Legislative Lowdown
Passthrough Deduction Eyed for Bigger Boost in Future Bill: House Republicans are weighing the possibility of a second major tax package following the recent enactment of their One, Big, Beautiful Bill Act (OBBBA, Public Law 119-21), which extends key provisions of the 2017 Tax Cuts and Jobs Act (TCJA, Public Law 115-97). A policy adviser to House leadership indicated that a future bill may revisit proposals from the House’s original version of the bill, including raising the passthrough business deduction from 20% to 23%, expanding retirement provisions under SECURE 2.0 and addressing technical corrections.
While some Republicans have floated the idea of a second reconciliation bill, no decision has been made and the likelihood of another bill being considered this year is low due to other legislative priorities. Lawmakers have two more reconciliation opportunities in fiscal years 2026 (which begins on Oct. 1) and 2027, which could allow them to advance additional priorities without Democratic support.
House Appropriations Subcommittee Markup of the FY26 FSGG Appropriations Bill: On Sunday evening, the House Appropriations Subcommittee on Financial Services and General Government (FSGG) released its fiscal year 2026 appropriations bill. See the key tax-related takeaways below:
- IRS Budget Cut: The bill includes a 20% cut to the IRS budget, amounting to a $2.8 billion reduction from FY25.
- Free Filing: Includes language that prohibits the IRS from using appropriated funds to develop or provide taxpayers with a free, public electronic return-filing service option, without prior approval from Congress.
- CDFI Program Funding: The bill provides up to $33.6 million for administrative expenses under the Community Development Financial Institutions (CDFI) Fund and the New Markets Tax Credit Program, including:
- At least $1 million for developing tools to assess investment performance and program impact.
- Up to $300,000 for administrative costs to support the direct loan program.
On Monday evening, the bill advanced out of the House FSGG subcommittee by a vote of 9-6. It is expected to be amended during the markup process as it moves through both the House and Senate. To avoid a government shutdown, both chambers must pass their 12 appropriations bills by Sept. 30. Given the calendar and minimal progress that the Appropriation committees have made in the government-funding process, it is very likely lawmakers will extend the current funding levels for fiscal year 2026 through a stopgap measure, commonly known as a continuing resolution (CR).
Energy-Tax Mainlines
Foreign Entity of Concern Rules Likely to Stifle Energy Tax Credit Claims: The OBBBA imposes new rules to prevent foreign entities from receiving U.S. tax credits on clean energy projects starting next year, significantly complicating access for solar and energy storage developers. These include complex requirements for tracing supply chains and contractual relationships to avoid involvement with “prohibited foreign entities,” such as companies tied to China or Russia. Legal and tax experts warn the rules are creating major compliance uncertainties that are already delaying project contracting and may ultimately discourage developers from pursuing projects potentially qualifying for investment or production tax credits. With the implementation timelines fast approaching and guidance still pending, many companies may hold off on projects or be unable to qualify under the tighter standards once final rules are issued.
1111 Constitution Avenue
TIGTA Releases Report on IRS Workforce Reductions: On Tuesday, the Treasury Inspector General for Tax Administration (TIGTA) found that the Internal Revenue Service (IRS) has experienced significant workforce reductions, with over 25,000 employees leaving between January and May due to resignations, retirements or layoffs. Among the hardest hit were tax examiners and revenue agents, with more than 7,000 departures combined. The office handling small business and self-employed taxpayers saw particularly steep losses, and workforce declines exceeded 30% in some Southern, Southwestern and Northeastern states. The IRS also cut 48 senior IT positions in March, and nearly 300 employees across the civil rights, taxpayer experience and equity offices received layoff notices.
Tax Worldview
U.S. Companies Not Fully Exempt from Minimum Tax: A recent G7 statement on the global minimum tax represents a shared understanding with the United States, not a formal agreement or full exemption for U.S. companies, according to Rebecca Burch, deputy assistant treasury secretary for international tax affairs. Speaking at a symposium, Burch clarified that U.S. firms are still subject to certain provisions of the 15% global minimum tax (Pillar Two), namely, countries with a qualified domestic minimum top-up tax. The G7 statement aimed to avoid a tax conflict by outlining a cooperative path forward but does not mark the end of negotiations, which continue within the Organisation for Economic Cooperation and Development (OECD) with the goal of reaching a formal agreement by year’s end. Burch also acknowledged congressional frustration that, despite the removal of the proposed “revenge tax” (section 899) from OBBBA, the G7 statement did not include commitments to end digital services taxes in other countries.
OECD Working to Resolve Concerns over G7 Minimum Tax Agreement: OECD officials are working to finalize guidance and potential new safe harbors to implement a “side-by-side” global minimum tax system by the end of 2025, aiming to prevent U.S. multinationals from facing top-up taxes abroad. The system, backed by the G7, would allow the United States to retain its own minimum tax rules (e.g., the global intangible low-taxed income (GILTI) tax) while exempting U.S. firms from some aspects of Pillar Two. Manal Corwin, director of the Centre for Tax Policy and Administration, said concerns—particularly about level playing field issues—are being addressed, in part through Qualified Domestic Minimum Top-up Taxes (QDMTTs), which apply to both U.S. and non-U.S. companies. Corwin emphasized that the inclusive framework is operating by consensus and that the G7 agreement does not bind other jurisdictions but is intended to support broader adoption.
