Tracking the 2025 One Big Beautiful Bill Act
On July 4, the “One Big Beautiful Bill Act” (OBBBA) was signed into law. GFOA is continuing to assess the implications of the budget reconciliation bill. While GFOA members’ advocacy efforts – including telling your stories at www.builtbybonds.com – resulted in the full preservation of tax-exempt municipal bonds, there are several other provisions of note. Below is the Federal Liaison Center’s initial assessment of new tax provisions and key changes to the existing tax code, many of which directly affect state and local governments.
*Please note, this assessment is based on a preliminary review of sections the bill relevant to state and local governments, which is a complex and extensive piece of legislation. To reference specific code sections and page numbers, use this version of the enacted law.
OBBBA does not change the tax code relative to accessing tax-exempt municipal bonds, 501(c)3 bonds or Private Activity Bonds. All these financing instruments remain unchanged through this round of tax reform due to the efforts of GFOA members and our partner communities, telling your stories about what has been #builtbybonds in your own communities. Our congressional advocacy efforts used these stories to successfully defend the municipal bond tax exemption throughout this budget reconciliation process. See the stories and add your own on www.builtbybonds.com
The tax legislation not only preserves tax exempt municipal bonds but also expands the tax code to include additional provisions authorizing tax-exempt bond financing for spaceports under the same general rule that applies to exempt facility bonds for airports, otherwise known as Private Activity Bonds (Section 142 of the Internal Revenue Code).
More specifically, spacecraft and space cargo manufacturing can now be financed with bond proceeds, along with other facilities for repairs, flight control operations, and other activities, if the facilities are near a launch or re-entry site.
Enacted Law: Section 70309, pages 130-131
The state and local tax deduction, known as SALT, provides a federal deduction for state and local income taxes and property taxes.
In the 2017 Tax Cuts and Jobs Act (TCJA), the limit was set at $10,000, which is set to expire in 2025.
This year’s tax bill includes a temporary SALT limit of $40,000, set to take effect this year as well. This benefit will begin to phase out or decrease after $500,000 of income.
Both the annual cap and the maximum income allowed to receive the deduction will increase by 1% yearly through 2029, before reverting.
The $40,000 cap will revert to $10,000 in 2030.
Enacted Law: Section 70120, pages 98-99
Early termination of the solar and wind tax credits: the bill eliminates the ability of taxpayers to claim the 45Y Production tax Credits and the 48E Clean Electricity Investment Tax Credits for a solar or wind project where the beginning of construction occurs on or after July 4, 2026.
A solar or wind project placed in service before December 31, 2027 is still eligible for the elective pay credits.
Other types of projects, such as geothermal, fuel cell, combined-heat-and-power systems, biogas systems, waster energy recovery, thermal energy, and battery storage, may still claim the 45Y Production Tax Credits and 48E Clean Electricity Investment Tax Credits.
These credits will phase out after December 31, 2032 by 25% annually until it reaches 0% in 2036.
The following tax credits for clean vehicles and energy efficient buildings terminate on the below dates:
-Commercial Clean Vehicle Credit: September 30, 2025
-New Energy Efficient Home Credit: June 30, 2026
-Clean Vehicle Credit: September 30, 2025
-Alternative Fuel Vehicle Refueling Credit: June 30, 2026
-Previously Owned Clean Vehicle Credits: September 30, 2025
-Residential Clean Energy Credit: December 31, 2025
-Energy Efficient Home Improvement Credit: December 31, 2025
FEOC (Foreign Entity of Concern): Disallowance of most surviving credits when the taxpayer, facility, or product has impermissible connections to China or other disfavored countries or entities, under provisions commonly referred to as foreign entity of concern (“FEOC”) rules.
Enacted Law: Section 70512, pages 179-183
Permanent 25% bond threshold reduction: The reconciliation bill permanently lowers the Private Activity Bond (PAB) test threshold from 50% to 25%, which will facilitate more bond deals. This provision requires 25% of a project’s basis to be financed by PABs for properties built after 2026. Projects can qualify for the 4% tax credits with 25% PAB financing.
Permanent 12% credit allocation increase: The reconciliation bill permanently increases the amount of 9% allocations for LIHTCs by 12% starting in 2026, which will attract more investment to the LIHTC program.
