The government shutdown dominated headlines this month, as the funding lapse had sweeping consequences for government operations and the broader economy.
Government Funding
Last week, the federal government reopened after a record 43-day shutdown. A group of Senators negotiated a bipartisan compromise that included:
- A “minibus” package comprised of three year-long appropriations bills funding Agriculture and Food and Drug Administration (FDA); Military Construction and Veterans Affairs; and the legislative branch
- A continuing resolution (CR) that will provide funding for the agencies covered by the remaining nine appropriations bills through January 30, 2026
- A reversal of the reductions in force (RIFs) affecting over 4,000 federal workers laid off during the shutdown, along with a prohibition on any additional layoffs through January 30, 2026
- Guaranteed back pay for federal workers who were furloughed during the shutdown
- A promise from Senate Majority Leader John Thune (R-SD) to hold a vote on extending the Affordable Care Act (ACA) Premium Tax Credits (PTCs)
The deal provides a welcome reprieve for government agencies, their employees, contractors, and the public who rely on many of the services that were disrupted. However, the next government funding showdown may be just around the corner as Congress approaches the new deadline in just over two months.
The most challenging funding negotiations are still ahead, as the nine appropriations bills covered by the CR account for approximately 90% of annual discretionary funding and include complex, and sometimes contentious, policy matters. We will continue to bring you updates as government funding developments occur.
Potential Legislation
Congress is returning from a record-breaking six-week shutdown to a packed agenda and a limited number of session days before the year ends. Work on the remaining nine appropriations bills, a solution for the expiring ACA PTCs and other must-pass legislation is likely to take precedence over other priorities.
Legislative initiatives we are watching include:
- Government Funding: As discussed above, there are just over two months before lawmakers face another potential government shutdown.
- Affordable Care Act Premium Tax Credits: The compromise that restored government funding included a promise for a Senate vote on an extension of the ACA PTCs. Democratic proposals range from a one-year to three-year extension, while Republicans favor reworking healthcare on a larger scale, possibly to include new health savings accounts. The solution will need to be bipartisan, as the legislation would face a 60-vote threshold in the Senate.
- Other Year-end Must-pass Legislation: Congress needs to pass the annual National Defense Authorization Act before the end of the year. While there is often an annual farm bill, the CR contained funding for critical farm programs and policies for another year, making another farm legislation unlikely.
- Digital Asset Regulation and Taxation: Though the path to potential digital asset legislation has been a rollercoaster, there seems to be a real desire to produce bipartisan digital asset legislation on both market structure and tax treatment. There are several proposals, including a recently released Senate Agriculture Committee discussion draft on cryptocurrency regulation. Senate Finance Committee Chair Mike Crapo (R-ID) has stated digital asset taxation is a priority for his committee.
- Bipartisan Tax Extenders: Several tax provisions with bipartisan support, including the Work Opportunity Tax Credit, are scheduled to expire at the end of 2025. Policymakers were initially aiming to extend these provisions through a 2025 year-end legislation; however, the timeline has shifted to 2026, as they now seem to be targeting the end of that year for retroactive implementation.
- Gambling Taxation: Republican leaders in both chambers have signaled a willingness to roll back the new gambling loss deduction limitation implemented in P.L. 119-21, or the “One Big Beautiful Bill Act.” Similar to the bipartisan tax extenders, policymakers seem to be targeting a retroactive fix in a 2026 legislation.
- Reconciliation 2.0: As discussed in the October 2025 Tax Policy Review, the near-term prospects for a second reconciliation bill remain slim. However, several key Republicans have voiced support, including Speaker Mike Johnson (R-LA) and Senate Budget Committee Chair Lindsey Graham (R-SC). And the Trump administration has floated the idea of using another reconciliation bill to tackle changes in health care policy. House Ways and Means Chair Jason Smith (R-MO) continues to solicit input from members on tax provisions that could be included in another reconciliation bill or a tax extender or other bipartisan bill.
- Section 899: While recent developments in global tax negotiations appear to be promising, Republicans have signaled a willingness to reintroduce the Section 899 retaliatory tax if talks break down or the outcome is unsatisfactory to policymakers.
