The House Ways and Means Committee advanced the tax portion of a massive fiscal package that Republicans aim to pass this summer, including a renewal of expiring 2017 Trump tax cuts. The S&P 500 is taking a breather on Wednesday following strong gains to start the week as the focus shifts from tariffs to tax cuts.
Big hurdles remain before the bill becomes law. The Senate budget blueprint called for bigger tax cuts and smaller spending cuts, and some legislators have competing priorities that will be tricky to resolve amid narrow Republican majorities. The bond market will be the ultimate arbiter of Republicans' fiscal stewardship, and the 10-year Treasury yield's rise above 4.5% doesn't provide much margin for error.
However, voters will get their say in the 2026 midterm elections about Trump policies. From a big-picture perspective, Republicans are basically using tariff revenue and spending cuts to offset the cost of renewing the 2017 tax cuts, limiting additional borrowing to covering the cost of additional tax cuts, which reflect President Donald Trump's campaign pledges.
What's In House GOP Reconciliation Package?
The Joint Committee on Taxation, the official scorekeeper for tax changes, found that a preliminary version of the package would add $3.8 trillion in cumulative deficits over the coming decade.
The Committee for a Responsible Federal Budget notes that the cost of the bill would actually be $5.3 trillion, if some provisions weren't written to sunset, mostly at the end of 2028 and 2029, after the next national election.
The budget group says the official cost reflects about $4.2 trillion to extend and expand individual and business provisions of the 2017 tax cuts. New tax cuts would cost an additional $663 billion. Reductions in tax credits and various tax hikes would raise a touch over $1 trillion to offset the budget impact.
Beyond that, House Republicans aim to curb spending on the Supplemental Nutrition Assistance Program by $290 billion and rein in Medicaid outlays by over $600 billion.
New Trump Tax Cuts
Trump had campaigned on cutting the corporate tax rate all the way to 15%, after permanently slashing it to 21% from 35% in his first term. That didn't make the House reconciliation package, but businesses make out in other ways.
The 2017 tax law provided a 20% deduction for the business income of sole proprietorships and partnerships filing taxes through individual returns. That provision is being extended at a cost of $705 billion. On top of that, the House bill would raise the deduction to 23%, at an extra cost of $104 billion.
The bill also provides full expensing for manufacturing, extraction and agricultural facilities whose construction begins before 2028 at a cost of $148 billion. That would serve as a carrot to attract new investment along with the stick of Trump tariffs.
Adopted Trump campaign proposals include no tax on tips for individuals and couples earning up to $80,000 and $160,000, respectively. The same limit applies to a tax exemption for overtime pay. Seniors earning up to $75,000 or $150,000 for married joint filers would get an extra $4,000 deduction, similar to Trump's proposal to shield Social Security income from taxes.
Further, a deduction for car loan interest on U.S.-built autos, campers and other vehicles is also in the bill. All the Trump campaign provisions would expire at the end of 2028, costing a combined $78 billion in 2027.
Stock Winners, Losers From House Bill
Student loan finance firm SLM has jumped 4.6% this week, clearing a buy point, with an apparent assist from the House GOP. The Committee for a Responsible Federal Budget's reconciliation tracker lists $51 billion in 10-year savings from repealing Grad Plus loans and related reforms. In a May 7 note, Deutsche Bank noted that "elimination of that program could significantly expand the addressable market for student lenders like SLM.
A big chunk of the savings in the House reconciliation package would come from repealing or limiting Inflation Reduction Act clean-energy incentives, including $191 billion in EV tax credits of up to $7,500. That has been priced in for a while, but the House package did include a couple of surprises.
Solar stocks including First Solar jumped on Tuesday on news that a production credit for solar energy is slated to gradually phase down in 2028, rather than being scrapped. On the other hand, operators of existing nuclear plants including Constellation Energy are pausing after a big run. That may be partially due to the House GOP bill's move to phase down a nuclear-focused production credit starting in 2029.
Distributional Effects Of Tax Package
Treasury Secretary Scott Bessent hailed the reconciliation package's progress on Wednesday, saying Trump's "plan for prosperity is in full swing" and touting "new measures to keep more money in the pockets of hardworking Americans."
Republicans have added some sugar to try to help the package go down smoothly. That includes a temporary boost in the child tax credit to $2,500 from $2,000. But the expansion won't apply to those who pay little or no taxes. The refundable portion, now $1,700, won't change.
The bill also establishes MAGA accounts, giving $1,000 to start tax-deferred savings accounts for families with young children.
Here's what the official JCT distributional analysis shows: Taxpayers earning less than $15,000 a year would actually get a tax hike of $1 billion, or 18.7%. Above that level, pretty much everyone gets a tax cut relative to present law.
For those earning $15,000 to $30,000, their average tax rate would fall to 2.3% from 2.9%, saving a cumulative $3.4 billion. At the top of the scale, $1 million and up, the tax rate would fall to 28.3% from 31.1%, saving a cumulative $96.1 billion.
However, this is just the tax cut portion. Reductions in spending on SNAP and Medicaid would affect low-income households. Further, the tariff revenue that indirectly helps offset the cost of the tax package also could have a regressive effect.
What Happens Now?
The House aims to approve the broad fiscal package next week, when it will be up to the Senate to modify the bill in a way that it can pass. Sen. Josh Hawley, R-Mo., has taken aim at Medicaid spending cuts, saying they could be a political killer.
It remains to be seen whether the Senate approves smaller spending cuts, potentially widening the deficit impact of the bill. Moderate House members have pushed for reinstating a deduction of state and local taxes to a large extent. Getting rid of that would keep down the bill's cost but at the expense of needed support in the House.