The One Big Beautiful Bill Act (OBBBA) is now law. Any comprehensive taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. legislation is going to have its wrinkles, and the One Big Beautiful Bill is no different. We have previously published estimates of the budgetary, economic, and distributional effects of the House legislation and the Senate legislation, but the final version has plenty of good, bad, and ugly to cover as well.
The Good
The One Big Beautiful Bill Act’s key benefits surround the principles of neutrality and stability.
The law makes expensing for investment in short-lived assets and domestic research and development permanent. Immediate deductions for capital investment eliminates a tax penalty for capital investment, and permanent expensing has the most “bang for the buck” when it comes to economic growth. Those two provisions boost long-run GDP by 0.7 percent by eliminating that tax penalty and giving taxpayers the certainty needed to boost long-run investment.
The law also makes the Tax Cuts and Jobs Act’s (TCJA) less restrictive limitation on interest deductions and Section 179 expensing for small business permanent, while introducing temporary expensing for some qualified structures—a good addition that would need to be made permanent for long-run economic growth.
The law also brings stability to the bones of the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. . It secures permanent extension of the rates and brackets of the 2017 individual tax cuts, providing certainty for households and stability to the structure of the tax code. The law also permanently extends a larger standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. and a modified alternative minimum tax threshold. It also keeps some of the TCJA’s limits on some itemized deductions, such as for mortgage interest, and limits the value of itemized deductions for top earners. The standard deduction and limitations on itemized deductions have greatly simplified the tax code for millions of taxpayers.
The final law unfortunately gives some ground on the state and local tax (SALT) deduction cap. Initially, the Senate Finance draft retained the $10,000 cap on the SALT deduction. However, the final version raises the SALT cap to $40,000 (adjusted by 1 percent annually) for taxpayers earning less than $500,000 from 2025-2029, before reverting to the $10,000 cap permanently afterwards. The final approach is still preferable to the House version, which would have made the $40,000 SALT cap for taxpayers earning less than $500,000 permanent.
Regarding the estate and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. , the law institutes a permanent (and inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. -adjusted) exemption level of $15 million beginning in 2026.
The law establishes permanent, though different, solutions for the treatment of international business income, removing the threat of substantially higher taxes at the end of this year for US-based multinational companies. While the House bill permanently extended a slightly less generous version of current policy for the international regime (GILTI, FDII, and BEAT), the Senate introduced permanent reforms (with new acronyms) that increase tax rates but reduce double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. . The Senate version prevailed and is now law.
The law also pulls back some of the tax code’s many tax credits, deductions, and other preferences. The largest area of reform is the Inflation Reduction Act’s (IRA) green energy tax credits; both the House and Senate approaches raise about $500 billion over a decade, reducing the cost of the green energy credits by about half. Several IRA credits—like those for electric vehicles (EVs) and residential energy products— are repealed, while most others are restricted or phased out quicker. However, the Senate provisions (which are now law) expand the carbon oxide sequestration credit and extends the clean fuel production tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income rather than the taxpayer’s tax bill directly. , while introducing additional compliance challenges for many credits.
Health insurance premium tax credits, projected to cost about $1 trillion over the next decade, are pared back about 20 percent by tightening eligibility rules and reducing improper payments. The law also tightens some tax-exempt rules, such as for unrelated business income.
The Bad
The new law spends far too much money on political gimmicks and carveouts. It introduces tax exemptions for overtime pay and tips, a deduction for auto loan interest, and an additional standard deduction available for some seniors, all of which violate basic tax principles of treating taxpayers equally. Combined, the four provisions cost more than $350 billion over the four years they are in effect, and the cost would more than double if they are made permanent. Complicated eligibility restrictions for some new deductions reduce the cost somewhat, but it would be better to not introduce bad ideas in the first place. Lawmakers also made a costly mistake by making the 20 percent deduction for pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. income permanent. The pass-through deduction creates lower effective tax rates on pass-through income relative to corporate profits, making the tax code less neutral with respect to business form. Fortunately, the final law does not expand the pass-through deduction, which the initial House bill did, but extending the provision is still an expensive change: $655 billion from 2025-2034, according to our estimates.
These mistakes drive up the law’s projected costs. Considering the tax side alone, the law would reduce revenue by $5.0 trillion on a conventional basis. Even after accounting for $940 billion in dynamic revenue feedback and over $1 trillion in spending cuts, the net deficit impact of the law ends up at $3 trillion over the next decade.
Lawmakers could have reduced the law’s costs by trillions of dollars by further cleaning up the tax code. Options, including strengthening the TCJA’s limitations on itemized deductions, rolling back tax exclusions for various types of employer-sponsored benefits, and repealing tax expenditures, such as the credit union exemption and the low-income housing tax credit (which instead gets extended), would have offset more of the revenue losses from tax cuts.
The Ugly
The law further complicates the tax code in several ways, sending taxpayers through a maze of new rules and compliance costs that in many cases likely outweigh potential tax benefits. No tax on tips, overtime, and car loans comes with various conditions and guardrails that, if enacted, will likely require hundreds of pages of IRS guidance to interpret. The changes to the IRA credits, while commendable in many ways, keep in place some of the most complicated rules, e.g., prevailing wage and apprenticeship requirements, and add new “foreign entity of concern” restrictions that may make many of the credits cost-prohibitive.
While the law provides new incentives for saving, the accounts are redundant and the rules complex. The tax code is already littered with a confusing array of special preferences for savers, including tax-preferred accounts for education, health, retirement, and other purposes that go largely unused by low- and middle-income households. Rather than simplifying and liberalizing the rules to allow saving for any purpose without penalty (universal savings accounts), both bills expand savings accounts for higher education (529 accounts) and for individuals with disabilities (ABLE accounts), drawing new lines for eligible expenses and contribution levels. The Senate bill initially left the House’s expansions of health savings accounts (HSAs) out but partially added them back in the final version.
The law also introduces a new savings vehicle called “Trump Accounts,” an entirely new type of incentive that includes a $1,000 government-provided baby bonus for children born in the next four years. The accounts allow taxpayer contributions up to $5,000 a year that can grow tax-free until the beneficiary turns 18, at which point the account becomes a traditional individual retirement account (IRA). Various other conditions apply. Trump Accounts provide a more limited and restricted tax benefit than existing saving incentives, such as 529 accounts. This is a missed opportunity to simplify saving and improve financial security for all Americans.
The law establishes a new tax credit for donations to scholarship-granting organizations, which may be intended to work in tandem with Trump Accounts. The Senate approach (which is now law) makes the credit permanent but shrinks it to $1,700 instead of the greater of $5,000 or 10 percent of adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” . While helpful for some, the tax credit will undoubtedly require a lot of rulemaking and administration by the Treasury Department and IRS, which is already overwhelmed with the task of administering our complicated tax code and multiple benefit programs under current law.
The Big Picture
The One Big Beautiful Bill Act makes many of the individual tax cuts and reforms of the TCJA permanent. It improves upon the TCJA by making expensing for R&D and equipment permanent. However, for the most part, it does not include further structural reforms, and instead introduces many new, narrow tax breaks to the code, adding complexity and raising revenue costs. The relative lack of base-broadening leads it to raise deficits. While the new law has many laudable components and will increase economic growth, it is not a true tax reform.
See Full Analysis Launch Reconciliation tracker
Share this article