- Tax Administration: The House passed several tax administration bills earlier this year with broad bipartisan support. Since then, the Senate has passed only one of the bills, the Filing Relief for Natural Disasters Act, which became law in July, and has yet to take up the others. The Senate passed the Internal Revenue Service Math and Taxpayer Help Act by unanimous consent in October, and it has been sent over to the House for consideration. While these bills have support from both Republicans and Democrats, it remains uncertain whether they will become law.
It is also worth noting President Trump’s recent proposal to send $2,000 rebate checks to taxpayers pulled from tariff revenue would require an act of Congress, as recently echoed by Treasury Secretary Scott Bessent. At the moment, there does not appear to be adequate support for the idea.
Implementing Tax Reform
Treasury Assistant Secretary for Tax Policy Ken Kies made public comments in October acknowledging the impact of the shutdown on the implementation of tax reform. “Yes, there are some people who have been furloughed. We have a plan once they come back to catch up on what has slipped,” Kies said. “We are very keenly focused on getting the guidance out.”
Despite the shutdown, over the last month, Treasury and the Internal Revenue Service (IRS) have issued additional guidance in the following areas:
- Car Loan Interest Reporting: Notice 2025-57 provides transitional guidance, easing reporting requirements for lenders for the 2025 taxable year.
- Form 1099-K: An updated set of FAQs released in Fact Sheet 2025-08 provides guidance on the changes to the 1099-K reporting threshold included in P.L. 119-21.
- Tipped and Overtime Income Reporting: Notice 2025-62 provides employers with penalty relief related to reporting requirements during the 2025 calendar year. However, the guidance encourages employers to provide employees with information that will allow them to determine their eligibility for individual deductions.
Taxpayers and practitioners are awaiting substantial additional guidance, which many hope will be issued in the coming weeks.
Internal Revenue Service (IRS) Updates
During the six-week shutdown, IRS operations were limited, with nearly half of employees furloughed according to the agency’s contingency plan. As a result, certain functions are backlogged, including taxpayer assistance and correspondence. In addition to resuming normal operations, the IRS is tasked with implementing P.L. 119-21, Republicans’ “One Big Beautiful Bill Act,” and preparing for the 2025 filing season, all while working with a significantly diminished workforce. Consequently, taxpayers should prepare for delays in service over the coming months.
According to its contingency plan, the IRS staffing level has dropped to 74,299 — a decline of nearly 28% from its January 2025 level of approximately 103,000. Treasury Inspector General for Tax Administration highlighted concerns related to “managing a reduced workforce and budget” in its annual report on Major Management Challenges Facing the IRS.
Late last week, President Trump withdrew Donald Korb’s nomination for IRS Chief Counsel without explanation, following a public criticism of Korb by a conservative activist. A replacement nominee has not yet been named.
Finally, the IRS released a backdated report on the replacement of Direct File, announcing it will suspend Direct File and refocus efforts on strengthening other existing free filing programs, including Free File. The IRS plans to rely on industry partners to provide free filing options rather than developing a new in-house program. The report states, “With input from taxpayers and industry partners, the IRS will establish a clear definition of what constitutes a ‘free return’ and develop a consistent metric for tracking usage across providers.”
Economic Outlook
This month’s economic outlook has been shaped by a myriad of factors, from the government shutdown’s impact on GDP and data availability to rising inflation and a recent decrease in the federal funds rate.
Government shutdowns typically weigh on economic input, reducing Gross Domestic Product (GDP), the total monetary value of final goods and services produced within a country over a given period, at least in the short term. The Congressional Budget Office (CBO) released an analysis that projected a six-week shutdown would result in a $28 billion decrease in real GDP in Q4 of 2025. While $18 billion of that loss is expected to be recovered between Q1 and Q3 of 2026, $10 billion in production is likely to be permanently lost.
The government shutdown also disrupted the release of key economic indicators, particularly from the Bureau of Labor Statistics (BLS):
- Inflation: The most recent Consumer Price Index Summary released by the BLS showed prices increased 0.3% for the month and 3.0% for the year ending September 2025. Inflation began the year at 3.0%, dropped to a 2025 low of 2.4% in March, and has been increasing since.
- Labor: The BLS did not issue a September or October Employment Situation Summary during the shutdown. ADP continued to issue the National Employment report, which measures private sector job growth showing a loss of 32,000 jobs in September, a gain of 42,000 jobs in October, and an unemployment rate of 4.5% in both months.
