state.
4. College Endowment Tax: The bill scales back and phases out IRA tax credits and enacts an escalating tax on the net investment income of college endowments, with a top rate of eight percent based on a student-endowment ratio.
5. “Trump Accounts”: The bill establishes “Trump Accounts” and allows contributions through 2028, modifying their treatment to more closely correspond with individual retirement accounts. The exact nature and implications for investment within these accounts would require further detailed analysis of the bill’s final text.
6. Spending and Deficit Impact:
- Increased National Debt: The nonpartisan Congressional Budget Office (CBO) estimates the package will add approximately $3.3 trillion to the national debt over the next decade.
- Offsetting Cuts: To help offset the cost of the tax cuts, the bill includes significant spending reductions.
Business Investment Incentives:
- 100% Bonus Depreciation Made Permanent: The OBBBA permanently restores 100% first-year bonus depreciation for qualified property. This means businesses can immediately deduct the full cost of eligible new and used depreciable assets (like machinery, equipment, and certain real property) placed in service after January 19, 2025, rather than depreciating them over many years. This is a major incentive for businesses to invest in new equipment and facilities.
- Permanent Expensing for Domestic Research & Development: As discussed previously, the bill permanently reinstates the immediate deduction of 100% of domestic research and experimental (R&E) expenses. This reverses a 2022 change that required R&D costs to be amortized over five years. This is a significant boon for research-intensive industries and encourages innovation. The bill also allows for retroactive application for businesses with gross receipts of $31 million or less for tax years beginning after December 31, 2021.
- Business Interest Limitation (Section 163(j)): The OBBBA reinstates a more favorable calculation for the Section 163(j) business interest deduction limitation. For taxable years beginning after December 31, 2024, the limitation will once again be calculated using a measure of income that excludes depreciation, amortization, or depletion (EBITDA), rather than a stricter measure that includes these deductions (EBIT). This change allows businesses to deduct more interest expense, making it easier to finance investments with debt.
- Qualified Production Property: Manufacturers can claim a 100% deduction for the cost of new “qualified production property,” including real property used in a “qualified production activity” (manufacturing, production, or refining of a qualified product). This applies to property placed in service after the date of enactment and before January 1, 2031.
- Advanced Manufacturing Investment Credit (48D): This credit has been increased from 30% to 35%, providing a greater incentive for investment in advanced manufacturing facilities.
The bill’s passage has been a contentious process, facing strong opposition from Democrats and even some Republicans who raised concerns about the impact of the cuts on social programs and the increase in the national debt. Despite these challenges, it cleared both the Senate and the House of Representatives with narrow majorities, marking a significant legislative victory for President Trump’s administration.