Hello and welcome to the RBC Global Asset Management Navigator podcast. My name is Tim Leary and I'm a senior portfolio manager with the blue Bay Fixed Income team at RBC Global Asset Management.

Tim

Today's episode of The Navigator podcast, we're going to discuss what investors need to know about the budget reconciliation bill, or otherwise known as “One Big Beautiful bill”.

We'll share our current thinking about what's going on and what it means for markets. It is my pleasure to be joined today by Justin Sok, principal consultant with Rich Feuer Anderson.

Justin, thanks for being here with us today.

Looking forward to getting your thoughts on what's already proven to be a volatile time in markets. And, before we jump in, why don't you introduce yourself and tell us a little bit about your background?

Justin

Thanks, Tim. Great to be with the RBC team today. I'm at a boutique firm here in Washington, D.C. advising clients on trends and policy, both on Capitol Hill and at federal regulators, related to tax, trade and many other things.

My background is in government here in DC.  I spent a good amount of time on Capitol Hill, where I worked for the now chairman of the Ways and Means Committee.  One of the main authors of the One Big Beautiful bill, Chairman Jason Smith of Missouri, and was his economic policy advisor for, little over five years. I also spent some time in the Treasury Department under the previous Trump administration, under Secretary Mnuchin, where I was his main liaison between Capitol Hill and the department on issues related to tax. And was kind of a key point person for the implementation of the 2017 tax bill.  And then in between my current job and the Treasury Department, I spent some time at a financial markets trade association system, where I led, the industry's tax policy work, for broker dealers, around the country, in the world.

Tim

So as the. The one big, beautiful bill certainly deals with tax policy. Why don't we dig in a bit to what it means for your clients? What are your clients most focused on? Who are the winners? Who are the losers? Obviously not looking for specific names, but if there's a way to break down in your mind for our listeners, what types of firms benefit specifically, and what types of firms.

Justin

Tell me, I think it's helpful at the start to just kind of talk about, like, how it got to be one big, beautiful bill. So there's this kind of arcane process called “budget reconciliation”, which I think for most listeners, the thing that they need to care about is like that reconciliation, budget reconciliation has become a tool of both political parties in Congress, particularly when they have the House, the majority in the House, the majority in the Senate and the white House. It's become the tool that they use to get things done. It is messy. It requires a lot of negotiation, and it requires hitting certain kind of revenue and spending targets, to do it. So the one big beautiful bill is this administration's and this Congress's reconciliation bill.

Under the Biden administration, we saw something called the Build Back Better Plan. Or as it was finalized, the Inflation Reduction Act was used by Democrats in Congress and the Biden White House to produce, that legislation.

And so just I think that's helpful to kind of frame what this bill was going to be about. And so, when we talk about winners and losers, I think the big thing is that it prevented a large tax increase that was set to fall on many types of or all Americans and also passed their businesses and some particular corporate benefits as well at the end of this year. A lot of these expirations stemmed from the 2017 tax Cuts and Jobs Act. And so, the priority for the Trump administration and Republicans in Congress was to prevent that tax increase from happening.

Could they have done it in a bipartisan way? Yes. But they had the tool of reconciliation available to them to not only extend the expiring tax cuts, but to also address some of the broader policy concerns, whether that is border security, immigration, some spending, cuts and controls as well to government programs. They wanted to lump in a large number of priorities. And to this one bill.

So as we think about winners and losers, look, I think most people, investors of all types will not see a tax increase coming next year.

The individual, unless you're a private foundation, you might see a tax increase. But for the most part, I think a lot of businesses and individuals can take, well, we'll see their taxes largely stay the same. They're not going to see a marginal decrease, unless you're a certain population, which we can get into. But, for the most part, a lot of people are just going to see their tax rates stay the same as they paid their taxes this past year.

Businesses, though, will see some juice. And I think the real winners in this bill are going to be businesses that saw some permanent corporate tax benefits, extended. They saw a 100% bonus depreciation, immediate expensing, for both broad business expenses, but also research into development, that amortization R&D amortization actually lapsed two years ago.

And so, it's been able to catch back up and businesses are going to find the boosting cash flow investment incentivized just because of those three provisions.

Tim

It's expensive to duck.

Justin

That's right. That's exactly right. That's exactly right. So, it is going to free up cash flow for a lot of businesses.  It's going to allow them to make investment decisions. And the I can't emphasize this enough, and I, I think this is one of the true benefits of this bill is these provisions were made permanent, meaning certainty. And I think this is in a pretty uncertain environment.

I think this is something that businesses are really excited about.

