Key Senate deliberations on a sweeping tax and spending bill—dubbed "One Big, Beautiful Bill"—have brought the state and local tax (SALT) deduction controversy to the forefront.
Senate Finance Committee Chair Mike Crapo (R., Idaho) unveiled new proposals this week that could reshape the House’s version of the bill, setting the stage for potentially contentious negotiations.
Republicans are racing against a self-imposed July 4 deadline to finalize legislation that would extend individual tax cuts from the Tax Cuts and Jobs Act of 2017 and incorporate new provisions, such as exempting tips and overtime from taxation. The Congressional Budget Office (CBO) has projected the House version of the bill could add $3 trillion to the federal debt over the next decade, increasing fiscal pressure as Congress faces an August debt-ceiling deadline.
SALT Deduction Remains a Divisive Issue
The SALT deduction, a hot-button issue for Republican lawmakers in high-tax states, remains a sticking point. The House bill’s $40,000 SALT cap for households earning less than $500,000 marked a win for moderates but met resistance in the Senate. Senate Majority Whip John Thune (R., S.D.) indicated a compromise might be necessary, though Senate Republicans appear less inclined to revisit the cap.
“We understand the dynamics in the House, but there’s limited appetite in the Senate for a SALT adjustment,” Thune stated in a recent interview.
Senate Finance Committee discussions suggest the $10,000 cap could remain, though negotiations are ongoing. This position risks alienating House Republicans like Rep. Mike Lawler (R., N.Y.), who has pledged to oppose any reduction from the $40,000 threshold negotiated in the House bill.
Key Business Tax Provisions
Senate Republicans are emphasizing provisions to make permanent certain business tax breaks, including deductions for research and development, interest expenses, and full expensing for property depreciation. The House’s version of the bill extended these deductions through 2029, citing cost concerns, but Senate leaders argue permanence could bolster business investment and economic growth.
Dan Clifton, head of policy research at Strategas Securities, noted in a report that these provisions could drive gains in stocks closely tied to the affected industries, presenting opportunities for investment advisors to monitor.
Medicaid and Spending Adjustments
The Senate’s approach to Medicaid and spending cuts diverges significantly from the House. The House bill’s Medicaid work requirements, estimated to save $300 billion over a decade, are likely to remain but could be paired with deeper cuts in the Senate. The Senate’s proposal includes a gradual reduction in the provider tax from 6% to 3.5% by 2031, signaling more aggressive cost-containment measures.
Energy Tax Credits and Debt Ceiling Dynamics
Clean-energy tax credits, a major point of contention, face slower phaseouts in the Senate’s version compared to the House’s more abrupt reductions. Additionally, while the House approved a $4 trillion debt ceiling increase, the Senate proposes a $5 trillion rise, reflecting broader fiscal considerations. A reconciliation of these differences is essential to ensure the final legislation aligns with both chambers’ priorities.
Foreign Investment and Tax Revisions
The so-called “revenge tax” on foreign investments from countries with discriminatory tax policies has been modified in the Senate bill, delaying its implementation to late 2026. Clarifications exclude “portfolio interest” on Treasury investments, addressing some business concerns while preserving the tax’s broader intent.
Potential Market Implications
For wealth advisors, the evolving legislation underscores the need to stay ahead of potential market shifts. Tax changes, particularly those affecting SALT deductions and business provisions, could influence state-specific municipal bonds and corporate investments. Advisors should evaluate client portfolios for exposure to industries most affected by proposed tax cuts or increases.
Furthermore, the Medicaid adjustments and changes to the debt ceiling could impact broader market sentiment. With the Senate Finance Committee poised to introduce deeper spending cuts, the resulting economic adjustments could drive volatility across fixed-income markets. Advisors may want to explore defensive strategies to mitigate potential risks in client portfolios.
Path Forward
Reconciling the House and Senate versions of the bill remains a daunting challenge. The GOP’s ability to pass the legislation hinges on maintaining cohesion among moderates and fiscal conservatives. With a thin margin for error in both chambers, any deviation from negotiated compromises risks derailing the bill entirely.
As negotiations intensify, wealth advisors should keep a close watch on the evolving provisions, particularly those with direct implications for high-net-worth clients. From SALT adjustments to business tax reforms, the final shape of this legislation could redefine key aspects of financial planning and portfolio strategy for years to come.
While GOP leaders project optimism about resolving these challenges, advisors should prepare for continued uncertainty in the weeks ahead. Staying informed and proactive will be essential in navigating the potential ripple effects of this landmark legislation.
