An Analysis Of The OBBBA

Leading up to the congressional votes in both the House & Senate it was obvious that Trump had a vested interest in getting the One Big Beautiful Bill Act (OBBBA) signed into law.  Trump wasn't picky about what the OBBBA included as long as it permanently extended the individual income tax provisions of the Tax Cuts & Jobs Act (TCJA) that he signed into law on December 22, 2017 & kept his campaign promises of no tax on tips, overtime, or Social Security benefits.

The urgency of the matter was that the individual income tax rates were set to expire after December 31, 2025 which would have resulted in the tax code reverting back to the law pre-TCJA which would mean a $4.5 trillion income tax increase in 2026 which very well could have triggered a recession thereby effectively ending Trump's 2nd term presidency & marking Trump as a failed president - an idea Trump was very aware of according to his close personal friend Bill O'Reilly.

Trump worked the phones & called GOP elected reps to the White House so that the OBBBA wound up with only 5 Republicans in total voting against it - In the House: Thomas Massie (KY) & Brian Fitzpatrick (PA); & in the Senate Rand Paul (KY), Thom Tillis (NC), & Susan Collins (ME).  The vote was 218 to 214 in the House & 51 to 50 in the Senate with the Vice President needed to break the tie.  Every Democrat in both chambers voted against the OBBBA which could be interpreted to mean that they were fine with the $4.5 trillion income tax increase in 2026.

Massie & Paul voted against the OBBBA because it would increase the debt, inflation, federal spending, & interest rates while Fitzpatrick, Tillis, & Collins voted against the OBBBA because it would result in reductions to projected federal Medicaid funding they regarded as too deep - Medicaid funding actually increased under the OBBBA but the rate of growth slowed.  In Washington this is regarded as a cut even though actual funding increases.  Almost nothing is ever actually cut in Washington & this is why the national debt keeps increasing.  The OBBBA, with Republicans holding the House, Senate, & presidency gave us a chance to do better. 

Like many, if not most of the major laws passed in the past 45 years the OBBBA was passed under a special legislative process known as reconciliation which expedites legislation limited to the fiscal budget - i.e., tax, spending, & the debt limit.  Reconciliation was created by the Congressional Budget Act of 1974.  President Reagan's two major tax & spending bills (The Economic Recovery Tax Act of 1981 & the Tax Reform Act of 1986) as well as Trump's TCJA of 2017 were passed using reconciliation.  More recently Biden's American Rescue Plan Act of 2021 & the Inflation Reduction Act of 2022 were passed under reconciliation.

The reconciliation process starts with the House & Senate initiating instructions (reconciliation directives) in a jointly agreed upon budget resolution that sets overall spending & revenue targets from which lawmakers work in finalizing appropriations & revenue legislation that is specifically intended to change existing law to align spending & revenue levels with the targets outlined in the budget resolution.

Under reconciliation the House & Senate must agree on a joint bill & there is no filibustering in the Senate & no changes to Social Security are allowed.  Amendments are limited in scope with the Senate parliamentarian ruling on the appropriateness of amendments.  All of this streamlines budgetary matters from standard congressional procedures.

The budget resolution set a $2 trillion minimum deficit reduction target for mandatory spending cuts over the ten years, 2025 through 2034, while maximizing tax cuts to $4.5 trillion over the same ten year period.  The time frame specified in the budget resolution for the OBBBA is ten years, often referred to as the budget window.  Very important, under reconciliation rules the budget targets adopted in the reconciliation process cannot intentionally increase the deficit beyond the ten year budget window - this rule played a big role in passing the TCJA in 2017 & the OBBBA.

The above provides the background for the process that produced the OBBBA.  Below are some specifics of the final bill that are enlightening.

1.  Medicaid reductions - not actual cuts in total spending but reductions slowing the rate of growth

The OBBBA did reduce the rate of growth of Medicaid by $1 trillion over the next ten years.  The problem is that Medicaid was scheduled to increase by more than $1 trillion over this period so in the end the program continues to grow.  This is a part of the OBBBA that Thomas Massie, Rand Paul, & I have a problem with.  But neither the congressman or senator's votes or my opinion was able to stop the OBBBA from passing.  

