A major concern for investors as we entered 2025 was the pending expiration of the individual tax rates established by the 2017 Tax Cuts and Jobs Act. The OBBB extended these rates permanently and added some new tax-friendly provisions which will enable consumers to keep a little more of their paychecks. For example, the State and Local Tax (“SALT”) deduction was increased on a sliding scale, the Child Tax Credit was increased, and some new temporary tax deductions were added to deliver on campaign promises, such as deductions for tips, overtime and auto loans (all expiring in 2028). One key provision for domestic corporations is the accelerated depreciation of their capital expenditures which, depending on how aggressively they invest, could result in a significant reduction in the effective corporate tax rate for companies. Corporate spending on capital expenditures also can have a significant impact on productivity, potentially boosting profits and U.S. real GDP growth.
Of course, these new and extended tax initiatives all come at a cost and the process for passing a bill, under what is known as reconciliation, requires that any changes made to existing laws must meet certain constraints. In short, spending can happen, but the money must come from somewhere…the ledger needs to be balanced. This political math resulted in the final bill phasing out clean energy tax credits from the Inflation Reduction Act (2022), making changes to healthcare and, of particular relevance to our readers, changes to the endowment tax and federal student loan programs. The final item is outlined in detail in the Commonfund Insights blog, Endowments, Nonprofit Sector Face Major Shifts under New Federal Tax and Education Law.
Now, with the incentives and offsets established, the question remains “What is the fiscal impact?”. Estimates of the growth impact of the OBBB range from an average +1 percent of additional real GDP growth to negative 0.1 percent. Caution, some of these estimates are skewed by political affiliation, but it is a wide range, nonetheless. The non-partisan Congressional Budget Office (“CBO”) estimates the OBBB will result in a $4.5 trillion decrease in revenues and a $1.1 trillion decline in spending through 2034. Ultimately, adding $3.4 trillion to U.S. deficits over the next decade. The CBO analysis does not consider the dynamic effects, which means it simply analyzes the bill as written relative to current law and doesn’t account for the impact on growth or interest rates. In another analysis, the CBO analyzed the bill to current policy, basically assuming the 2017 tax cuts were never going to expire and just continue on. This analysis yielded materially different results with deficits being reduced by $366 billion over the decade with revenues falling $849 billion—about one-fifth the drop recorded in the conventional scoring.
The true economic and fiscal impacts are largely unknown. The chart below illustrates the current level of the budget deficit relative to U.S growth. With growth slowing and interest rates elevated, the next move for this ratio is likely more negative. The inability to quantify the longer-term dynamic effects of the new legislation is a significant shortfall in the value of the analysis. There are a host of other factors that will determine the health of the domestic economy in the coming years, such as the impact of tariffs on federal revenues, inflation and, by extension, interest rates. The costs of more restrictive immigration policies and their impact on employment and wages. Finally, the drive towards deregulation and resulting increased corporate profitability. Ultimately, the OBBB represents a significant legislative effort to reshape tax policy and economic strategy in the United States, with wide ranging implications for individuals, business and families alike.