The TCJA Cliff and OBBBA: US Fiscal Trajectory Through 2026

The cliff: which TCJA provisions sunset on December 31, 2025 #

The 2017 Tax Cuts and Jobs Act, Public Law 115-97, used reconciliation under the Byrd Rule to scope nearly all individual-side provisions to a temporary window ending December 31, 2025, while making most corporate provisions permanent. The expiring set was material: the seven-bracket rate schedule with a top rate of 37 percent, the doubled standard deduction at 14,600 dollars single and 29,200 dollars joint for tax year 2024, the 2,000 dollar Child Tax Credit with a 1,700 dollar refundable portion, the 10,000 dollar SALT cap, the lower mortgage interest principal cap of 750,000 dollars on new originations, the section 199A 20 percent QBI deduction for pass-throughs, the doubled AMT exemption with elevated phase-out thresholds, and the doubled estate and gift tax exemption that stood at 13.99 million dollars per individual for 2025 per IRS Revenue Procedure 2024-40.

The Joint Committee on Taxation in JCX-1-25 quantified the static ten-year revenue cost of straight extension at 4.0 to 4.5 trillion dollars, with section 199A and the rate brackets accounting for half the total. The Tax Foundation General Equilibrium Model published April 2025 placed the conventional cost at 4.5 trillion and the dynamic cost at 4.0 trillion, with a long-run GDP boost of 1.1 percent and a long-run wage boost of 0.5 percent. The Penn Wharton Budget Model in its April 9, 2025 simulation placed the cost at 4.7 trillion conventional and 4.0 trillion dynamic, with debt to GDP rising 7.4 percentage points above the prior-law baseline by 2034 and a long-run capital stock decline of 1.7 percent under conventional financing because of crowd-out.

The corporate side: permanent rate, fading bonus depreciation, GILTI, FDII, BEAT #

The corporate provisions of TCJA were structured as permanent at enactment. The 21 percent flat corporate income tax rate, codified at section 11, replaced the prior graduated schedule with a 35 percent top rate. The Treasury Office of Tax Analysis estimated in 2024 that the rate cut alone reduced federal corporate receipts by 1.0 to 1.3 percent of GDP per year against the pre-2018 trajectory, partially offset by the international anti-base-erosion regime that comprises GILTI under section 951A, FDII under section 250, and BEAT under section 59A. GILTI imposes a minimum tax of 10.5 percent rising to 13.125 percent post-2025 on global intangible low-taxed income; FDII grants a deduction yielding an effective rate of 13.125 percent rising to 16.4 percent on foreign-derived intangible income; BEAT operates as a base-erosion alternative minimum tax with a 10 percent rate.

The most volatile corporate provision is 100 percent bonus depreciation under section 168(k). The phase-down legislated in 2017 set bonus at 100 percent through 2022, 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, and zero from 2027. The OBBBA reset bonus to 100 percent for property placed in service after January 19, 2025 and made it permanent. The JCT in JCX-22-25 scored the restoration at 363 billion dollars over ten years, the single largest business-side line item in OBBBA. Research and experimentation expensing under section 174, which had reverted to five-year amortization for domestic and fifteen-year for foreign in 2022, was restored to immediate expensing for domestic R and E only. The interest limitation under section 163(j) was returned to an EBITDA basis from the EBIT basis that took effect in 2022. These three corrections, bonus, R and E, and 163(j), account for roughly 850 billion dollars of the ten-year score.

OBBBA: structure, score, and pay-fors #

The One Big Beautiful Bill Act, Public Law 119-21, was signed on July 4, 2025 after passing the House on May 22, 2025 by 215 to 214 and the Senate on July 1, 2025 by 51 to 50 with the Vice President breaking the tie. CBO's final score, released July 21, 2025, placed the ten-year deficit increase at 3.4 trillion dollars on a conventional basis, lifting to roughly 4.5 trillion when interest costs and the IRA energy credit interaction are fully attributed. The conventional revenue effect of the tax title alone was minus 4.5 trillion against the prior-law baseline, partially offset by mandatory spending reductions of 1.1 trillion concentrated in Medicaid work requirements, ACA premium tax credit modifications, SNAP eligibility tightening, and a rollback of multiple Inflation Reduction Act energy credits including the section 30D clean vehicle credit, the section 25E used vehicle credit, and accelerated phase-out of the section 45Y and section 48E technology-neutral credits.

The headline individual changes: TCJA rates, brackets, and standard deduction made permanent at 2025 levels indexed; the Child Tax Credit raised to 2,200 dollars indexed; the SALT cap raised to 40,000 dollars for 2025 with a 1 percent annual escalator and a phase-out beginning at 500,000 dollars of modified AGI, reverting to 10,000 dollars after 2029; section 199A made permanent at 20 percent; the AMT exemption made permanent; the doubled estate and gift exemption made permanent at 15 million dollars per individual indexed from 2026. New provisions include a temporary deduction for tip income up to 25,000 dollars, a temporary deduction for overtime premium up to 12,500 dollars single and 25,000 joint, a senior bonus deduction of 6,000 dollars for taxpayers age 65 and older, and an above-the-line deduction for auto loan interest on US-assembled vehicles.

Distributional incidence: the top decile and the bottom quintile #

The Tax Policy Center distributional table for OBBBA, published August 12, 2025, decomposes the static after-tax income change by expanded cash income percentile for calendar year 2026. The lowest quintile sees an average federal tax cut of 160 dollars, equal to 0.6 percent of after-tax income, with most of that benefit driven by the tip and overtime deductions and the modest CTC indexation. The middle quintile receives an average cut of 1,890 dollars, equal to 2.5 percent of after-tax income, dominated by the rate-bracket extension and the standard deduction. The 80th to 95th percentile band receives an average cut of 5,720 dollars, equal to 3.1 percent of after-tax income. The 95th to 99th percentile receives 14,400 dollars, equal to 4.5 percent. The top 1 percent receives an average cut of 73,500 dollars, equal to 5.7 percent of after-tax income, with the section 199A QBI permanence, the rate extension, the higher SALT cap, and the estate exemption driving the bulk.