Last week, White House Press Secretary Karoline Leavitt warned the October jobs and inflation reports may never be calculated or released. Collecting the missing data would be difficult as it is drawn from multiple sources, including national surveys. Leavitt noted the lack of information leaves the Federal Reserve policymakers “flying blind at a critical period.”
Despite a lack of data, the Federal Open Market Committee (FOMC) reduced its benchmark federal funds rate by another 25 basis points (or 0.25%) at its October meeting. This is the second reduction in 2025, which brings the federal funds target range down to 3.75% – 4.0%. However, the Fed Chair Jerome Powell raised doubts about a potential third rate cut in 2025, which the market had previously been predicting. During his post-meeting news conference, he stated there were “strongly differing views about how to proceed in December,” and that “a further reduction in the policy rate at the December meeting is not a foregone conclusion.”
Finally, it is worth noting that consumer sentiment has fallen sharply in recent months. The University of Michigan’s November 2025 Index of Consumer Sentiment posted a reading of 50.3, the second lowest on record. Consumer sentiment reflects consumers’ confidence in their personal finances and the broader economy and serves as a key economic indicator and predictor of future consumer behavior.
Global Tax Negotiations
While there is no official agreement and very few details available, reports from critical Organization for Economic Cooperation and Development (OECD) meetings on the creation of a potential side-by-side agreement positive.
As a reminder, Republicans dropped the Section 899 retaliatory tax provision from their tax reform bill in exchange for a G7 agreement on global minimum taxes outlining a “side-by-side” approach that would exempt the U.S. from the OECD’s Pillar Two rules.
Reports indicate OECD negotiators are closing in on an agreement that will rework the minimum tax framework, exempting the U.S. from the Undertaxed Profits Rule (UTPR) and Income Inclusion Rule (IIR). A deal may be reached before the U.S.-imposed December 31, 2025, deadline; however, even if there is a favorable resolution, it may take some countries months or years to adopt the changes.
Trade Policy
On Wednesday, November 5, the Supreme Court heard oral arguments in Trump v. V.O.S. Selections and Learning Resources, Inc. v. Trump. These consolidated cases challenge presidential authority to impose tariffs under the International Emergency Economic Powers Act (IEEPA).
Although the Supreme Court holds a six-three conservative majority, the justices’ questioning during oral arguments suggests the ultimate decision is unlikely to fall strictly along ideological lines. Three of the court’s six conservative justices expressed skepticism about the government’s position. Though the questions asked by the justices do not necessarily indicate how they will decide, it does provide insight into their line of thinking on some of the complexities at play.
The Supreme Court usually releases its most consequential decisions at the end of their term, which would be in June 2026; however, the court considered this consolidated case on an expedited schedule, which may indicate a decision will come relatively quickly. Regardless of timing, the outcome is certain to have broad impacts on the economy and global trade policy.
Control of Congress: 2026 Midterms
Democrats had a strong performance this month, exceeding expectations across several key off-year elections:
- Virginia: Former Rep. Abaigail Spanberger (D) made history as the state’s first female governor, winning by a 15-point margin. Democrats also secured victories in the races for lieutenant governor and attorney general and gained 13 seats in the House, resulting in a 64-36 majority.
- New Jersey: Rep. Mikie Sherill (D) won the NJ gubernatorial race, winning by 14 points despite predictions of a close race. Democrats also expanded their majority in New Jersey’s General Assembly.
- California: The most impactful outcome of 2025 election day on the 2026 midterms was California’s approval of Proposition 50, which temporarily allows the use of alternative congressional district maps that benefit Democrats through 2030.
The Democratic victories came one year after Republicans swept the 2024 elections, gaining control of both chambers of Congress and the White House, and one year before the 2026 midterms, which will determine the balance of power in the 120th Congress.
While the outcome of this year’s off-cycle elections may offer some insights into voter sentiment, they are not definitive indicators of future national outcomes. Over the coming months, we will provide more information on the midterm elections and the impact of possible outcomes.
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: September 2025
- Newsletter: Tax Policy Review: August 2025
- Newsletter: Tax Policy Review: July 2025
- Newsletter: Tax Policy Review: June 2025 Update
- Newsletter: Tax Policy Review: May 2025 Update
