Washington: What to Watch Now

Washington: What to Watch Now is a regular column that analyzes only those political and regulatory issues that could potentially affect investors. For more, listen to the WashingtonWise podcast on Apple Podcasts.

President Donald Trump signed the massive tax-cut and spending bill into law on July 4th. The Senate made major changes to the House-passed bill and passed it 51-50, with Vice President J.D. Vance casting the tiebreaking vote, on July 1st. Despite frustration from House Republicans with the scope of the changes made by the Senate, the House passed the bill 218-214 on July 3rd. Five takeaways:

• This is a huge win for Trump and Republican leaders on Capitol Hill. The president got almost everything he wanted from this bill, including a signing ceremony on July 4th, something most observers (including this one) thought was nearly impossible. He proved again that he is the ultimate arm-twister and that threats to support primary opponents against any Republican who opposed him are effective. House Speaker Mike Johnson (R-La.) and Senate Majority Leader John Thune (R-S.D.) deserve credit for shepherding a massive, unwieldy bill through their respective chambers.
• There is certainty on taxes for years to come. The heart of the bill was making the 2017 tax cuts permanent. Setting the estate tax at $15 million in 2026 (and indexing it to inflation thereafter) is a huge win for wealth planning. There is a new charitable contribution deduction for non-itemizers. And the four big temporary provisions—no taxes on tip income, no taxes on overtime hours, making auto loan interest tax deductible and the additional $6,000 tax deduction for seniors, all of which have income caps and other restrictions—will be tough to vote against when they come up for renewal after 2028.
• There will be no debt-ceiling drama until 2027—but huge budget deficits and a rising national debt will be an ongoing concern for bond markets. The bill raises the debt ceiling by $5 trillion, averting the usual market-rattling debt drama next month and taking the issue off the table until after a new Congress is seated in 2027. But the bill is projected by the nonpartisan Congressional Budget Office to raise the debt by more than $3.3 trillion. Interest payments on the debt are now the second-largest annual expenditure of the federal government. Will this change the attitude of foreign investors or increase concerns in the bond market generally? Time will tell.
• Welcome to the biggest issue of the 2026 midterms. Democrats have already started the campaign ads, focusing on the deep cuts to Medicaid and SNAP (food stamps) and the tilt of the tax benefits to the wealthiest Americans. Republicans may have succeeded on their big bill, but early polling shows it's not popular with voters. Democrats are optimistic that they can flip the House in 2026. But the midterms are a long way off, and Republicans will be working hard to explain the benefits of the bill.
• The next big issue: Government funding deadline looms in October. The bill doesn't address a key issue—the annual funding of government operations. Both the House and Senate will be scrambling to pass the 12 appropriations bills that fund every government agency and federal program by the time the fiscal year begins on October 1st. And the rules that allowed Republicans to pass the "One Big Beautiful Bill" without any Democrat support don't apply to appropriations bills. Think the Democrats are in a mood to cut deals with their Republican colleagues? Not at the moment. A government shutdown in the fall is a real possibility.

A tariff deadline looms on Wednesday. The 90-day pause on the so-called "reciprocal" tariffs on about 90 countries expires on July 9th. Treasury Secretary Scott Bessent said on July 6th that letters were being sent to all countries indicating that the higher tariff rates will go into effect on August 1st unless real progress is being made in trade talks. Trump first announced the country-by-country tariffs during "Liberation Day" on April 2nd. They went into effect briefly on April 9th before a negative bond market reaction persuaded the White House to pause the tariffs for 90 days. The White House hoped for "90 trade deals in 90 days," but to date has managed to announce broad outlines of a deal with just two countries—the UK and Vietnam. As many as two dozen other countries are reportedly close to an announcement.

The Senate faces a decision on a rescissions bill. Congress is facing a July 18th deadline to approve the president's request to rescind more than $8 billion in funds Congress appropriated for foreign aid, as well as $1.1 billion in funding for the Corporation for Public Broadcasting, which oversees public television and National Public Radio. The House passed the bill last month, but several Republican senators have concerns. Amending the bill is an option, but then it would have to go back to the House for another vote, and the timing is tight with the House in recess until July 14th. If Congress doesn't act on the bill by the July 18th deadline, the funding will proceed as planned.

Two high-profile Republicans plan to retire. Senator Thom Tillis (R-N.C.) announced that he would not run for re-election in 2026 after he decided to oppose the "One Big Beautiful Bill" and drew the ire (and a promise of a tough primary) from the president. North Carolina becomes the Democrats' best opportunity to pick up a seat in the Senate in 2026, especially if former Democratic Governor Roy Cooper decides to run. Republicans are likely to have a competitive primary. It will be one of the most closely watched Senate races next year. Also announcing his decision not to run for re-election was Rep. Don Bacon (R-Neb.), who has held the seat in the blue-leaning district that includes Omaha since 2016. It is just one of three districts that supported Kamala Harris for president in 2024 but elected a Republican to Congress. Democrats see the seat as a key pickup opportunity in their effort to recapture the House in 2026.