Impacts from the One Big Beautiful Bill Act: A Guide for City Leaders

The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025. Its primary objective is to extend key provisions of the 2017 Tax Cuts and Jobs Act (TCJA), including individual and corporate tax cuts. Beyond tax policy, the bill significantly reshapes federal spending and regulatory frameworks. Cities will likely feel the impact most acutely in four key areas:

1. municipal funding, as the federal government shifts financial responsibility to state and local governments;
2. environmental impact, with rollbacks to renewable energy tax incentives;
3. health care and social safety net reductions, including stricter Medicaid eligibility requirements and cuts to Affordable Care Act subsidies; and
4. modifications to opportunity zones (OZs), which alter investment incentives and eligibility criteria.

Municipal Funding

OBBBA includes changes to municipal finance, bonding and the State and Local Tax (SALT) deduction. The bill preserves tax exemptions on municipal and private activity bonds. In addition, the bill designates spaceport-related infrastructure as eligible for exemption under facility bonds, which will expand funding options for cities to invest in aerospace and technology innovation.

The bill temporarily increases the SALT deduction cap from $10,000 to $40,000 (for joint filers), with phaseouts starting for households earning over $500,000. The cap will increase by 1% annually through 2029, and revert to $10,000 in 2030.

Moreover, the cuts to Medicaid and the Supplemental Nutrition Assistance Program (SNAP) will put more pressure on state budgets, which will constrain municipal budgets as well.

Environmental Impact

OBBBA significantly reduces and eliminates tax credits and incentives created under the Inflation Reduction Act (IRA) for clean energy projects, electric vehicles (EVs) and clean transportation initiatives. Specifically, the bill includes an aggressive phaseout of solar and wind energy tax credits. The House modified the tax credits to include earlier phaseout timelines, restrictions on taxpayer eligibility and new language that tethers credit eligibility to a placed-in-service date instead of the commence-construction date. These changes could effectively terminate eligibility four years before they were originally scheduled, affecting projects still in the planning phase.

Cities will likely lose federal funding for solar installations, building retrofits and energy efficiency upgrades and experience reduced electricity capacity as a result. According to Energy Innovation, the OBBBA threatens to undercut more than $522 billion in previously announced private investment in clean energy and manufacturing across the United States.

The Commercial Clean Vehicle Tax Credit (Section 45W) will sunset after Sept. 30, 2025, with implications for municipal fleet electrification efforts. With the phaseout of EV charging infrastructure credits (Section 30C), cities must accelerate infrastructure deployment by June 30, 2026, to qualify. OBBBA also includes limits on elective pay options for municipalities and nonprofits.

Changes to Health Care and Human Service Programs

Medicaid eligibility restrictions are expected to increase the number of uninsured Americans. Hospitals and clinics in cities may face increased costs associated with uncompensated care, as more uninsured people will likely seek health care from emergency rooms. The related costs may lead to cuts in services or increased costs for insured patients. The new Medicaid eligibility requirements include work requirements and those that tighten verification of citizenship and immigration status.

OBBBA cuts federal funding for social programs, which may increase the burden on city-funded social services and lead to negative health outcomes.

Low-Income Housing and Opportunity Zones

OBBBA includes enhancements to the Low-Income Housing Tax Credit (LIHTC). The bill reinstates a temporary increase in credit allocations from 9% to 12.5% that had expired in 2021, which will extend from 2025 to 2029. Separately, beginning in 2026, the bill institutes a new permanent 12% increase in annual LIHTC allocations. For 4% LIHTC deals (also referred to as “bond deals”), OBBBA lowers the private activity bond threshold from 50% to 25% for properties placed in service after Dec. 31, 2025, and before Jan. 1, 2030.

OBBBA also includes changes to OZs. OBBBA makes the OZ program permanent and introduces a 10-year cycle for zone designations beginning on July 1, 2026. For investments made after Dec. 31, 2026, deferred capital gain will become recognizable on the earlier of: (1) the date of disposition of the investment, or (2) five years from the date of investment. Current OZs will sunset at the end of 2026, creating uncertainty for ongoing projects and potentially excluding some areas from future eligibility.

Considerations for Cities

Beyond OBBBA, the Trump administration continues to review all federal grants and contracts for waste, fraud and abuse and any ties to diversity, equity or inclusion-related projects. Planners should keep the shifting landscape of federal grants and contracts in mind as they now work with the changes flowing from OBBBA.

Short-Term Planning: Cities can adopt various short-term planning strategies, including:

1. Conduct an audit of all active and pending federal grants to identify which are still viable, which are at risk and which require accelerated implementation to meet new deadlines.
2. Retain and consult with legal and policy experts in federal grants and administrative law to assess risk exposure and develop mitigation strategies, given the potential for retroactive recoupments and disqualifications.
3. Maximize the use of elective pay before the linked tax credits are phased out. Cities should expedite the permitting, procurement and construction of the following projects:
   • Electric vehicles by Sept. 30, 2025;
   • Electric vehicle charging infrastructure must be placed in service by June 30, 2026; and
   • Wind and solar energy projects, including solar storage systems, should commence construction before July 4, 2026, to avoid shortened phaseout timelines and qualify for full federal tax credits
4. Seek alternative funding from regional climate initiatives, philanthropic foundations and state-level programs, green banks or climate resilience funds.

Long-Term Fiscal Strategy: Longer-term fiscal strategies for cities may include:

1. Leverage preserved municipal bond tools for infrastructure investment. Because of their continued tax-exempt status, municipal bonds, including private activity bonds and qualified 501(c)(3) bonds, will be critical tools for financing public spending. Accordingly, cities should expand their use of the aforementioned bonds, general obligation bonds, revenue bonds, conduit bonds, taxable municipal bonds and green bonds. Moreover, OZ expenses and full expensing for capital investments can be paired with municipal bonds to attract private co-investment in distressed areas.
2. Monitor evolving federal guidance and IRS interpretations. Cities should establish a federal compliance unit or designate a liaison in their financial department to monitor IRS bulletins, Treasury Department notices and Federal Register updates. In terms of implementation, city officials can subscribe to IRS e-News for Tax Professionals and join municipal finance associations.
3. Develop a multisource capital source strategy. Cities should diversify their capital sources, which includes layering state revolving funds, philanthropic capital, public-private partnerships (P3s) and bond proceeds. Cities should create a capital stack framework for major infrastructure projects that outlines potential funding layers, risk-sharing mechanisms and legal constraints.
4. Build fiscal resilience through stabilization reserves. OBBBA’s reductions in federal funding to states will create the need for buffers against volatility in cities. Cities should strengthen rainy day funds and budget stabilization reserves. Specifically, cities should adopt formal reserve policies that set minimum thresholds (e.g., 15-20% of general fund expenditures) and define conditions for use and replenishment.

Intern Phoebe K. Rotman contributed to this alert.