Congress returned to Capitol Hill in early September, following a monthlong recess, to a packed legislative agenda. The most urgent priority for policymakers is addressing government funding to avoid a shutdown on October 1.
Over the last month, we’ve also seen Treasury and the Internal Revenue Service (IRS) begin to issue tax reform guidance, a decrease in the federal funds rate in response to changes in the economic outlook, and several developments in global trade policy.
Government Funding
There are less than two weeks before the government funding deadline. As of the time of this publication, there isn’t a clear resolution in sight.
Republican leadership has proposed a continuing resolution (CR) that will fund the government through November 20, 2025. Democrats are demanding Republicans negotiate before they will provide any support. Unlike reconciliation, appropriations must be a bipartisan process, as Senate passage requires at least 60 votes.
CRs are temporary stopgap measures to keep the government funded for a limited period of time to avoid a lapse in appropriations. While a CR seems like a simple enough solution, it’s important to note that none of the 12 annual appropriation bills were passed in FY25; the entire year was funded with two different CRs.
CRs are generally passed at prior year funding levels, so a FY26 CR would provide government funding at approximately FY24 levels. Additionally, CRs provide the Office of Management and Budget (OMB) with increased discretion over how funds are allocated, something Democrats are particularly sensitive to under the Trump administration.
Negotiations
The negotiations Democrats are seeking center around healthcare policy with a focus on the extension of the enhanced premium tax credit for Affordable Care Act (ACA) premiums. This is a priority they’re hoping to address quickly, as open enrollment for healthcare plans begins in November. Republicans, however, remain divided on the best approach to these expiring credits and don’t believe they should be part of government funding negotiations.
An agreement is needed by the end of the month to avoid a government shutdown.
Potential Legislation
Though policymakers’ most pressing concern is government funding, we continue to monitor several other legislative initiatives:
Bipartisan Tax Extender
As noted in the August 2025 Tax Policy Review, Republicans are hoping to win Democratic support for a 2025 tax extender package. There haven’t been many recent developments on this priority, as government funding has taken center stage on Capitol Hill. The potential for a bipartisan package could rest on whether Republicans and Democrats can work together to address government funding — an inability to do so that results in a shutdown could poison the well for future bipartisan efforts, including tax extenders.
Reconciliation 2.0
Enthusiasm for a second reconciliation bill may be fading. As we discussed in August, the interest in a second bill was primarily coming from House Republicans. Earlier this month, Ways and Means Chairman Jason Smith (R-MO) was asked about a second bill during an appearance on Squawk Box.
“I think that’s a great question,” he said. “I feel like we delivered everything the President promised to the American people, and that he campaigned on, in this bill.” Smith would likely be a key player in drafting any subsequent reconciliation package.
ACA Bill
Democrats are seeking an extension of the ACA premium tax credits that expire at the end of this year. Failure to renew these subsidies would result in a significant increase in health insurance costs for millions of Americans. As discussed above, Democrats are currently tying their support for government funding to healthcare negotiations.
Republicans remain divided on the issue. Jen Kiggans (R-VA), a vulnerable House Republican, has introduced a bill that would provide a simple one-year extension of the subsidies, which has garnered the support of a dozen House Republicans. Additionally, a group of Republican Senators is working on a possible extension package that would also include some policy changes.
Implementing Tax Reform
In the last month, Treasury and the IRS have provided additional guidance in the following areas:
- Research & Experimental (R&E) Expenditures: The IRS provided guidance on the implementation of the changes to the treatment of R&E expenditures under Section 174A.
- Tipped Income: Treasury released a preliminary list of occupations eligible for the tips deduction. The official list just cleared regulatory review and is expected to be posted in the federal register shortly.
- IRS Forms: The IRS is beginning to release draft forms, including the new Draft Form 1040 Schedule 1-A, where taxpayers will calculate their deductions for tipped income, overtime income, car loan interest and enhanced deduction for seniors.
Much more guidance is needed, particularly for the numerous taxpayer-favorable provisions that have retroactive implementation dates. We will continue to monitor and report on relevant developments.
IRS Updates
Earlier this year, President Trump issued an executive order requiring federal agencies to transition to electronic disbursement and receipts, including tax payments and refunds. The order requires the IRS to stop issuing most types of paper checks after September 30, 2025, and to stop accepting paper checks “as soon as practicable.”
As of this publication, the IRS is continuing to accept tax payments made by check but has stated it will phase out most paper disbursements by the end of the month. There are logistical issues with making the transition, including several types of taxpayers for which there is currently no direct deposit mechanism available. We are awaiting additional IRS guidance, including details relating to potential exceptions.
In other IRS news, Treasury Secretary Scott Bessent continues to serve as the acting IRS commissioner; he is the seventh person to hold the role in 2025. While several potential successors have been floated in media reports, no official candidate has been named by the Trump administration.
Donald Korb, a veteran IRS employee, has been tapped to serve as IRS chief counsel, a role he previously held from 2004 to 2008 under former President George W. Bush. Korb is expected to be confirmed in the coming weeks.
Economic Outlook
Recent data indicates the labor market is weakening while inflation is rising:
- Inflation: On September 11, the U.S. Bureau of Labor Statistics (BLS) issued the Consumer Price Index Summary, which indicated prices increased 0.4% in August (double the 0.2% increase for July) and 2.9% for the year ending August 2025 (an increase from 2.7% for the year ending July 2025).
- Labor: On September 5, the BLS issued the Employment Situation Summary showing the U.S. added only 22,000 jobs in August and the unemployment rate climbed to 4.3% (up from 4.2% in July). While economists generally consider numbers under 5% to be “full employment,” the new 4.3% figure is the highest level of unemployment since late 2021.