Tim

Right.

Justin

Yeah. Yeah, I think that's right. But from the administration's perspective, I think if you had to consider a quote unquote loser on the bill, it's the overall cost. I think Scorekeepers estimated that it would, reduce, you know, federal revenue, over about 4.5 trillion over the next decade.

And so, the larger, deficit costs of the bill is something that's a major concern. And so I think as the administration is messaging and congressional Republicans or messaging about the overall cost in the bill, the tariff policy, as Secretary Benson has said, about estimated 300 billion in tariffs, revenue this year. There, adding that into the messaging on the calculation, not the official calculation, but the messaging calculation of this bill.

And if I could touch on just one other, I think, quote unquote loser, if you will, in the bill, has to be the, the kind of the renewable energy space, the green energy space, one of the, ways in which the overall cost of the bill was offset was by sunsetting and eliminating a lot of energy credits.

Almost all the consumer credits, whether solar installations, electric vehicles, almost all of those will end by the end of this year.

In that, just on those consumer credits, it's about 200, almost $300 billion is like $296 billion.  So overall, the kind of reduction from the Inflation Reduction Act credits the wind and solar, ITC and PTC, the kind of phase out which is coming over the next several years of these.

The phase out of these credits is total supposed to raise about $525 billion, over ten years.

Tim

And correct me if I'm wrong. And I could very well be. But my working assumption would be that it's primarily higher income, higher tax bracket individuals that are, spending money on solar panels on the roof and, you know, EVs and so on and so forth. Was there anyone is that sort of rollback, does that affect lower tax brackets the same degree, or is that primarily, a 1% tax that gets rolled back?

Justin

The pure credit, distribution falls on upper income, quartiles. But, it's interesting. I mean, you look at the ongoing effects of who this can have. I didn't directly they're not one of my clients. I did have a client in the solar space and one of their, installers, which was blue collar workers in Texas and Utah. These solar panel installation companies have boomed, because of these credits and the growth of solar, solar on homes and small businesses. And it's like that. These installers are going to see a serious drop in business opportunities, if the credits are not there because it's expensive to put these things on there. So those are some middle market jobs, some middle-income jobs that, trade jobs that are going to be impacted by this decision.

Yeah.  I think that's definitely correct. I think obviously, the kind of renewable energy space, is going to see some contraction because of the kind of loss of these credits.

Tim

But you could see, expansion in other ways. Congress is considering permitting reform for domestic energy production and expansion. Not to mention the over levered companies that.

Justin

Oh. That's right. I mean, it's you're this administration, just to use their, political phrase in themselves, drill, baby, drill is kind of the next policy goal, that they have, to expand energy production and as they quote, say, energy dominance here in the US. But it's, it's candidly, I think they, the administration and others have really they need to lean more into the all the above approach with regards to energy. The demand is through the roof. And, with AI data centers coming on board and energy storage, the demand I s through the roof.

And so, they're trying to figure out the way to, to solve that.

Tim

So, Justin, as we think about how the benefits of these this bill's tax cuts for corporations are sort of dispersed throughout, how are corporations, whether it's public company versus the mom-and-pop store, how are they going to be treated differently? Who are the real beneficiaries here? How much of this really accrues to the benefit of large corporations versus the smaller?

Justin

Yeah. So, the broader the big items. So, bonus depreciation, 100% bonus depreciation, R&D expensing, full and immediate expensing of manufacturing equipment like those items made permanent not only available to see Corp's but also sole proprietorships pass through as one of the provisions from the 2017 bill that was extended and made permanent in the one big beautiful bill was, permanent pass-through deduction, for sole proprietorships, partnerships, LLCs, etc. essentially allowed them to, identify qualified business income and deduct up to 23% of that qbi (qualified business income), which more or less tries to put, you know, your sole proprietorships or passes on the same level corporation. They also included several provisions that simplified tax compliance.

I mean, we haven't really talked about the big word yet, Tim, which is SALT (State and Local Tax). And there is a pretty significant SALT cap relief, included in the bill. It increased the SALT cap. Previous law was $10,000. The cap is now increased to $40,000 for households that are making under $500,000 a year, for the next, four years.

Tim

How does that work in practice?

Justin

So, if you make $402,000, it's what your rate is. It progressive in that sense, or It is progressive. There is a phase down of the rate heading up to that 500,000 limit. But again, after five years or after four years in 2029, the cap drops back down to $10,000. So, the savings, for the SALT cap or the, I guess the real juice and the revenue of the SALT cap is paid. And they in those later years, not in these early years, but, there is some SALT relief. And that means that's important for businesses as well, because there were some compliance changes made that will help businesses.