German Finance Minister Says Berlin Committed to Global Minimum Corporate Tax: German Finance Minister Lars Klingbeil reaffirmed Germany’s support for the global minimum corporate tax following comments by Chancellor Friedrich Merz critical of the regime. Klingbeil clarified that he and Merz are aligned on upholding the 15% tax and advancing international tax coordination. While the United States has negotiated a G7 deal excluding its companies from the tax in exchange for dropping retaliatory measures, Klingbeil emphasized that the agreement still allows European countries to tax U.S. firms operating within their borders. The tax, part of a broader Two-Pillar framework involving around 140 countries, is projected to generate $250 billion annually in revenue. Despite political differences, Germany’s coalition government remains committed to the minimum tax while monitoring competitive impacts on European companies.
EU High Court to Hear U.S. Business Challenge to Global Minimum Tax: A Belgian court ruled that it lacks jurisdiction to decide a challenge brought by several U.S. business groups against the global minimum tax and has referred the case to the European Court of Justice. The American Free Enterprise Chamber of Commerce and other state-level business organizations sought to nullify Belgium’s use of the Undertaxed Profits Rule (UTPR), a key enforcement mechanism under the European Union’s (EU) 15% global minimum tax directive. The Belgian court found that the rule stems from the EU directive, which only the European Court of Justice can assess. The directive, adopted in 2022 and effective in most EU countries starting in 2024, allows countries to collect taxes from multinationals to the extent they are not subject to the minimum tax rate in either the parent or the host country.
At a Glance
OBBBA Adjusts Interest Deduction Rules for Capital-Intensive Industries: A new tax provision enacted under the OBBBA modifies the limitation on business interest deductions, easing restrictions for capital-intensive and IP-driven industries such as telecommunications, pharmaceuticals and manufacturing. The change shifts the cap from 30% of EBIT to 30% of EBITDA, allowing companies to exclude depreciation and amortization from the calculation and to deduct a greater portion of their interest expenses. The revision is expected to support investment and economic activity, though some critics have raised concerns about potential increases in corporate debt. While the adjustment is projected to reduce federal revenues, accompanying measures—such as including capitalized interest and excluding certain foreign income—are estimated to recover approximately $21.7 billion over a decade.
Proposal to Cut Capital Gains Taxes Resurfaces: Several advocacy groups and lawmakers are encouraging the administration to resurrect a capital gains tax cut, potentially through executive action. The proposal would adjust the original purchase price of assets for inflation when calculating capital gains, which supporters say would lower taxes on sales of stocks, homes and businesses. Advocates argue this change could encourage investment and provide relief to middle-income households and retirees. Critics, including nonpartisan analysts, note that the benefits would primarily go to higher-income individuals, could increase the federal deficit by up to $200 billion, and may open new avenues for tax avoidance. President Trump is reportedly considering the proposal.
Sen. Lankford in Talks with Trump Administration to Change IRS Church Rule: Sen. James Lankford (R-OK) is in discussions with the Trump administration about taking executive action to clarify that churches can engage in political speech without risking their tax-exempt status. The talks follow a recent IRS court filing indicating a shift in how it enforces the Johnson amendment that bars nonprofits from political activity. The IRS now appears to treat political endorsements from churches as private discussions, signaling a potentially softer stance. Sen. Lankford argues this shift is necessary to protect First Amendment rights, and while an executive order would not repeal the Johnson amendment, it could provide clearer guidance.
Brownstein Bookshelf
AEI Study Shows 20 Universities Will Pay $10.5 Billion in Endowment Taxes by 2030: A recent analysis by the American Enterprise Institute (AEI) estimates that around 20 universities will be subject to the OBBBA endowment tax next year, with the tax falling most heavily on schools with large endowments. The study found that Harvard could owe up to $368 million in the first year, followed by Yale ($276M), Princeton ($217M), and Stanford ($202M). Each of these schools could pay more than $1 billion over five years. The tax applies to earnings on endowment assets and applies progressively—1.4% on assets per student between $500,000–$750,000, 4% up to $2 million, and 8% above that—raising stakes for wealthy institutions. While some universities remain below the threshold for now, rapid endowment growth could push them into taxable territory. The study notes that actual payments may vary based on schools’ strategic moves, such as expanding enrollment, realizing capital losses or liquidating investments—potentially incurring additional capital gains taxes.
OBBBA to Add $3.4 Trillion to U.S. Deficits, CBO Says: The Congressional Budget Office (CBO) projects that the OBBBA will add approximately $3.4 trillion to the federal deficit over the next decade, driven mainly by $4.5 trillion in reduced revenue partially offset by $1.1 trillion in spending cuts. While some policymakers expect tariff revenues to help reduce the deficit, economists have raised concerns about potential inflationary effects and impacts on low-income households. The CBO also released an alternative estimate based on the current policy baseline, which shows the bill reducing the deficit by $366 billion.
Hearings and Events
House Ways and Means Committee
The House Ways and Means Committee will hold field hearings in Las Vegas, Nevada, and Simi Valley, California, to discuss the One, Big, Beautiful Bill Act (OBBBA) on July 25 at 1 p.m. (EDT) and July 26 at 12 p.m. (EDT).
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.