The biggest changes are SALT and Medicaid, but there are many significant details.
SALT Deduction Back to $10,000 from $40,000
The Wall Street Journal reports Senate Trims SALT, Cuts More Medicaid in Proposed Changes to Trump Megabill
Major Changes
SALT. The House’s $40,000 cap on the state and local tax deduction was crucial to getting a handful of blue-state Republicans on board. They have threatened to kill the bill if the Senate lowers that number. But there are no Senate Republicans from high-tax states where this is a major issue. Instead, they see a lower cap as a revenue source and a way to prevent the federal government from picking up part of the tab of state tax increases. House Republicans from New York immediately declared a $10,000 cap unacceptable, and the GOP will fight this out in the coming weeks.
Mish Comment: They should have killed it. Call the House bluff. Republicans will not opt for a $4 trillion tax hike.
Clean-energy credits. The Senate’s plan creates a longer runway before the end of clean-energy tax credits that were created in Democrats’ 2022 Inflation Reduction Act. The House bill, changed at the last minute to satisfy conservatives, would deny some tax credits to projects that don’t start construction within 60 days or begin operations by the end of 2028. It would also tighten rules on certain foreign content.
The Senate plan would give projects more time. For example, wind and solar projects could begin construction in 2026 or 2027 and still qualify for some tax credits. Other technologies such as geothermal, nuclear and hydropower energy could get credits if they begin construction as late as 2035, according to a Finance Committee summary.
Mish Comment: Kill the credits entirely. As with SALT, Republicans in the Senate differ on this in a major way.
Medicaid. The Senate text more aggressively takes aim at increasingly popular Medicaid taxes that states impose on hospitals and other providers as a way to increase federal matching contributions. The Senate text would effectively cap so-called provider taxes at 3.5% for states that have expanded Medicaid under the Affordable Care Act, down from the current 6%. More than 35 states have provider taxes that would have to ratchet down, according to the nonprofit health research organization KFF. The House text, in contrast, froze all provider taxes at current rates.
The Senate bill also reduces certain existing state supplemental payments to hospitals, whereas the House version limited future payments. The provider taxes and the state-directed payments have become an important lifeline for hospitals, who are expected to decry the Senate’s approach. But the changes will cheer fiscal conservatives.
Just as the House bill did, the Senate bill imposes work requirements on able-bodied Medicaid recipients. The Senate bill says adults with dependent children older than 14 are among those who must complete 20 hours a week of community service or work, whereas the House exempted all adults with dependent children from the requirements.
Mish Comment: This should now be easy. If the Senate can ram this through, so can the House. There were three Senate Republicans against these cut, but three is not enough.
Business tax breaks. The Senate bill would make permanent several business tax provisions that the House bill would extend only temporarily. Those include full, immediate deductions for domestic research expenses and equipment purchases, including retroactive research deductions for some smaller businesses. Economists say those changes would do more to encourage growth and investment.
Mish Comment: I am not in favor of “temporary” provisions. The original TCJA was said to be temporary, now it’s billed as a $4 trillion tax hike. Stop the games.
Pass-through deduction. The Senate would keep the deduction for pass-through businesses—those that pay income taxes through their owners’ individual returns—at 20%, rejecting the House bill’s expansion to 23%.
Mish Comment: The House expansion would help me, but I am not in favor of increasing deficits.
University endowments. While the House bill set the top tax rate on university endowment income as high as 21%, the Senate has a narrower version that would set the top tax rate at 8%. Both are up from today’s 1.4% rate.
Mish Comment: Set it to 20 percent the same I pay.
Charitable deductions. The Senate bill includes a much larger charitable-donation deduction for people who don’t itemize their deductions and a new limit on those who do. Non-itemizers could claim up to $1,000 or $2,000 for married couples. Itemizers could only claim such donations above a floor that is generally 0.5% of their adjusted gross income. For example, someone with $200,000 in adjusted gross income wouldn’t be able to deduct their first $1,000 of charitable donations.
Mish Comment: Kill charitable deductions entirely.
‘Revenge tax.’ The bill seeks a more limited implementation of what is being called the “revenge tax.” That is a House proposal that would add up to 20% taxes on companies whose home countries have implemented digital service taxes or certain corporate taxes under a global deal negotiated by the Biden administration. Foreign-owned companies have been warning that the proposal would deter investment in the U.S.
The Senate plan would cap the additional tax increase at 15% and slow down the implementation dates. The Senate version would take effect for many taxpayers in 2027 instead of the House’s 2026 start date.
Mish Comment: Start it now and go for 20 percent.
Seniors, tips and overtime. The Senate altered back some of the president’s priorities. It would increase a proposed $4,000 per-person deduction for senior citizens to $6,000. That is a version of Trump’s promise to eliminate income taxes on Social Security.