With their state and local tax passed their businesses with their state and local tax deductions. If we had to drill in on market reactions and industries that everything you've mentioned thus far is going to be impacted. To me, it feels like US focused businesses that are heavy industry cyclical, where there's a lot of CapEx being spent in the United States of America.

Tim

I would agree, I would agree I think these these expensing your business A and you've got decisions on what you need to do and having the tax certainty. And then having that cash flow and CapEx to be able to make those decisions, especially in these first couple of years I think will be true growth, mechanisms for a lot of different types of businesses.

Justin

I think that's right.

There is there is going to be some impact to state budgets.  You know, one of the larger pay for us in this bill was about $1 trillion cut to Medicaid, the kind of state run health care program it added in work requirements, provided, tax freezes for certain types of providers, which will ultimately shift the cost to states.

So, there's politics in how you message this, but ultimately, it means that fewer people will be eligible for these programs or enroll in these programs.  And so states are going to have to fund these alternatives, themselves.

It also is a concern for businesses to, providing health care for your employees is one of the more important decisions that businesses have to make. It's enticing to hiring people.

So it is something that will affect, certain types of businesses. The increase in the SALT cap will allow at least modest relief, and a certain type of, for certain types of taxpayers. And I would say just California, Connecticut, and New York. But it might be offset by the, Medicaid related fiscal pressures.

The other thing, you know, there could be, many higher costs for many borrowers if we just think about the broader federal fiscal concerned and what that means for the bond markets. So higher Treasury yields could push those rates up, which strains state budgets, for spending on infrastructure.

But one of the things that was kind of preserved in the bill, I think, to help offset that pressure, was a continued deduction for, state, for many bond financing. So that was a pay for that was on the table, but taken off.

Ultimately, in the conversations. I think the most concerning aspect of it is its overall fiscal cost. You know, it's challenging and politically charged, when even talking about the scoring of a bill like this, you know, the Congressional Budget Offers office, which is one of the official scores, kind of has built into their baseline only a meager 1% gross GDP growth.

The administration, looking at previous trends, in more freedom in their model, estimates a closer to 2.8% gross GDP growth. That's a real GDP number.

Tim

I think ultimately my concern is the overall costs. We are just continuing to deficit spend and ultimately where are we going?

Justin

 Yeah. Over the next decade. Yeah. Yeah. True and I think that you're, you're pinpointing a concern that I think policymakers, and members of Congress have with how the CBO estimates, certain things. but there's no doubt that this is a deficit spend bill, as much as we've cut spending in other areas. It is it is still a deficit spend. And we as a country are just spending out of a deficit.

And that's a real problem for, markets. It's a problem for rates. It provides pressure on rates and also just an overall, concern about the fiscal health of our country as we move forward.

Tim

But is it, in your mind, realistic, unrealistic, possible that U.S. debt to GDP at the end of 2025 is materially different? One way or the other versus 2024? Bearing in mind that it's already at astronomical levels.

Justin

Yeah. I think that's a good point. Look, I think Republicans, at least in Congress and the administration, are looking back at the 2017 bill. And it took a while, but CBO ultimately adjusted their overall, estimates, you know, years after the bill was in place, they estimated more revenue that came in than was projected at the time.

And they also estimated more growth than was estimated at the time. So maybe the problem in our country is economist. That's poor economist joke. But, no, I think there are there are real concerns about the level of spending.

And I think this is, at the end of the day, one of the problems, core problems in this bill and, to be, to be fair, spending government money is a bipartisan problem.

And if I could just, like, pivot to a last little bit of sunshine for investors and executives as a as their possible. Listen out there. Look, I think there are. To your point, there's large tax incentives based and baked into this bill, that will allow sectors like manufacturing and technology to see a boom in job creation and investment.

I think the high cost of the bill is going to potentially lead to some higher borrowing costs. As we look at the yields on ten-year notes and others continue to rise, so it's important to secure some solid financing rates at that point as business owner and hopefully mitigate against kind of future risk.

I think fiscal policy overall is something to monitor.

And this is, I think, the big debate in Washington right now is once you do a bill like this, our next election is the next year, the midterm election. Does this have effects on that election? Will the voter remember the trillion dollars spent, over the next decade or trillions of dollars spent over the next decade? Will they remember that when they go into the voting booth?

Tim

And then overall, it's just the impacts are likely going to be unseen in the short term.  But again, I think for businesses and investors, I think some of the I think those tax incentives they can look to, to see some true growth potential, as they're making investment decisions.