The Penn Wharton Budget Model April 2025 distributional simulation reaches a similar shape: the top quintile captures roughly 64 percent of the conventional benefit, the top 5 percent captures 38 percent, and the top 1 percent captures 23 to 26 percent depending on the tip and overtime treatment. PWBM also models the dynamic incidence under conventional financing and reports that lower-income households are made worse off in present value terms once the debt service burden and lower wages from capital crowd-out are attributed. The Joint Committee on Taxation table in JCX-25-25 reports a similar distributional pattern across the 2026, 2030, and 2034 windows, with the top decile share of the conventional benefit rising over time as the temporary tip, overtime, and senior provisions sunset after 2028 while the permanent rate, QBI, and estate provisions continue.

Debt service, term premium, and Treasury issuance #

The Congressional Budget Office January 2025 Budget and Economic Outlook projected debt held by the public at 99 percent of GDP at fiscal year-end 2025, rising to 118 percent by 2035 under prior law. The CBO August 2025 update incorporating OBBBA shifts that path to 127 percent by 2035 and 156 percent by 2055. Net interest as a share of GDP rises from 3.2 percent in 2025 to 4.1 percent by 2030 and 4.9 percent by 2035 under the OBBBA-inclusive baseline, exceeding defense outlays in every year from 2024 forward, a structural inversion already realized in fiscal 2024. The fiscal year 2025 deficit closed at 1.83 trillion dollars per Treasury Final Monthly Statement, equal to 6.2 percent of GDP. The fiscal 2026 deficit is projected at 1.9 to 2.1 trillion in CBO's August update.

Treasury adjusted issuance composition. The Treasury Borrowing Advisory Committee minutes from the November 2025 refunding noted a deliberate shift to coupon-heavy issuance to reduce bill share, after the bill share rose to 22.4 percent of marketable debt in 2024 against the historical 15 to 20 percent guideline. The Federal Reserve Bank of New York ACM term premium estimate on the ten-year Treasury rose from minus 30 basis points at the close of 2023 to plus 65 basis points by Q1 2026, the largest sustained rise since 2010. The ten-year nominal yield averaged 4.55 percent in March 2026 against a fed funds upper bound of 3.75 percent. The Federal Reserve Beige Book for the March 2026 cycle reported tighter credit standards in seven of twelve districts and softer commercial real estate refinance dynamics tied to the higher rate floor.

State conformity, SALT cap workarounds, and the federalism layer #

State income tax systems conform to the federal Internal Revenue Code through static and rolling conformity rules. The TCJA cliff and the OBBBA extension both transmit through this channel, with state-level revenue effects that diverge from federal incidence. Twenty-three states use rolling conformity and inherit OBBBA changes automatically; sixteen use static conformity tied to a fixed IRC date and require legislative action to update. New York, California, Massachusetts, New Jersey, and Maryland passed pass-through entity tax workarounds to the original 10,000 dollar SALT cap between 2020 and 2023 under IRS Notice 2020-75. Thirty-six states adopted such workarounds by Q1 2026 per AICPA tracker. The OBBBA SALT cap increase to 40,000 dollars phases out at 500,000 dollars of modified AGI, raising the marginal value of pass-through workarounds for high-income filers in high-tax jurisdictions.

California, New York, and Illinois face the sharpest conformity tradeoffs. California's franchise tax board estimated in February 2026 that automatic conformity to OBBBA would reduce state revenue by 4.8 billion dollars per year, prompting Senate Bill 1217 to decouple from the bonus depreciation and section 199A permanence on the corporate side. New York issued a department of taxation and finance memorandum on March 3, 2026 confirming non-conformity to the federal SALT cap increase for purposes of the resident tax credit calculation. The state-federal asymmetry changes the effective marginal tax rate for high-income filers in California and New York, where combined federal-state-FICA marginal rates remain near 50 percent even under OBBBA. The implications for capital allocation, household marginal tax rates, federal revenue, and the bond market run through 2026 and frame the fiscal 2027 budget cycle, when multiple short-window OBBBA provisions including tip income and overtime sunset and reset the political negotiation.

Sources #

• Public Law 115-97, Tax Cuts and Jobs Act, 2017
• Public Law 119-21, One Big Beautiful Bill Act, 2025
• CBO, The Budget and Economic Outlook 2025 to 2035, January 2025
• CBO, Estimated Budgetary Effects of Public Law 119-21, July 21 2025
• Joint Committee on Taxation, JCX-22-25 and JCX-25-25
• Treasury Final Monthly Statement, fiscal year 2025
• Treasury Borrowing Advisory Committee, November 2025 Refunding
• IRS Revenue Procedure 2024-40, inflation adjustments tax year 2025
• Tax Policy Center, OBBBA Distributional Tables, August 12 2025
• Penn Wharton Budget Model, OBBBA Conventional and Dynamic Effects
• Tax Foundation, OBBBA General Equilibrium Analysis April 2025
• Federal Reserve Bank of New York, ACM Term Premium Estimates
• Federal Reserve, Beige Book March 2026 cycle
• Bureau of Economic Analysis, National Income and Product Accounts
• Congressional Research Service, R45341 The Tax Cuts and Jobs Act
• AICPA State Pass-Through Entity Tax Workaround Tracker