The “no tax on tips” deduction would be limited to $25,000 per person, as opposed to the uncapped version in the House bill. Similarly, the “no tax on overtime” provision would be limited to $12,500 or $25,000 for married couples, as opposed to the House’s uncapped version. The Senate includes income limits for both new breaks but they are structured differently from the House bill.
Mish Comment: Kill this nonsense entirely. Why are we making the tax code more complex?
And why the hell are we excluding $25,000 in tips for the expressed benefit of those who get tips to the detriment of everyone else?
Thee Senate capped the deductions, but they are still absurd.
Child tax credit. The Senate bill would boost the child tax credit to $2,200 from $2,000 starting in 2025 and extends that permanently. The House bill includes a $2,500 maximum credit, but only for four years. The Senate does keep the House’s eligibility changes, which would deny the credit to some households where children are U.S. citizens but parents don’t have Social Security numbers making them eligible to work.
Mish Comment: I would kill the child tax credits entirely. But that idea has no chance.
Foundations. The Senate bill would nix a proposed tax increase on foundations. The House version would have raised a 1.39% annual tax on private foundations’ net investment income to as high as 10%.
Mish Comment: Since I am in a 20 percent mood, go with 20 percent.
Health savings accounts. The Senate bill doesn’t include the House’s significant expansion of tax-advantaged Health Savings Accounts.
I am OK with Health Savings Accounts.
Debt limit. As expected, the bill includes a $5 trillion increase in the debt limit, up from $4 trillion in the House bill.
Mish Comment: I have no idea why we play these games anymore. Republicans are not fiscal conservatives except they pretend to be when Democrats are in power.
Remittance tax. The Senate bill includes new exceptions to the House’s 3.5% tax on remittances abroad. Remittances funded from certain U.S. accounts or funded with U.S.-issued debit or credit cards wouldn’t be subject to the tax.
Mish Comment: As long as people are paying income tax, then let them spend the rest however they want. They can easily escape this via Bitcoin anyway, and coming soon are stable-coin wallets.
Mish Synopsis
The Senate changes are more favorable than I expected. SALT is the big one, but not big enough IMO.
Medicaid is another step in the right direction.
Wind and solar. Seriously kill both. I am OK with rare earths but draw the line there.
I ask again: Why are we making the tax code more complex by adding out more special interest exceptions?
But we know the answer: Vote buying proposals from hypocrites and fake fiscal conservatives.
What I Expect
The SALT change is very favorable and I hope Trump hammers on the House to accept it. I sense a compromise, the smaller the better.
The Senate made a good set of changes on Medicaid that I think will stick. I thought there might have been a bigger Senate fight.
I expect the Senate caps on overtime and tips to stick.’
The Bottom Line
It’s hard to crow over big budget deficits, but the bill appears to be a significant improvement.
There is a decent chance most of the Senate changes stick.
Budget analysis should be out in a day or to so we can assess the real score card.
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The Xi-Trump call eased tensions, but Trump is still likely to do much damage.
Trump said, “don’t touch Medicaid.” A lot of Trump’s base depends on Medicaid.
Trump’s seeming willingness to go to War with Iran — and to spend more on military budgets — while cutting Medicaid suggests that fiscal rectitude is not the reason for the cuts but old Republican neocon ideology.
It will be interesting to see how the politics play out over the next few weeks. That will give ample time for public opposition to crescendo. So far, the polls are not encouraging to Republicans with the strongly negative reaction of the Republican base for these domestic spending cuts. I expect that Mr. TACO will force the House and Senate to accept bigger budget deficits in the end.
In short, passing anything like the House or Senate bills should spell doom for Republicans in 2026, were it not for the Democrats’ amazing ability to lose elections they should win
Kill the personal income tax entirely.
For the overtime and SSN taxation, the mind problem was when additional taxes owed triggered a bracket increase. Overtime reporting will be abused no matter what they do. I wonder how the states that tax income will treat these changes.
I suspect they weren’t collecting much tax on tips anyway, and so they won’t miss much.
If tax on remittances refers to the foreign exchange charge, then I agree on the exceptions because too many are likely fraudulent charges.
I agree with the other opinions in the article.
There are a few things that I wish the federal government would issue tax credits for, but the child tax credit is not one of them.
Why isn’t someone or everyone on the right not loudly pointing out that SALT would not be an issue in blue states if they’d just lower their excessive taxes on everyone? Put the pressure on them to lower their taxes rather than allowing pressure on the federal government to foot their excessive bills.
Tax policy should be based on short term but also long term initiatives. We need to invest in education, infrastructure, climate resilience and also the preservation of our lands. Well-run States (mostly Blue) spend money on all of these initiatives, which then results in a healthier, safer and better educated citizenry. These initiatives are funded by State income taxes. Better to give an unlimited tax deduction than to encourage States to go the way of the Red States, which have no income taxes and then have their handout to the federal government as so much of their citizenry is uneducated and incapable of supporting themselves.
