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Congress is barreling toward a government shutdown as the new fiscal year approaches Oct. 1, and the two parties have been unable to reach an agreement on a funding plan. While the House was able to eke out passage Sept. 19 of a seven-week spending bill — a continuing resolution (CR) that generally continues funding at current levels — the Senate does not have the necessary 60 votes, as Democrats hold out for negotiations over healthcare provisions.
Throughout September, both parties have increasingly dug in on their positions regarding passage of a CR. Senate Democrats, led by Sen. Charles Schumer of New York, provided the needed votes to avoid a government shutdown earlier this year, but there was significant backlash from many in the congressional caucus and from constituents; as a result, Schumer, his counterpart, House Minority Leader Hakeem Jeffries, D-N.Y., and their members in both chambers are well coordinated this time around.
Schumer and Jeffries released an alternative CR proposal last week that would run through Oct. 31; permanently extend tax credits intended to subsidize premiums for insurance bought through Affordable Care Act (ACA) marketplaces, due to expire at year’s end; reverse changes to Medicaid and other health programs that Republicans included in their tax and spending bill — known as the One Big Beautiful Bill Act (OBBBA) — this summer; and limit President Trump’s ability to roll back spending approved by Congress. While there are some Republicans interested in extending the ACA credits in some form, GOP leaders insist they will not negotiate the policy as part of a short-term CR.
The Senate voted Sept. 19 on both the House-passed CR and the Democratic proposal and failed to get 60 votes for either. After passing its bill by a vote of 217-214 earlier that day, the House adjourned and is not expected back in Washington until at least Oct. 1, a schedule that is designed to exert maximum pressure on the Senate to accept the House version and avert the shutdown. The Senate is not due back until Sept. 29.
The Congressional Budget Office estimated last week that permanently extending the enhanced ACA subsidies would increase the federal deficit by about $350 billion over the next decade and would result in about 3.8 million more people having health insurance by 2035. If the subsidies were made permanent on Sept. 30, premiums would be 2.4% lower for the 2026 plan year than the baseline projections, according to CBO’s report.
Grant Thornton insight:
If neither side blinks before Oct. 1 and the government does shut down, it is unclear how quickly it might reopen and what would change either party’s current stance. In the first Trump administration, the GOP presided over the longest government shutdown in history.
The House-passed CR through Nov. 21 would freeze the last of the IRS enforcement money allocated in the 2022 Inflation Reduction Act (IRA). A full-year FY2026 bill, if eventually passed, is likely to rescind it. Of the $80 billion provided for the service in the IRA, $45.6 billion was earmarked for enforcement; almost $42 billion of that has since been clawed back, and the IRS has been able to spend only about $3.5 billion.
In the FY2026 appropriations bill, House Republicans approved a 23% cut to the agency’s funding, including a 9% cut for operations support. In alignment with the president’s budget request, the House is looking to leave only a small portion of the overall IRS boost from the IRA, to be used for business systems modernization. A recently passed bipartisan Senate appropriations bill also would cut $11.7 billion of the remaining $18.9 billion the IRA originally included for IRS operations support.
Grant Thornton insight:
In the event of a government shutdown beginning Oct. 1, essential services will continue, but many IRS employees will be furloughed, and there will be disruptions to tax processing, audits and other services. A prolonged shutdown could lead to significant delays in the resolution of audits or appeals and an increase in processing backlogs.
Also in Congress…
House GOP Ways and Means Committee members last week outlined their priorities for the upcoming fiscal year in the annually required “Views and Estimates” letter to the House Budget Committee. On the tax front, they said they will “continue to prioritize tax policies that support American workers, families, farmers and small businesses.” Lawmakers said that in addition to working closely with the Treasury Department and the IRS to ensure smooth implementation of the latest tax bill, they expect to look for potential tax code improvement in areas including the tax-exempt sector and digital assets and to consider the use of artificial intelligence to combat improper payments and fraud and improve tax administration. They also noted that they continue to monitor “ongoing international tax discussions with impacts to the U.S. tax code and revenue base.”
Grant Thornton insight:
Ways and Means Chair Jason Smith, R-Mo., has recently made remarks in multiple settings about the need to see meaningful progress by year’s end at the OECD to implement this summer’s G7 agreement that would create a “side-by-side” international tax system under Pillar 2 and exempt U.S. companies from certain taxes (see this recent Grant Thornton article). He has noted that the statement from him and Senate Finance Committee Chair Mike Crapo, R-Idaho, withdrawing the proposed Section 899 from the OBBBA in response to the G7 agreement made clear that they were willing to reintroduce the retaliatory measure if the deal was not fulfilled. Negotiations at the OECD are ongoing, and it is not currently clear what degree of progress can be made by the end of the year.
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