May 2025 Policy Pulse

It is pedal to the metal this week in Washington, D.C., as Republicans race against the clock in an attempt to send their multi-trillion tax reform package to President Trump’s desk by July 4.

While the goalpost for sending “one big, beautiful bill’ to the White House has been extended from Memorial Day to Independence Day, many with insider knowledge on Capitol Hill remain skeptical there will be fireworks the day it arrives. A senior Senate Republican aide told Baker Tilly on May 5 that “the Fourth of July is a very ambitious timeline,” adding that “corralling the House will continue to be the problem on policy – the Senate will be the time problem.”

Budget reconciliation

Congressional Republicans are once again using the multi-stage budget reconciliation process to enact tax reform, which means their yet unveiled tax and spending package can hitch a ride across the finish line using a reconciliation measure as its legislative vehicle. To that end, House and Senate Republicans successfully unlocked this process recently through the end of the fiscal year (Sept. 30, 2025) with the adoption of identical budget resolutions (albeit different instructions), which will allow them to avoid the Senate’s 60-vote threshold under regular order and pass the reconciliation bill in the upper chamber with a 51-vote simple majority. That is, if it can first get out of the House.

While often criticized as a tool for enacting partisan priorities on a party-line basis, budget reconciliation, created under the Congressional Budget Act of 1974, is a fairly transparent process from a cost and poison-pill perspective, with strict rules governing what makes the cut, particularly in the Senate. As a senior Senate Republican aide told Baker Tilly on May 6, no matter the measure that manages to clear the House, however, the Senate is almost certain to amend during its unlimited amendment reconciliation procedure known as vote-a-rama (having caused many sleepless nights for tax policy wonks), often lasting into the early morning hours. And, of course, there is the initial “Byrd scrub” and “Byrd bath” that first aims to ensure any non-budgetary items are removed and that all provisions of the reconciliation bill have a primary effect on spending and revenue in compliance with the Byrd Rule.

But before the tax and spending bill reaches the Senate, it faces a razor-thin margin in the House. Republicans’ negotiation efforts this year on tax reform are proving much more difficult than in 2017 with the tax reform law (P.L. 115-97) commonly known as the Tax Cuts and Jobs Act (TCJA). And the numbers don’t lie. In 2017, 13 House Republicans voted against the TCJA, though not deterring its passage. Currently, with a 220-213 majority in the House, Republicans can’t afford more than three defaults this go-round.

That said, the House collectively appeasing the Trump administration and a diverse Republican conference while balancing $2 trillion in required spending cuts with a costly $4.5 trillion in tax cuts is no easy feat. And one that finds Republicans stepping on each other’s toes.

Tax reform tango

Although the so-called legislative sausage-making is cranking at full speed on Capitol Hill, House Republican tax writers continue to dance in circles over key items related to their “problem[s] on policy.” Republican leadership, top tax writers and the administration, namely the “Big Six,” are in daily talks to reach consensus but remain at odds over how to craft the perfect recipe of tax and spending cuts. We can be sure, however, that they are looking for just the right amount of state and local tax (SALT).

SALT

The TCJA’s controversial $10,000 cap on SALT deductions for 2018 through 2025 persists as one of the top issues spurring disagreement among Republicans, even amongst SALT caucus members themselves. Republican leadership, juggling demands from fiscal hawks who oppose expanding the SALT cap, is reportedly exploring an income cap alongside an increase for the deduction to primarily benefit middle-income taxpayers.

While it appears Republicans from high-tax states are likely to make progress in their longstanding push to raise the SALT cap, how much, and with what constraints, remains to be seen. SALT caucus member Rep. Mike Lawler (R-NY) has stated that increasing the cap to $25,000, for example, would be “woefully insufficient.” And while there have been talks on the Hill about a proposed cap on the SALT deduction for businesses, largely referred to as C-SALT, that has reportedly been taken off the table.

IRA credits

Adding to the tax policy tussle are calls to sunset many, if not all, of the clean energy tax credits under Democrats’ 2022 Inflation Reduction Act (IRA) – also moved through budget reconciliation. Many Republican lawmakers and the Trump administration are reportedly eyeing this potential move as a significant revenue raiser but not without intraparty pushback.

To that end, over 30 hardline House Republicans sent a May 1 letter to Ways and Means Chair Jason Smith (R-MO), calling for full repeal of the IRA. That same day, over 20 House Republicans sent a letter to Smith, reiterating a March 9 letter, in which lawmakers emphasized the importance of prioritizing energy dominance and affordability while criticizing their colleagues’ efforts to repeal or reform energy tax credits under current law.

View Baker Tilly’s resource on all things IRA under current law here.

