President Donald Trump's "One Big Beautiful Bill Act" has made it through Congress, after House fiscal conservatives gave up demands of deeper spending cuts and moderate Republicans came to terms with the size of Medicaid cuts. The fact that House Speaker Mike Johnson got pulled from both sides of his party meant that neither side could be assured of a better deal if revisions proved necessary.
Wall Street never thought it was possible that the GOP would fail to renew the 2017 tax cuts, since that would tank the economy. The most important market reaction may come from bond investors. The 10-year Treasury yield perked up to 4.34% on Thursday. But so far, there's no sign of concern that the beautiful bill will make U.S. deficits too large to comfortably finance.
The Deficit Effect
The Congressional Budget Office said Tuesday that the final changes to the Senate version of the One Big Beautiful Bill Act (or OBBBA) added $110 billion to deficits vs. the prior version. Some of those last-minute changes were focused on extending the time for renewable energy projects to take advantage of Inflation Reduction Act production tax credits. The Senate also doubled the size of an emergency fund to support rural hospitals facing Medicaid cuts to $50 billion.
Based on the current-law baseline, which assumes expiration of most 2017 tax cuts at the end of this year, CBO said that the OBBBA has $4.5 trillion in tax cuts and $1.1 trillion in spending cuts, raising deficits by $3.4 trillion. Based on current policy, CBO said the Senate bill would cut spending by $1.25 trillion and lower taxes by $850 billion, lowering the deficit by about $400 billion.
The prior score showed that the Senate cut a few hundred billion less than the House in food aid and student loans. That only partly explains why the bill — despite bigger cuts to projected Medicaid spending — fell about $900 billion short of the fiscal bar set by the House, which required that tax cuts exceed spending cuts by no more than $2.5 trillion over 10 years. The Senate also spent an extra $344 billion than the House version on business tax incentives for expensing equipment purchases and funding research and development.
The brunt of the deficits would come in the next few years. Relative to the current-law baseline that assumes expiration of the tax cuts, the deficit would be higher by $443 billion in fiscal 2026, $538 billion in 2027 and $508 billion in 2028. The deficit increase tails off to a range of $256 billion to $319 billion from 2030 onward.
Medicaid Cuts
On June 24, 16 House Republicans wrote to Senate Majority Leader John Thune and House Speaker Mike Johnson, taking issue with the Senate version of the bill that fails to "give hospitals time to adjust to new budgetary constraints."
Before those last-minute tweaks, the CBO said the Senate bill included roughly $930 billion in cuts to Medicaid spending and about $230 billion in cuts to spending on tax credits to buy insurance on the Affordable Care Act health insurance exchanges. By comparison, the House sought $793 billion in Medicaid cuts.
The CBO said 4.8 million Medicaid recipients would become uninsured due to an 80-hour work requirement for able-bodied adults who aren't caregivers for a child or disabled family member. The work requirements are projected to save $317 billion over 10 years.
An additional $183 billion would come from limiting state taxes on medical providers, gradually lowering the ceiling to 3.5% from 6% for states that expanded Medicaid under the ACA. States plow those taxes into benefit payments, which leaves providers no worse off, yet the federal government faces a higher bill to cover its share of Medicaid costs.
Some states have directed Medicaid managed care operators to reimburse medical providers at up to 100% of commercial insurance reimbursement rates. The Big Beautiful Bill would lower that to 100% of Medicare rates in states that expanded Medicaid.
New Tax Cuts
New OBBBA tax cuts include a deduction of overtime pay of up to $12,500 for single filers earning up to $150,0000, with a phase out for higher earners. The $90 billion cost is limited by having it sunset after 2028.
A deduction of tipped income of up to $25,000 for $150,000 earners would cost $32 billion.
A deduction of up to $10,000 for loans on U.S.-assembled autos costs $31 billion.
The bill largely fulfills President Trump's campaign pledge to end taxes on Social Security income by providing a new $6,000 deduction for seniors. That measure carries a $93 billion cost, $27 billion more than the $66 billion cost of the House's $4,000 deduction.
The bill boosts the child tax credit to $2,200 from $2,000, though the refundable amount for those who don't owe income taxes is held at $1,700. Both figures rise with inflation. If not extended, the child tax credit would revert to $1,000 for 2026. The entire cost is $817 billion.
The bulk of the bill's costs come from renewing the 2017 cut in marginal income-tax rates ($2.2 trillion), a 20% business deduction ($737 billion) and limiting exposure to the estate tax ($212 billion).
Other OBBBA Spending Cuts
About $186 billion in spending cuts are aimed at the Supplemental Nutrition Assistance Program, including a work requirement estimated to lower funding by $69 billion.
Limiting student loans and adjusting repayment options is estimated to save $307 billion.
The termination of green energy tax credits, including for buying electric vehicles and producing solar and wind energy, faced roughly $550 billion in cuts before the final Senate bill tweaks.
