Senate Republicans Unveil $4.2 Trillion Tax Plan Ahead of July 4th Deadline

The U.S. Senate, under Republican control, has unveiled a new version of a $4.2 trillion tax and spending plan, with voting set to commence in the coming days. This development comes as the deadline set by Trump for July 4th approaches, marking a critical juncture in the legislative process. The new draft reflects a compromise among various factions within the Republican Party, addressing previous disagreements over the extent of cuts to social security projects and the phasing out of renewable energy tax credits from the Biden administration era.

The draft includes a temporary agreement with House Republicans to raise the limit on State and Local Tax (SALT) deductions from $10,000 to $40,000 for five years, after which it will revert to the original standard. Republicans aim to initiate the voting process as early as noon on Saturday local time, with a final vote potentially scheduled for early Sunday morning. Party leaders plan to recall House members early next week to complete the legislative process before Trump's deadline.

The Senate's 940-page bill, released shortly before midnight, includes several key changes aimed at securing approval. These modifications are essential as the Senate works to put the bill back on track, despite facing significant hurdles. Senate Majority Leader John Thune has indicated that the legislative text of the budget reconciliation package will be available on Friday, with voting on the legislation expected to commence shortly thereafter.

The Senate Judiciary Committee also released its updated text for the bill late Friday night, omitting some provisions that had been contentious among Democrats. This move is part of a broader effort to streamline the bill and address intraparty divisions. The Senate is aiming to start voting on the massive domestic policy bill as early as Saturday, even though some major components of the bill are still being finalized.

The bill includes several significant changes from the version passed by the House. Notably, the Senate Finance Committee's draft proposes permanency for what is known as "the big three" business provisions—business interest expensing, bonus depreciation, and research and development expensing—whereas the House proposed only temporarily extending these provisions through 2029. The Senate bill also retains the state and local tax (SALT) cap at the current $10,000 level, with expectations that it will rise to $40,000, similar to the House bill but with lower income thresholds. Additionally, the Senate bill proposes making permanent the section 199A qualified business income deduction at the current 20% rate, instead of the House-proposed 23% rate.

The Senate bill also includes significant international tax changes and more lenient adjustments to the House’s phase-out of certain Inflation Reduction Act (IRA) clean energy credits. While the Senate bill retains the House-approved permanency of individual tax provisions under the Tax Cuts and Jobs Act (TCJA), it proposes several modifications. For example, the Senate bill aims to eliminate the disparity in the House’s bill by prohibiting entity-level deductions for all pass-through entities, not just specified service trades or businesses (SSTBs). This proposal would allow a separate pass-through entity tax (PTET) deduction for owners of all pass-through entities (PTEs) up to an amount not to exceed the greater of $40,000 ($20,000 for married filing separately), or 50% of PTET.

The Senate Judiciary Committee's text also includes a provision that would expand the protections afforded to businesses under federal law by defining "solicitation of orders." If enacted, this provision would likely have a significant impact on states' ability to assert nexus over multiple types of business transactions.

The bill is currently undergoing a "Byrd bath" or "Byrd scrub" under the Senate’s reconciliation process, which aims to remove extraneous provisions and ensure that all provisions have a budgetary effect related to revenue that is not "merely incidental" and won’t increase the deficit generally outside the typical 10-year budget window. While some provisions may be axed from the bill, senators can still rewrite these provisions at the last minute to comply with the Senate Parliamentarian’s assessment. These Byrd violations may further delay the Republican leadership’s ambitious timeline, especially when pay-fors are involved.

Senate Republicans are working with two different cost estimates from the nonpartisan Joint Committee on Taxation (JCT) attributable to the upper chamber’s novel no-cost approach of estimating revenue effects relative to a current policy baseline. Under this controversial method, JCT estimates that the Senate bill would cost $442 billion—not including an expected lift in the SALT cap—and in line with the novel notion that extending the expiring TCJA provisions in essence don’t count. Using more traditional accounting methods, however, JCT has preliminarily estimated the tax measure would cost $4.2 trillion relative to a current-law baseline from 2025 through 2034, which is more than House Republicans have agreed to spend.

Senate Majority Leader John Thune has stated that the Senate will not recess as planned for the Fourth of July holiday until it has passed the reconciliation bill and sent it back to the House for its approval. House Speaker Mike Johnson is also asking members to be flexible with holiday plans based on the Senate’s timing. Disagreement amongst Republicans in both chambers on key issues remain, however. Namely, the SALT cap, Medicaid reform, certain IRA clean energy credit phase-outs and the projected increase to the deficit continue to be primary sticking points. Republicans are hoping to avoid sending the bill to conference committee, which would be required to reconcile the two chambers’ bills if the House won’t pass the Senate’s as-is.