Medicaid

Republicans remain at odds over the implications of the budget’s instruction to the House’s Energy and Commerce Committee to save $880B. While as reported in this space, the budget does not specifically call out changes to Medicaid, but as a practical matter, the only way that level of cuts can be achieved will require some modification to the program, which many nameworthy Republican lawmakers are steadfastly against. Read more in our March and April Policy Pulses.

JCT/CBO

Congressional Republicans are working closely with the nonpartisan Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO) as they finalize their tax and spending package for cost estimates and revenue analysis. The CBO has estimated that extending the TCJA’s expiring individual income tax provisions, the higher estate tax exemptions, and extending the business provisions would cost $4.6 trillion over the 10-year budget window (FY2025-2034), not including debt service costs.

As we approach the “X-date”, this forthcoming analysis will be more consequential than ever.

White House

Adding fuel to the fire, President Trump again weighed in on the tax policy debate this week by sending Republican leadership on the Hill a fresh list of what he wants to see included in the tax package. This list generally includes:

• A lower tax rate for foreign-derived intangible income, or FDII, from FY 2025 to FY 2029.
• A 15% tax rate for corporations that manufacture in the U.S., bringing it down from the current 21% rate. Additionally, Trump wants a corresponding tax cut for pass-through businesses that make products domestically.
• Restored 100% bonus depreciation during FY 2025 to FY 2029. Full expensing began phasing down by 20% in 2023.
• A new tax deduction for interest payments on auto loans for U.S. manufacturers vehicles.
• No tax on tips, overtime pay and Social Security benefits.

Additionally, on May 2 the White House released Trump’s FY 2026 Discretionary Budget Request, sparking immediate concern across the aisle in Washington, D.C. Generally, the president’s so-called “skinny budget” is largely known among lawmakers as more of a “wish list,” but the proposed cuts to the IRS amid recent turnover in the federal agency caused alarm on Capitol Hill. Notably, the administration’s FY 2026 budget request proposes a nearly $2.5 billion cut in annual funding for the IRS.

IRS

On May 2, the Treasury Inspector General for Tax Administration (TIGTA) released Report Number: 2025-IE-R017, which provides a snapshot of IRS workforce reductions as of last March. As noted in the report, TIGTA found that more than 11,000 IRS employees were either approved for the deferred resignation program (DRP) or received termination notices during their probationary employment period—these departures represent an 11% reduction of the IRS’s workforce.

Additionally, the TIGTA report notes that these departures disproportionally affected revenue agents with approximately 31% having separated from the Service. These revenue agents primarily worked in and conducted examinations with the IRS’s Large Business and International (LB&I) and Small Business/Self Employed (SB/SE) units, as well as assisting with Tax Exempt & Government Entities (TE/GE) and Taxpayer Services.

X-date “warning track”

As discussed in last month’s Policy Pulse, significantly adding to the time-sensitive nature of tax reform is the quickly approaching so-called X-date, and whether the budget reconciliation package will be Congress’ mechanism for increasing the debt ceiling. If so, it must be passed prior to the X-date to avoid defaulting on the government’s financial obligations. Congressional Republicans are reportedly aiming to raise the debt ceiling by $5 trillion, to just over $40 trillion, as part of the tax and spending cut package.

Treasury Secretary Scott Bessent testified before the House Appropriations Subcommittee on Financial Services and General Government on May 6, discussing the debt ceiling, among other things. Though declining to give a specific answer, Bessent told lawmakers that the U.S. is nearing the day when it will run out of funding to pay its bills.

“Just as an outfielder running for a fly ball, we are on the warning track,” Bessent told lawmakers, adding that “when you’re on the warning track, it means the wall’s not far away.” Bessent said that Treasury’s estimate of when the U.S. will reach its borrowing capacity is “forthcoming,” but assured lawmakers that the U.S. will “never default.”

Looking ahead

Crypto

While all eyes might be on the House this week, we’re also watching the Senate. The upper chamber is scheduled to take up landmark cryptocurrency legislation under regular order with a key procedural vote occurring on May 7. This is moving separately from the reconciliation package being crafted in the House. The Republican-led, bipartisan stablecoin bill, Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act (S. 919), would create the first U.S. regulatory framework for issuers of stablecoins.

Stay tuned

Tax policy and administration developments are expected to continue rolling in over the next several weeks. Most notably, it is expected on Capitol Hill that legislative text of House Republicans’ tax and spending cuts package will be released in the coming days. The House Ways and Means committee is anticipated to be readying its markup on May 13 or 14. Stay tuned for more on that front.

As always, it’s critical to stay informed and proactive for effective tax planning. Staying abreast of tax policy developments both before – and after – they occur will aid in this strategy.

On Capitol Hill, it is often a marathon, not a sprint.

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.