President Donald Trump’s budget reconciliation bill (H.R.1.), dubbed the One Big Beautiful Bill Act (the Bill), nearly put a decade-long pause on state and local government AI regulation within the United States (the Moratorium). Ultimately, the controversial provision was removed by the Senate before the Bill was signed into law on July 4, 2025. With the Moratorium removed from the final Bill, states and local governments remain independent in their efforts to build guardrails for AI for now. However, the saga of the failed Moratorium provides some key insights into what to expect going forward.
One Big Beautiful Bill Background
Touted by the Trump administration as “a generational opportunity to restore America’s economic strength”, the Bill was first introduced as part of Congress’s budget reconciliation process and combines various tax cuts with reforms to Medicaid, SNAP benefits, education funding, and more. The Bill’s first iteration contained the Moratorium in the “Artificial Intelligence and Information Technology Modernization Initiative” section of the Bill, which, subject to a few exceptions, would have established a ten-year prohibition on enforcement of state and local restrictions or regulations on artificial intelligence models, artificial intelligence systems, and automated decision-making. The Moratorium emerged in part as an effort from the House Energy and Commerce Committee to prevent the emergence of patchwork state AI laws and to remove barriers to innovation, which is in line with the administration’s stance on AI, including President Trump’s AI-related Executive Orders.
On May 22, the Bill, along with its Moratorium provision, narrowly passed the House of Representatives by a vote of 215-214. Part of the Senate’s reconciliation process involves the Byrd Rule, which is a control against extraneous provisions in budget reconciliation bills. To maneuver around the Byrd Rule, the Senate revised the Moratorium to fit into the budget by attempting to tie Moratorium compliance with certain federal funding.
More revisions came through Senate negotiations as opponents of the Moratorium across the political spectrum sought concessions to the Moratorium’s terms, including attempted negotiations to widen exceptions to the Moratorium, citing concerns about protecting children and publicity rights. Additionally, the revised Moratorium was rebranded as a “temporary pause” and shortened from a period of 10 years to 5 years. Ultimately, an unambiguous 99-1 Senate vote removed the Moratorium from the Bill. As such, when President Trump signed the Bill into law on July 4, the final version included no restrictions on state or local AI legislation enforcement.
What Comes Next?
Although the Moratorium was ultimately removed from the Bill, that should not be taken as a lack of legislative interest in regulating or deregulating AI. The Moratorium legislative process – including opinions emerging from both sides of the aisle – provides valuable insights into the motivations and barriers to developing a consistent American AI policy. Discourse emerged throughout the process, including from 40 state attorneys general and 17 republican governors. In addition to the negotiations and attempts to broaden exceptions, a number of state attorneys general throughout the country opposed the Moratorium, citing consumer and citizen protection issues (and a desire to maintain state enforcement).
On the flip side, proponents of the Moratorium criticized the inconsistency of the emerging patchwork of state AI laws, noting the difficulties and added costs for businesses needing to comply with a state-by-state framework. The argument continues that the patchwork approach may hinder commercial efforts to innovate, mirroring the Trump administration’s concerns that AI regulation stifles innovation. This is not a new concern, as we saw similar arguments made (and lost) as the patchwork of consumer privacy laws developed across US states. In that instance, Congress was (and still is) unable to agree upon comprehensive privacy legislation and preemption of state laws. It remains to be seen whether the topic of AI presents a more fertile breeding ground for federal compromise on those topics.
In any event, we expect that Moratorium efforts will continue, and as a result, continue to be debated in Congress. It remains to be seen whether the concerns of consumer protection or business flexibility and innovation will outweigh the other in those conversations. But one thing is for sure – there is federal legislative interest in deregulating AI.
What Does This Mean for Business?
At the time of this publication, hundreds of AI-related bills have been introduced across all 50 states, and with the Moratorium off the table for some time, this is unlikely to slow down anytime soon. Businesses should pay particular attention to states with robust AI legislation, such as California, Colorado, Utah, and Texas.
At a minimum, state laws are focusing on AI governance requirements with a focus on AI tools that are used in higher risk use cases (e.g., employment, housing, banking, and healthcare). AI developers and deployers in those spaces in particular should start sharpening their pencils for compliance efforts if they haven’t already, as several key pieces of AI legislation are set to go into effect in the next year.
Across the board, companies looking to leverage AI should implement AI policies that address: (1) licensing in and licensing out AI, including vendor diligence; (2) minimum developer/licensor representations and assurances regarding the AI software and training data (including transparency, discrimination, etc.); (3) liability shifting; (4) internal processes for reviewing and approving AI products and use cases; (5) determining and documenting permitted employee uses; and (6) a general organizational mission/approach to guide the use of AI within the business. Given the potential for liability and the ongoing explosion of AI into product and service offerings as a “market differentiator,” all businesses, even in their role as a deployer or customer, must stay abreast of developing legislation.
Special thank you to summer associate, Topher Kittilson, for his assistance with this client alert.