Under the OBBBA federal Medicaid spending is scheduled to increase by 26% from 2025 levels which equates to a 15% reduction compared to what was previously projected for 2034.  See graphic below.

click on graphic to enlarge

The budget directive to the House Energy & Commerce committee to cut $880 billion over ten years was the catalyst that led to $1 trillion being cut from Medicaid's projected federal spending from 2025 to 2034 despite Trump's promises to never cut Medicaid & threat to veto the OBBBA if Congress did.  No matter how hard Democrats protested over the months prior to the passing of the OBBBA, Republicans & conservative pundits on TV said they would not cut Medicaid despite it being obvious that no other program but Medicaid was large enough to meet the budget directive's target for the House E&C committee who has sole jurisdiction over Medicaid. 

The biggest reduction to Medicaid's projected federal spending comes from almost 9 million able bodied people 19 to 64 who are eligible for Medicaid through the ObamaCare expansion losing coverage for failure to meet work requirements (exemptions for those with dependent children & medical conditions).  People in this category will have to prove their incomes are below state thresholds semiannually rather than annually, plus prove they have spent 80 hours a month working, volunteering, or attending school.  Does this seem too much to ask?  Similar requirements pertain to receiving food stamps - people in the lowest income decile stand to lose food stamps.  

Another big reduction to Medicaid's projected federal spending involves restricting the cash flow gimmick that states & hospitals use in gaming the system.  States charge hospitals provider taxes.  Once this tax money is received the state can use these same funds to increase Medicaid payments to the hospitals thereby reimbursing the hospitals for paying the provider tax.  The states' Medicaid payments that use the provider tax adds to the states' costs that generate federal matching funds that end up with the hospitals receiving back more money than they paid in provider taxes.  A sorry exercise for the real taxpayers.

Democrats plan on making cuts (not reductions to projected federal spending) to Medicaid in the OBBBA one of the main issues of the 2026 midterms.  See below for how Republicans should counter these claims. 

Medicaid should completely be a state function with no federal involvement.

2.  Reinstatement of the SALT (State & Local Tax) deduction

The reinstatement of the SALT deduction in the OBBBA after it was severely restricted in the TCJA of 2017 is the most inexplicable part of the OBBBA based on the merits.  But Trump wanted it included for political reasons - to help the reelection of blue state GOP congressmen who think it behooves them to have states where they're from like New York & New Jersey receive federal tax money from people in Tennessee & Florida to help pay for the high NY & NJ state & local taxes that used to be 100% deductible prior to the TCJA.  The OBBBA reinstates what are actually subsidies from well run states to states like NY, NJ, & CA.  High tax blue states had no incentive @ all to control state spending until the TCJA & even then states found workarounds for some, but not all, people.  With the OBBBA the door has @ least been put ajar.  And who thinks this issue will help GOP congressmen win reelection in NY or NJ?

The OBBBA allows SALT deductions this year of up to $40,000 per income tax return, not per person, so it starts with a marriage penalty for couples who file joint returns.  The SALT deduction lapses in 2029 & has a phase out that begins @ an annual modified adjusted gross income (MAGI) of $500,000 & reverts back to the current TCJA SALT limit of $10,000 once MAGI reaches $600,000 so it is a boon to people making several hundred thousand dollars per year who have property tax & state income tax (or state sales tax) that total $40,000.  It is no benefit for people with MAGI of more than $600,000 per return in 2025.  To use the SALT deduction you have to itemise deductions on Schedule A so you have to compare the SALT deduction benefit to using the quite generous indexed to inflation standard deduction that has to be exceeded for any of this to be beneficial.  Both the $40,000 cap & the $500,000 & $600,000 income thresholds increase 1% each year from 2026 through 2029 before the cap resets to $10,000 starting in 2030. 

In addition, taxpayers are required to check the interplay between the Alternative Minimum Tax (AMT) parallel income tax system with the SALT deductions under the OBBBA & pay the higher tax prompting Steve Moore, decades ago, to call the AMT the MMT for Mandatory Maximum Tax.    Since the new increased SALT deduction could lead to some people having significant incomes with small tax liabilities, more people could be subject to the AMT.

Accordingly, for all the reasons given above, the increased SALT deduction may be a disappointment to many well off taxpayers.

The SALT deduction should be zero.