Enacted Law: Section 70422, pages 163-164
This legislation permanently extends the child tax credit and bumps the biggest credit to $2,200 starting in 2025. That figure will be indexed to inflation starting in 2026.
There is a threshold at which the credit becomes refundable, which was set to expire this year. This has also been made permanent and adjusts for inflation. Commonly referred to as the additional child tax credit, it is worth up to $1,700 for 2025.
Enacted Law: Section 70104, pages 89-90
The tax bill permanently extends the Qualified Opportunity Zone (QOZ) program. It also creates a new category of fund, a “Qualified Rural Opportunity Fund” (QROF), that provides investors with generous tax benefits. Additionally, there are new reporting requirements among other changes that are mostly set to take effect on January 1, 2027, providing a longer runway so that stakeholders have more time to prepare.
Enacted Law: Section 70421, pages 152-158
The Senate version is estimated to reduce federal Medicaid spending by $1 trillion over a decade (2025-2034).
OBBBA mandates that adults eligible for Medicaid through the Affordable Care Act (ACA) expansion must meet work or community engagement requirements to maintain eligibility. Exemptions exist for certain groups like minors, pregnant women, and caregivers of young children.
The bill includes provisions that tighten enrollment and maintenance of coverage requirements including:
-Reduces Medicaid eligibility based on legal status.
-Increases the frequency of eligibility redeterminations for the ACA expansion population to once every 6 months.
-Modifies FMAP for emergency medical conditions furnished to the states, likely lowering Medicaid payments to the states
-Eliminates the additional incentive for states to take up Medicaid expansion after January 1, 2026.
Enacted Law: Section 71101, pages 219-235
Cost-share proposal: States have to start contributing to food benefits. The specific amount, or share of a state’s contribution, is tied to the payment error rate from three fiscal years prior. In the past, states only contributed to administrative costs, while the federal government covered 100% of food benefits. This is the first time in history states are required to pay for food benefits.
Cost-sharing will start in FY 2028.
-SNAP contributions are tied to the payment error rate from three fiscal years prior, so a state’s FY 2028 cost share is based on its FY 2025 payment error rate.
T-he payment error rate measures how accurately a state calculated benefit amounts.
New work requirements: The reconciliation bill adds work requirements for adults between the ages of 55 to 64 and parents of children 14 and older, requiring at least 20 hours of work per week to qualify for benefits. In the past, these requirements only applied to able-bodied adults ages 18 to 54. This provision could strain state budgets and alter the federal-state partnership underpinning SNAP.
Changes to immigrant eligibility: The reconciliation bill excludes refugees, individuals granted asylum, victims of domestic violence, and victims of human trafficking, who were previously eligible for benefits, from qualifying.
Enacted Law: Section 10102, pages 11-14
Deduction for Tip Income (No Tax on Tips). OBBBA creates a new above-the-line deduction of up to $25,000 for qualified tips received by an individual in an occupation which customarily and regularly receives tips during a given tax year. This deduction is temporary, only available for tax years 2025-2028 and only for individuals in traditionally and customarily tipped industries, regardless of whether they itemize. It's important to note that this is a federal income tax deduction, not an exclusion. That means that tips may still be reportable—and taxable – at the state and local level.
Enacted Law: Section 70201, page 99
Deduction for Overtime Pay (No Tax on Overtime). OBBBA creates a new above-the-line deduction for up to $12,500 ($25,000 in the case of a joint return) for "qualified overtime compensation" (defined as overtime compensation paid to an individual under Section 7 of the Fair Labor Standards Act). Similar to the no tax on tips provision, this is a deduction, not an exclusion. The deduction would apply to taxpayers who do not itemize and would also be temporary—only for tax years 2025 through 2028. There is a phaseout for certain high-income MAGI.
Enacted Law: Section 70201, page 103
Note: GFOA is monitoring this provision with our state partners to better understand how these specific above-the-line provisions impact states and districts with rolling and static conformity to the US Federal Tax Code. As of July 1, 44 states have enacted a full year budget for fiscal 2026, but some could modify their spending plans as a result of the passage of OBBBA.