Refinements and Retreats: What the Senate Proposal Gets Right and Wrong
Evaluating the Senate's revised OBBBA
The Senate Finance Committee has released its revised version of the much-discussed “Big Beautiful Bill.” But while the original House version raised eyebrows with its sprawling scope and contradictory aims, the Senate version manages to both sharpen and dull the bill in equal measure.
Some provisions are tighter, smarter, and more principled. Others are merely tweaks at the margins. And then there are those classic Beltway blunders: handouts, carve-outs, and silent fiscal landmines that the Senate has somehow made worse. As ever in American politics, compromise has a price.
Where the Senate Got It Right
1. Medicaid Provider Tax Reform: Finally, a Real Cap
Let’s start with one of the most serious improvements. The Senate version takes a bolder stand on Medicaid provider taxes — a longstanding budgetary sleight of hand used by states to draw down more federal funds than they otherwise could. While the House proposal merely froze these taxes at current levels, the Senate version introduces a real cap: 3.5% for states that expanded Medicaid under the ACA, down from the current 6%.
This is a commendable step toward discipline. Provider taxes have been used to inflate Medicaid budgets artificially, feeding a cycle of dependency on federal money. The Senate doesn’t solve the problem entirely, but it goes further than the House. Crucially, the Senate also retains the House’s work requirements for able-bodied Medicaid recipients — no small feat in an era where reciprocity in welfare is treated as taboo.
2. SALT Cap Sensibility: Holding the Line (for Now)
The Senate resists pressure from blue-state delegations to blow open the State and Local Tax (SALT) deduction cap. Whereas the House proposed a $40,000 cap, a gift to wealthy households in a handful of suburbs, the Senate keeps it at $10,000.
This is a more defensible position on neutrality and fiscal sanity grounds. Of course, as Senators have signaled, this is merely a starting point for negotiation. Expect the final compromise to drift upward, likely into the $25,000–$30,000 range. Still, starting low signals seriousness.
3. Permanency for Pro-Growth Business Tax Provisions
Perhaps the most encouraging shift: The Senate makes permanent what the House would only extend temporarily. That includes full and immediate deductions for domestic R&D and equipment purchases — provisions that are pro-investment, pro-innovation, and pro-productivity. Notably, retroactive research deductions for small businesses also get the green light.
Making these provisions permanent lends predictability to firms that want to invest and grow. It’s a nod to the idea that tax policy shouldn’t change with the seasons.
Where the Senate Just Nudged the Dial
1. Pass-Through Deduction: A Soft Retreat to 20%
The House floated a bump in the pass-through deduction to 23%. The Senate instead keeps the existing 20% deduction from the 2017 tax reform. It’s a status quo move that prevents expansion but doesn’t unwind the regime either. Small business advocates may grumble, but this is less about ideology than restraint. A marginal improvement, if your concern is simplicity and fiscal restraint.
2. Section 899: Slightly Less Punitive (still bad policy)
Section 899 remains a clunky, counterproductive mess. But the Senate’s tweaks make it marginally more tolerable. The additional tax burden is capped at 15%, and implementation is delayed from 2026 (in the House version) to 2027. It’s a classic case of kicking the can — delaying the pain without removing the threat. Still harmful, just not immediately harmful. If the U.S. wants to lead on global tax reform, it should do so by example, not by issuing veiled threats or punitive levies.
3. Tip and Overtime Tax Exemptions: Now Capped
The House version included two populist baubles: overtime pay and an unlimited deduction for tips. The Senate adds some guardrails. Tips are now tax-free up to $25,000 per person, and overtime up to $12,500 (or $25,000 for couples). Lawmakers should resist the lure of targeted giveaways and return to the harder, but more rewarding, task of building a broader, simpler, and more growth-oriented tax code.
Where the Senate Made Things Worse
1. Slower Phase-Out of Green New Deal Subsidies
The Senate weakens the House’s plan to wind down renewable energy subsidies. The House had required eligible solar and wind projects to be “placed in service” by 2028 to qualify for credits. The Senate softens this into a “construction begins” deadline of 2025–2027, which, thanks to the generous four-year “safe harbor” rule, means projects can actually qualify as late as 2029 to 2031. Other technologies, such as geothermal, nuclear, and hydropower, could qualify through 2035.
In practice, this ensures the federal spigot for green energy will keep flowing through the end of the decade, if not much longer. History suggests as much: The Production Tax Credit for wind has been extended more than a dozen times since the early 1990s. This move virtually guarantees that subsidies outlive the political moment, and that yet another generation of energy entrepreneurs will be trained to chase tax preferences, not profits.
2. A “Seniors Deduction” That’s Too Generous
If you’re 65 or older, the Senate wants to give you more: $6,000 compared to the House’s $4,000 per-person deduction. This is fiscal populism at its worst. Seniors already receive the lion’s share of federal transfers through Social Security and Medicare. While few politicians dare say it, there’s no public finance case for increasing this handout. It’s a sweetener, pure and simple.
3. Child Tax Credit Expansion: The Fiscal Time Bomb
Here lies one of the bill’s most egregious features. The Senate proposes boosting the Child Tax Credit (CTC) from $2,000 to $2,200 starting in 2025 — and making it permanent. While the CTC may be politically popular, its expansion locks in hundreds of billions in long-term costs. Combined with lax eligibility checks and phase-ins, it flattens the incentive to work while fattening the welfare rolls. This isn’t tax relief. It’s a transfer payment by another name. A better approach to tackling affordability issues for families with children would be to expand upon tax-free savings accounts — sadly, the Senate tax proposal (as I note in the next point) gets this wrong, too.
4. Health Savings Accounts Left Behind
The House wisely included a robust expansion of Health Savings Accounts—letting Americans save more for out-of-pocket medical expenses, tax-free. The Senate dropped the provision entirely. For anyone serious about market-based healthcare reform, this is a major miss. HSAs empower patients, lower costs, and encourage saving. Dropping them suggests a lack of imagination, or worse, a tilt toward centralized solutions.
5. Even More Debt, with Fewer Compunctions
Finally, the Senate lifts the debt ceiling by a staggering $5 trillion — $1 trillion more than the House’s already generous proposal. Fiscal conservatives will find this especially galling.
No matter the justification, an open-ended expansion of the national credit card with little meaningful structural reform in sight is Washington’s oldest betrayal. Debt becomes policy. Irresponsibility becomes permanent.
Progress with Caveats
The Senate’s version of the Big Beautiful Bill is, in places, slightly more beautiful than the House’s. Its discipline on provider taxes, SALT, and business deductions is commendable. But where it’s not merely treading water, it’s actively backsliding, especially on corporate subsidies, carve-outs, and long-term debt.
As the bill heads into reconciliation, one hopes the few remaining adults in the room will hold the line. A big bill needn’t be an irresponsible one. Lawmakers should insist on a lower deficit and debt impact, restore the HSA expansions, and sunset the worst giveaways like the expanded CTC. In Washington, size often correlates with surrender. Let’s hope, for once, the Senate’s modest improvements can anchor a final outcome grounded in something that resembles fiscal sanity.