3.  No tax on tips, overtime, Social Security, & car loans

What the OBBBA provides is a far cry from Trump's absolute statement that there will be no tax on tips, overtime, & Social Security.  Under the OBBBA there is no general elimination of taxes on tips, overtime, or Social Security - tips & overtime are still considered taxable income subject to federal income taxes as well as payroll taxes of Social Security & Medicare.  The OBBBA provides deductions for both qualified tip & overtime income.  Social Security cannot be changed by reconciliation so a special senior deduction is available for qualified taxpayers.  These topics are ripe for disappointment because they come with significant limitations.

No tax on tips, overtime, & Social Security are taken right out of Death Of Democracy principles regarding buying votes by Trump, namely, voters effectively voting themselves seemingly generous gifts from the public treasury by voting for the candidate who promises the most benefits.  

Favoring tips, overtime, & Social Security from taxes through special deductions benefits certain targeted groups.  None of this is pro-growth in that each erodes tax fairness (why should a janitor or truck driver making the same income as a tipped worker be taxed @ a different rate or someone working overtime pay less tax than a salaried worker logging in the same number of hours?), jeopardizing government revenue (Social Security trust funds are depleted faster), & distorting labor markets & benefit programs (incentivizing employers to rely on tipped workers or overtime leading to lower base wages & a tipping economy where, for example, consumers tip cashiers for handing the consumer a bag @ a takeout restaurant).  Also, many tipped workers already pay little or no federal income tax due to low earnings so no tax on tips would have limited benefits for these people in the first place.

The tip deduction isn't for all workers & is limited to $25,000 per person for tax years 2025 through 2028 for tipped income that qualifies, defined as voluntarily paid by the customer who determines the amount, & which are received in occupations that customarily receive tips on or before December 31, 2024.  The tip deduction starts to phase out with MAGI of $150,000 ($300,000 if married filing jointly) @ a rate of $100 per $1,000 of income above these limits.  To claim the tip deduction workers are required to report their tips as income & pay payroll taxes throughout the year.  How to claim the deduction will be in the line by line instructions for Form 1040.

The overtime deduction runs from 2025 through 2028 & is capped annually @ $12,500 per individual & $25,000 for joint filers with a phase out range of $150,000 to $275,000 for single filers & $300,000 to $550,000 for joint filers.  An example best shows how the overtime deduction works: if you work M-F eight hours each day & then work 8 hours on Saturday making time & a half you can deduct the half portion of Saturday's pay meaning Trump would have been clearer saying no income tax on the premium portion of overtime pay.  To be eligible for the deduction the overtime must be paid as required by the Fair Labor Standards Act which applies to employees working 40 hours per week.  Withholding will not change in 2025 so people who qualify will receive credit for overtime pay which in turn could lead to a refund next April.

The OBBBA does not eliminate income taxes on Social Security - for tax years 2025 through 2028 it offers a new senior deduction of $6,000 for single filers & $12,000 for joint filers for people 65 & over.  These deductions phase out starting @ a MAGI of $75,000 for single filers & $150,000 for joint filers but here again comes a marriage penalty - the deduction is phased out @ a MAGI of $175,000 for single filers & $250,000 for joint filers.  Without the marriage penalty the joint filers deduction would extend to $350,000.

The new senior deduction reduces taxable income including Social Security benefits subject to taxation, but it does not exempt those benefits which still come under the specific line rules of the Form 1040 instructions.

Currently nine states tax Social Security benefits - Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, & West Virginia.  The OBBBA does not affect these state taxes.

From 2025 through 2028 there is an annual $10,000 taxable income deduction for interest paid on the purchase of new passenger autos for personal use if final assembly was in the U.S.  This deduction phases out between $100,000 to $150,000 of MAGI for single filers & $200,000 to $250,000 of MAGI for joint filers.  If the vehicle weighs less than 14,000 pounds there is a good chance it qualifies but check all the rules with the dealer before purchase.  Most imported cars subject to the new 25% tariff won't meet the U.S. assembly requirement making such vehicles ineligible for the deduction.

4.  Debt & Deficits 

The TCJA of 2017 was passed under a reconciliation budget window of ten years but because the individual income tax provisions of the TCJA increased the debt if they were in place for more than eight years the individual income tax provisions were designed to expire (sunset) after December 31, 2025.  Senate reconciliation rules do not allow the debt to increase outside of the budget window.  It was well known that the individual income tax provisions of the TCJA were temporary & that this matter would require attention in 2025.  If the individual income tax provisions of the TCJA were not extended it was clearly understood that the tax code would revert to its pre-TCJA rates for individuals after 2025 (i.e., under the current law baseline) meaning a $4.5 trillion tax increase for 2026.  Since Trump thought in 2017 that he would be out of office after 2024 this matter only became important to him after being reelected.