- In addition, the BLS updated its Current Employment Statistics benchmark for the year ending March 2025, showing the U.S. created 911,000 fewer jobs than first estimated.
- Congressional Budget Office (CBO) Analysis: The CBO released its Current View of the Economy from 2025 to 2028 this week. The economic forecast projects a decrease in GDP growth from 2.5% in 2024 to 1.4% in 2025, further softening in the labor market until unemployment reaches 4.5% later this year, and inflation increasing to 3.1% by the end of 2025.
- Each of these metrics should improve modestly in 2026, per the CBO’s estimates.
Federal Open Market Committee
As a result of these conditions, the Federal Open Market Committee (FOMC), the Federal Reserve System’s policy-making body, reduced its benchmark federal funds rate by 25 basis points (or 0.25%) at its September meeting. Furthermore, the market is pricing in two additional rate cuts at the FOMC’s October and December meetings.
FOMC Chair Jerome Powell and other committee members have been under immense political pressure from President Trump to decrease the federal funds rate over the last few months. Trump disagrees with the Fed board’s policy, as he seeks to reduce the cost of borrowing to jump-start the economy.
The FOMC decreased the federal funds rate by 100 basis points (or 1.0%) in a series of three interest rate cuts in late 2024, following a substantial set of increases in 2022 and 2023 to combat historic levels of inflation. The monetary policy board then held rates steady until this month’s interest rate cut.
As we’ll continue to revisit monetary policy over the coming months, it’s important for taxpayers to understand two key facts about the FOMC:
Dual Mandate
The FOMC has a dual mandate to maximize employment and keep prices stable. Maximum employment is “the lowest level of unemployment the economy can sustain in a context of price stability.” Meanwhile, the FOMC has a 2% target rate for inflation, the level at which it considers prices to be stable. Balancing these priorities can be exceptionally difficult.
Over the last several years, when unemployment has been low and inflation has been coming down from historic highs, the FOMC has maintained a higher benchmark rate. However, as unemployment has started to rise, we’re seeing a slight change in course.
Interest Rates
The FOMC influences monetary policy but does not set commercial lending rates. The FOMC sets a target range for the federal funds rate, which is the interest rate banks charge each other to borrow overnight. While the Fed’s rates don’t directly set borrowing costs, they heavily influence the short-term interest rates for other financial instruments.
They also have an impact, though less directly, on the medium- and long-term interest rates for other financial instruments; however, there are many other factors that influence these rates, including the market’s expectations for the overall economy.
Global Tax Negotiations
In late June, Treasury Secretary Scott Bessent negotiated an agreement with fellow G7 members on global minimum taxes, which introduced a “side-by-side” approach that would exempt U.S. companies from the Organization for Economic Co-operation and Development (OECD)’s Pillar Two rules. In exchange for G7 support, congressional Republicans dropped the Section 899 retaliatory tax provisions from their reconciliation bill.
The G7 proposal to alter Pillar Two rules must be ratified by the OECD in order to take effect. Republicans are pushing for the changes to be made by the end of the year, but passage is far from certain, as several countries have spoken out against the agreement on the premise that they believe it provides U.S. companies with preferential treatment.
If Congress doesn’t see sufficient progress on implementation of the agreement, we may see a reintroduction of Section 899. In a meeting with Republican House Ways and Means Committee members earlier this month, Treasury Assistant Secretary for Tax Policy Ken Kies indicated the agency would support Republicans’ efforts to reintroduce Section 899 should the OECD fail to adopt the G7’s proposal.
Trade Policy
Although there have been several developments related to trade policy this month, significant uncertainty remains and is likely to persist in the months ahead.
Legal Challenges
Earlier this month, the Supreme Court agreed to review and consolidate two cases challenging President Trump’s imposition of tariffs under the International Emergency and Economic Powers Act (IEEPA) — V.O.S. Selections, Inc. v. Trump and Learning Resources, Inc. v. Trump.
This development follows a late August decision by the U.S. Court of Appeals for the Federal Circuit upholding the U.S. Court of International Trade’s opinion that the president’s implementation of reciprocal tariffs exceeded his authority under IEEPA.
The case will proceed on an expedited schedule, with justices hearing oral arguments the first week in November. Current tariffs will remain in effect until the Supreme Court issues a decision, which is likely to be in the first half of 2026.
It’s important to note these cases only deal with the reciprocal tariffs issued under IEEPA. Section 232 tariffs that the administration has put in place on products such as steel, automobiles and copper will not be impacted. We anticipate an expansion in the number of products subject to Section 232 tariffs in the coming months. There are currently 10 Section 232 investigations open into a myriad of products, including timber, pharmaceuticals, semiconductors, and critical minerals, among others.
Additionally, if the Supreme Court rules against the administration, the president — who has made tariffs a central part of his economic policy — has other avenues to implement tariffs similar to those issued under IEEPA.
Updated Executive Order
The administration issued an executive order on September 5 that modified the list of products that are not subject to reciprocal tariffs and created a new list of products that may potentially be eligible for exemption if quantities of the product are not readily available domestically and the trading partners is in a trade agreement with the U.S.
If tariffs are impacting your business, view our trade policy insights and reach out to our International Tax Team.
Your Guide Forward
Cherry Bekaert’s Tax Policy group is committed to bringing you information on the latest tax developments and opportunities.
Related Insights
- Newsletter: Tax Policy Review: August 2025
- Newsletter: Tax Policy Review: July 2025
- Newsletter: Tax Policy Review: June 2025
- Newsletter: Tax Policy Review: May 2025
