Government shutdown looms, and GOP wrestles with selling OBBBA

Congress returned to session last week after its annual August recess, and the fall looks likely to be characterized by continued partisan messaging on the GOP’s massive tax and spending reconciliation package. Also raising tensions on Capitol Hill is the Trump administration’s efforts to cancel previously appropriated federal spending, increasing the possibility of a government shutdown as current funding runs out after Sept. 30.

In a tacit acknowledgment that the new law is not as popular with voters as they would like, White House officials convened a meeting with Republican lawmakers immediately upon Congress’ return to Washington and urged them to talk about the legislation as a “working families tax cut bill” rather than as the One Big Beautiful Bill, as President Donald Trump previously branded it).

Throughout the recess, Republicans sought to highlight the tax cuts that some households will receive from new provisions, including temporary deductions for some tip and overtime income, as well as the permanent extension of rate cuts initially passed in 2017’s Tax Cuts and Jobs Act (TCJA). The administration also released guidance on the new tips deduction and revived domestic R&E expensing, as part of a push to expedite political and practical benefits of the law.

While the tax provisions in the law generally take effect sooner than the spending cuts — purposefully, ahead of next year’s midterm congressional elections — a challenge for Republicans is that the heart of the bill’s tax policies was essentially an extension of the status quo, undoing sunsets enacted by the Republican-written 2017 Tax Cuts and Jobs Act. The expiration of the TCJA tax cuts would have been apparent to taxpayers, but the question is whether the lack of expiration, alongside populist Trump campaign promises like tax deductions for tips and overtime, will outweigh other issues. While the GOP is heavily touting new Trump-advocated temporary provisions, only 3% of households are expected to benefit from the deduction for tip income, and 9%  from the deduction for overtime income, while fewer than half of seniors will benefit from the bill’s temporary bonus deduction for those over age 65, aimed at fulfilling a promise to make Social Security payments tax-free.

Republicans are also weighing whether to do another party-line package using the process known as budget reconciliation, this time more focused towards healthcare and additional spending cuts still on the wish list of some rank-and-file members. Democrats have gone on the attack over scheduled spending cuts and changes to Medicaid included in the OBBBA, and the impending expiration of tax credits intended to subsidize premiums for insurance bought through Affordable Care Act (ACA) marketplaces may add to healthcare-related political pressure on Republicans.

Government funding legislation is a potential vehicle for an extension of the premium credits and could be used in horse-trading between Republican leaders and congressional Democrats. With the new fiscal year beginning Oct. 1 and none of the 12 annual appropriations bills signed into law, yet, a continuing resolution (CR), which would extend funding at fiscal year 2025 levels, will be needed by the end of the month to prevent a government shutdown.

However, Republican approval earlier this summer of a $9 billion recissions package — canceling funding previously approved by Congress — and the Trump administration’s recent announcement of a controversial $5 billion “pocket recission” is causing Congressional tension. A number of Republican appropriators, including Senate Appropriations Committee Chair Susan Collins, R-Maine, have also sharply criticized the latest White House move and said it will be an obstacle to getting the necessary Democratic support for fiscal year 2026 funding.

Senate Minority Leader Charles Schumer, D-N.Y. warned of a potential shutdown in an open letter to the Senate Democratic on Sept. 2.

“As we near the funding deadline, Republicans are once again threatening to go-at-it-alone — heading our country towards a shutdown,” he wrote.

One item at issue in government funding: additional cuts to the IRS requested by the Trump administration. House Republicans have advanced legislation to cut IRS enforcement funding by an additional $2.9 billion, with a net cut of $2.8 billion from last year’s funding levels. The cuts are a nonstarter for Democrats, who have already seen the additional $80 billion in IRS funding, many of them voted for in the 2022 Inflation Reduction Act, undone.

A government shutdown could also poison the well for any additional dealmaking, around the ACA tax credits or other expiring tax provisions that have support from some elected officials but were not addressed in the OBBBA, like the work opportunity tax credit. A bipartisan effort led by the Nevada congressional delegation to undo a last-minute provision that reduced the amount of gambling losses eligible for a tax deduction could also lose steam in the event of a government shutdown, as anger and distrust between both parties is near an all-time high. 

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