In passing the OBBBA last month Republicans resorted to budget deficit gimmickry by changing the basis of the analysis to a current policy baseline instead of the current law baseline that was used to sunset the individual income tax provisions of the TCJA after 2025.  Under the current policy approach Republicans claimed extending expiring individual provision tax cuts would reduce the deficit by $500 billion which is very disingenuous regarding the way the individual provision tax cuts were passed to begin with.  If the tax cuts are extended beyond 2025 the $4.5 trillion in revenue is never realized thereby resulting in a deficit hole that must be closed through spending cuts per the reconciliation process - & of course Republicans are no more capable of reducing spending than Democrats.

In this case an honest gimmick-free attempt to pass the OBBBA would have found $3.3 trillion more in spending cuts over the ten year reconciliation budget window ($3.3 T is the amount of additional spending cuts that would result in the OBBBA having more spending cuts than tax cuts) which would have allowed the bill to pass without chicanery.   It is this chicanery that only Congressman Massie & Senator Paul stood up to.

The national debt held by the public was already projected to be over $50 trillion by 2034 & the OBBBA doesn't cut into this but adds to it.  Rand Paul asked why does the OBBBA increase the debt ceiling by $5 trillion if Congress claims the bill will reduce the debt?  This turned him & Thomas Massie off from the beginning.

During the legislative process Republicans faced two choices: 1) voting against the OBBBA & having Trump find a primary challenger to run against the disloyal Member in the 2026 midterms, or 2) voting for the bill & chance losing the 2026 midterm election anyway.  At one point the OBBBA passed the House by one vote with Freedom Caucus President Andy Harris having the chance to make the entire process restart by voting "No" but instead he voted "Present" & the bill continued.  No leadership by any except Trump.

Poll after poll shows the OBBBA to be unpopular - because the hostile anti-American media continues to present the bill as throwing poor people off of Medicaid in order to give tax cuts to Republican billionaires.  In the runup to the 2026 midterms expect Democrats to present a handful of people with gut wrenching stories who have been thrown off of Medicaid & are devastated by the work requirements described above.  The insidious feature of the OBBBA that has the Medicaid spending reductions go into effect after the 2026 midterms while the tax cuts are retroactive to January 1 will only help portray the Republicans as weasels. And of course Dems will milk the tax cuts for the wealthy for all its worth juxtaposing billionaires with tax cuts against poor people thrown off  Medicaid.  The American people will empathise with those thrown off Medicaid & Republican politicians will shrink from the debate.  

Disgustingly, you can @ best expect Republicans to offer pitiful responses to these charges, never mentioning the number of able-bodied people collecting Medicaid, that Medicaid spending actually increases under the OBBBA (see graphic above), or  that Medicaid began as a state welfare program sixty years ago almost to the date of this post & now covers nearly 100,000 million Americans (more than one in four) & that the OBBBA gave us the best chance ever to return Medicaid to being a state only program thereby eliminating one of the three large federal entitlement liabilities that threaten the country's well being.

Republicans will shy away from saying that the bottom 70% of taxpayers don't receive large tax cuts because they don't pay much in taxes to begin with.  It is too much to expect that defensive Republicans could explain supply-side economic principles: namely, that the reduction in the size of government & its claims on earned income is what fuels economic growth, & hence our standard of living, when coupled with sound-money policies & lower marginal tax rates for the highest income earners who are the job creators.

If we can't win with these arguments we have lost anyway.  That we can only find two out of five hundred thirty five elected politicians to make these arguments is even worse.

Congress & the president (either of the last two) keep spending @ record levels.  Fiscal year 2025 outlays were projected to be 58% greater than the pre-pandemic levels of FY 2019 based on May 2025 data.  It was necessary to pass the OBBBA permanently extending the TCJA individual income tax provisions but unnecessary to include all the gingerbread described hereinbefore, especially using the budget gimmickry of changing baselines when Congress found themselves right back in the same exact spot of December 2017 - namely, how to account for the deficit caused by the TCJA going into 2026.