Not sure where you live but California, Illinois and Maryland are epic fails at education. Those who successfully get educated in those states do so despite the poor and overly-expensive government system, not because of it.
“invest in” = take money via taxes and give to interest group, with no discernable ROI.
Education of the population is indeed important, but I think I am safe making a blanket statement that increased spending on education for the last 100 years has resulted in discernable worse results. My kids are homeschooled in AZ and know latin, real history, have a great vocabulary, can write essays, etc. for a fraction of what the state would spend on them in a school/daycare/prison camp (every school regardless of neighborhood is heavily gated). The school kids in our ‘good school district’ neighborhood are functionally retarded compared to my kids the same age.
You’re teaching your kids latin…?😳
Question – Does the tax code include tax breaks for fossil fuels? If so, should we eliminate them?
And who pays for the bureaucracy to monitor this new medicaid system. May be simple in your mind because you have a computer, car and can easily access what you need. Poor people likely do not own computers, have cell phones with limited capacity. The burden is significant. The feds should set up a system so states can simply see that x amount of withholding taxes were paid and not require individuals to do all the work. Compassion is not all bad.
The real problem is how to we get health care to the people who are under age 65, and do not get health care through their employer
Great article Mish agree with most of what you and Doug78 below say . Thanks .
Trump’s plan and confirmed by Bessent is to find ways to increase the income of the bottom two-fifths of the working population as quickly as possible without using government hand-outs. I totally agree with this goal. It’s not about fairness or anything like that. It’s simply that history shows when the immiseration of a significant part of the population occurs while wealth becomes extremely concentrated into a very small portion of the population very bad things happen. Society breaks down. It is great to discuss economic theory but I am sure that most would prefer not to be discussing it while waiting their turn at the guillotine or firing squad. Every thing Trump does I view through this lens.
No tax on tips: Although I think the tipping culture is out of hand I support no tax on tips because it immediately puts more money in the pockets of some of the lowest two-fifths.
SALT: I am against it because it encourages the hand-out culture used by some states. It is better for wages increase rather than hand-outs.
Clean Energy Credits: Cut them. The projects that need them are mostly pork and the ones that don’t need them don’t need them.
Medicaid: Good moves but I see this as secondary to the problem. The heath industry and especially the insurance payment systems need to be rationalized. The extra costs come from the absurdities built into the system. Some timid steps have been made already but they have to get much more aggressive. Lowering heath bills ties into what I said before.
Business tax breaks: Eliminate totally the Qualified Business Income for Pass-Though Entities (QBI). It has no use except to give give Wall Street a tax break they do no deserve. It’s been abused way too much.
University Endowments: I agree with Mish on that and charitable deductions. It’s been abused too much. Tax them.
Child Tax Credit: I am for it.
Remittances: I am not for taxing them because tax has already been paid on them. However I am open to using it in tariff and other negotiations.
I agree with Mish on the government deficit. It has to be lowered by hook or by crook. I think the trade deficit has to be lowered by any means too. The twin deficits are the number 1 danger now and we can’t put it off any longer.
The first $18,200 of income is tax-free here – and there is no state income tax.
There is a flat 10% Goods and Services Tax though which applies to most things except food and medical….
There is much lower income inequality in Australia than the US, partly through paying lower-income workers higher wages. I know someone who works 26 hours a week as a shopping mall janitor and is paid about AUD$64,000/year (US$42,000) plus 11.5% retirement contributions….
“It would increase a proposed $4,000 per-person deduction for senior citizens to $6,000.”
I would much rather see the taxable benefit thresholds re-indexed for inflation from 1993 (the last legislation that mucked with this stuff) to 2025 dollars. If they can’t do that, just tack the $6000 amount to all the thresholds, and make it permanent.
Thanks Mish for another solid article!
I agree 100% on the need to simplify the tax code. There’s too much time and energy wasted on gaming the current system.
Personally I think the entire tax code should be thrown out and replaced with Biden’s Law: just charge “10% for the Big Guy” (Uncle Sam) on the profit from any transaction within Federal jurisdiction.
Congress needs to focus on restoring a proper Appropriations process instead of wasting time on monkeying endlessly with the tax code.
Agree with Mish on most items – especially the nonsense about no tax on tips and overtime.
Mish, I agree with your proposals, but I would
i) keep the child tax credit
ii) Completely remove Payroll Tax from the tax obligations of individual free lancers.
Thanks for the analysis and comments.
What many of the states are doing with Obama-expanded Medicaid is essentially corrupt, making the federal taxpayer pay through the nose, and often to cover illegal invaders. It is hopeful that the Senate addressed this somewhat.
I suspect that Trump and the R Senate will be more generous to the aged, deep poor, dependent masses than any democrats. This large demographic is not as expensive to maintain as many think.
Still leaving those non budget one liners which will consolidate trumps power.