The pace has not slowed in Washington, D.C. as Republicans feverishly attempt to address differences within the party and budgetary hurdles preventing them from passing legislation featuring tax reform and other GOP priorities. Meanwhile, the president has announced a universal 10% tariff on imports from all countries.
Status of tax reform
Competing budget resolutions
As discussed in detail in our March Policy Pulse, the Senate and House of Representatives passed separate, vastly disparate budget resolutions. Also as noted in our March edition, the chambers’ differing strategies must be reconciled before any ultimate legislation can be drafted. However, Republican lawmakers are currently following an unconventional strategy whereby they move forward despite the differences in the budget resolutions, with each chambers’ spending and saving instructions addressing their respective committees alone and deferring to the other side of the Rotunda to instruct the committees under its purview.
On April 2, the Senate unveiled an updated budget blueprint which mirrors the House’s one-bill strategy but critically differs from the lower chamber’s budget as the Senate’s calls for use of the highly unconventional “current policy” baseline. As previously discussed in this space, this baseline assumes any provisions set to expire by statute will be extended in accordance with the policy in effect and as such, said extensions have no associated cost. Of course, the expiring provisions at issue are those under Tax Cuts and Jobs Act (TCJA) which sunset on Dec. 31, 2025. Use of the current policy baseline presumably allows for these provisions to be made permanent by any ultimate reconciliation bill. Critically, the Senate parliamentarian has yet to formally approve this approach, which Republican Senators were reportedly seeking ahead of unveiling their plan. However, they shifted course, with Senate Budget Committee Chair Lindsey Graham (R-SC) stating he has the authority under Senate rules to set the budget. In addition to not yet having formal approval by the parliamentarian, which Democrats have said they will seek to have her make a ruling if Republicans indeed attempt to bypass her altogether, House Budget Committee Chair Jodey Arrington (R-TX) and other deficit hawks in the lower chamber panned the blueprint for the impact it would have on the national debt. This undoubtedly calls into question whether this updated budget could pass the House, where Republicans have a razor thin majority.
The updated Senate plan calls for an additional $1.5 trillion in tax cuts presumably to accommodate some combination of policies the president campaigned on and has continued to advocate for, including excluding tip, overtime and social security income from taxable income, and reducing the corporate tax rate. Separately, this instruction may cover an increase of the state and local tax (SALT) deduction limitation from $10,000, which the bipartisan SALT caucus has demanded in exchange for votes needed to pass any ultimate legislation.
The proposed budget maintains the House’s resolution’s mandatory spending cuts of $1.5 trillion, which calls on the Energy and Commerce Committee, whose purview includes Medicaid, to account for $880 billion of those savings. Again, while Medicaid was not specifically named in the lower chamber’s blueprint, achieving that level of spending cuts would all but assuredly require alterations to the program, which has created consternation amongst Republicans in both the House and Senate. However, while preserving the House’s steep cuts, the Senate plan calls on its own committees to account for a mere $4 billion in savings.
Lastly, and critically, the new framework would increase the debt ceiling by $5 trillion (the House’s blueprint increases it by $4 trillion). The U.S. hit the ceiling for the amount it is authorized by law to borrow at the beginning of the year, meaning Treasury has been resorting to so-called ‘extraordinary measures’ to continue paying the government’s bills without borrowing additional funds. It is estimated that the “X date”, which is the date on which these extraordinary measures will have been exhausted, will occur sometime this summer or early fall – meaning unless the statutory debt ceiling is increased by then, which now both chambers’ budget blueprints would accomplish, the federal government will no longer be able to make payments on its current debt, which would have catastrophic economic consequences.
Timing
The Senate intends to vote on its updated resolution imminently, in hopes of sending it to the House for a vote prior to the Easter holiday recess which begins April 11. While some of the critical gaps between the House’s and the Senate’s initial budgets have been bridged, or at least partially so, by the latter’s updated proposal, the fact remains that the reconciliation rules require identical budgets to be adopted before any ultimate legislation can be passed. Given as mentioned above deficit hawks in the House are already protesting the impact the Senate’s plan would have on the national debt, principally for its use of the current policy baseline, this timing for passage is extremely ambitious.
House Speaker Mike Johnson (R-LA) and Ways and Means Chair Jason Smith (R-MO) still intend to have an ultimate reconciliation bill on the president’s desk for signature by the Memorial Day holiday, however, Senate leadership anticipates it could push further into the summer. Critically adding to the timing sensitivity is the fact that if the budget reconciliation package will be Congress’ mechanism for increasing the debt ceiling, it must be passed prior to the X date as discussed above to avoid a cataclysmic default on the government’s debt.
Tariffs
On April 2, the president announced a baseline 10% tariff on imports from all countries, to take effect on April 5, and additional “reciprocal tariffs” on countries identified as having the most imbalanced trade relations with the U.S. to take effect on April 9, sending the global markets in a tailspin and sparking concerns of a full-scale global trade war. Canada and Mexico were exempted from these reciprocal tariffs as they are already subject to a previously announced tariff of 25% on goods not compliant with the United States-Mexico-Canada Agreement. Notable reciprocal tariffs include:
- Cambodia – 49%
- Vietnam – 46%
- China – 34%
- India – 26%
- South Korea – 25%
- Japan – 24%
- European Union (27 countries) – 20%
The situation remains in flux, and this latest round, the most significant tariffs issued since the 1930s, have created massive market volatility. From a tax lens, this market instability only heightens Republicans’ interest to enact tax reform as soon as possible to help mitigate the tariffs’ adverse effects on the stock market. Additionally, from a tax perspective, taxpayers should remain aware of the fact that tariffs may have an impact on their computation of costs required to be capitalized to inventory under Internal Revenue Code section 263A and consult their tax advisors.
Government funding
The House and Senate passed the former’s government funding bill, another continuing resolution which funds the government through the end of its fiscal year (Sept. 30, 2025). The president signed it into law on March 15, avoiding a government shutdown. Passage at first seemed unlikely, given Senate Democrats’ strong opposition to the lack of any guardrails around efforts by the president and the Department of Government Efficiency (DOGE) to continue freezing previously appropriated funds. However, Senate Minority Leader Chuck Schumer (D-NY) reversed course from his initial stance of refusal to bring the bill to the Senate floor, which all but one Democratic representative in the House voted against. Citing the need avoid a shutdown, Schumer put the bill before the upper chamber where it achieved the 60 requisite votes needed to clear a key procedural hurdle and ultimately passed by a 54-46 margin.
It is important to note that this resolution includes a further freezing of $20 billion dollars’ worth of IRS funding earmarked for enforcement it had received via the Inflation Reduction Act, which in addition to the rampant turnover discussed in our previous edition of the Policy Pulse, will undoubtedly impair the Service’s auditing efforts.
BOI reporting
On March 21, Financial Crimes Enforcement Network (FinCEN) issued an interim final rule that limits Beneficial Ownership Information (BOI) requirements to foreign entities and foreign nationals, effectively exempting “[a]ll entities created in the United States — including those previously known as ‘domestic reporting companies’ — and their beneficial owners” from BOI requirements, per the FinCEN website.
Visit and bookmark our developments in beneficial ownership information reporting page to keep up with the latest information on the status of BOI requirements.
Questions?
If you have questions, please reach out to your Baker Tilly tax advisor to discuss the impact of our tax policy updates.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
