What are the potential credit implications of the new U.S. tax and spending law?

S&P Global Ratings expects the U.S.’s recently passed One Big Beautiful Bill Act (which includes significant changes in spending and taxation) to clarify some near-term policy uncertainty, but ongoing macroeconomic risks may shape its long-term implications.

While the new law could generally strengthen companies' post-tax cash flow, likely spurring more capital expenditure and potentially domestic investments or dividends and share repurchases, at this juncture we don't expect it to significantly boost the U.S. economy's long-run potential. The legislation could pose long-term risks for some rated issuers—such as insurers in the health care sector and U.S. public finance entities, along with companies that benefited from clean energy tax credits that will now be phased out.

Considering that the bill increased the government debt ceiling by $5 trillion, we believe the high fiscal deficit will persist.

What We're Watching

Likely to be the signature tax and spending legislation of the Trump Administration, the Act (signed into law on July 4) reflects key policy priorities—including supporting business investment, extending the 2017 Tax Cuts and Jobs Act (TCJA) and enacting new tax cuts, bolstering funding for border security and facilitating deportation of immigrants lacking permanent legal status, changing Medicaid and the Affordable Care Act (ACA) exchange program, and phasing out federal renewable energy tax credits.

The law also includes deregulation provisions primarily aimed at reducing regulatory agencies' expenses. The reforms aim to accelerate and expand permitting for fossil fuel projects, pipelines, and mining operations. However, some provisions could roll back investor protections. Deregulation measures could also increase mergers and acquisitions.

We will analyze the law's impact on fiscal outcomes and on GDP growth over the next several years while awaiting greater clarity on trade policy, including tariff levels and likely revenue. Our current economic forecast of 1.7% real U.S. GDP growth in 2025 and 1.6% in 2026 incorporates our assumptions of lower immigration, cuts to the federal government workforce, and more uncertain operating conditions for many businesses.

The extension of the TCJA's personal income tax cuts doesn't affect our baseline forecast for consumer spending, since we already assumed continuity of these cuts. Their extension avoids a consumer spending cliff but shouldn't be confused with growth stimulus. The other new individual tax provisions could somewhat boost growth, but not significantly relative to our baseline forecast.

The legislation also raises the U.S. government debt ceiling as Congress continues to act in a timely manner to ensure debt service, consistent with our 'AA+/Stable/A-1+' sovereign rating.

What We Think And Why

At this time, immediate and direct ratings impact from the bill's passage will likely be limited. We believe longer-term downside risks could coalesce around health insurers, not-for-profit health care providers, and renewables developers—while conventional fossil and nuclear generators could see some upside.

From a corporate perspective, we believe the extension of the expiring tax cuts will generally benefit companies' net income and boost post-tax cash flow. Increased cash flow could lead to higher capex, especially in capital-intensive and domestic sectors such as industrials, manufacturing, and energy. Changes to business tax provisions will likely add 0.2 percentage points annually to our GDP growth forecasts for the next two years, especially the allowance of 100% expensing of business equipment and research and development investment.

For individuals, modifications to some federal income tax provisions could benefit those in states with high tax burdens and potentially support employees in some industries. Some household incomes could benefit from temporary provisions to end taxes on tips and overtime and allowing the deduction of auto loan interest, among other measures (although the magnitude of the impact is difficult to estimate and could be offset by major variables such as potentially rising tariffs on imports). Households with additional disposable income for discretionary purchases could help boost sales tax revenue. While inflation remains a risk for affordability, sales tax revenue has historically been resilient during periods of higher inflation.

Despite these tax provisions, trade conflicts and market volatility could continue to weigh on consumer sentiment. We expect some tariff-induced inflation and unemployment to rise, which could squeeze individuals' discretionary spending. In the near term, we believe the drag from tariffs on the consumer sector will likely exceed any boost from overall tax provisions.

Considering the law’s significant changes to Medicaid and ACA (which serve as the source of primary health insurance coverage for roughly 21% and 6% of Americans, respectively), we view the new law as a negative credit factor for the U.S. health insurance sector and not-for-profit health care providers. The sector will likely face long-term revenue and earnings risks, while the law will likely increase providers’ costs for charity care. The law's enactment confirms our expectation of heightened legislative risks, which factored into us revising our view on the U.S. health insurance sector to negative from stable in January 2025. We expect to take limited immediate rating actions in the health insurance sector from the new law's enactment and will increasingly incorporate the impact of the exchange changes into our ratings as the law is implemented over the next five years.

For U.S. public finance entities, we believe longer-term implications for credit quality and stability—from new Medicaid stipulations that standardize work requirements for recipients, reduce the provider tax, and introduce other programmatic changes—could materialize. Higher Medicaid costs for U.S. states could be partially offset by a decrease in direct Medicaid spending through 2034 as a decline in covered individuals could shrink the rolls.

While the magnitude and implementation period of potential federal changes will be critical to states' ability to make timely budget adjustments, we believe states generally possess good autonomy to implement changes to their programs, which should limit the direct impact on ratings.

In our view, the law's provisions should improve the financial feasibility of developing affordable housing units, although uncertainty will continue until the U.S. Department of Housing and Urban Development appropriations bill is passed and the fiscal 2026 budget is finalized. We believe issuers will continue to mitigate uncertainty through proactive management planning and financial flexibility.

Looking at the power sector, the phased elimination of tax credits for renewable energy assets starting after 2027 will allow companies to adjust and prepare for the change. Earlier sunsets of tax credits could slow growth, affecting companies' ability to secure financing. From a credit perspective, we view the legislation as broadly unfavorable but manageable for renewable developers, neutral to favorable for conventional fossil generation, and favorable for nuclear generators.

The phase-out of certain renewable energy credits will also affect investors—particularly those with portfolios focused on climate, sustainable infrastructure, and the energy transition—by potentially weighing on investment in renewable energy. The provision could also reduce demand for electric vehicles.

We also consider that not-for-profit public power and electric cooperative utilities that planned to invest in clean energy resources based on economic incentives in the 2022 U.S. Inflation Reduction Act could face added costs when executing these investments. However, the transition period could provide sufficient time for utilities to incorporate higher costs into their future rate-case filings.

As a result, we assume the law's overall impact on the credit quality of investor-owned utilities will be broadly neutral. But projects that begin construction after June 2026 and are placed into service after the following year will likely face higher all-in costs. This could translate to increased costs for utility customers and may lead to a greater reliance on fossil fuel generation than we previously anticipated.

What Could Change

Overall, the bill's passage has reduced some uncertainty. But lingering macroeconomic risks could affect how the long-term effects of the legislation play out. For example, changes to trade policy (including tariff levels and likely revenue) could have an important impact on fiscal outcomes, and potentially investment and GDP, over the next several years.

We don’t expect the new law to meaningfully lift the U.S. economy's long-run potential. In theory, a lower adjusted tax rate would reduce the user cost of capital for some industries and likely lead to higher investment—but history suggests not by much, with lower corporate taxes more likely to boost dividends and stock buybacks. Moreover, the drag on labor supply increases due to slower immigration growth could more than offset any marginal positive growth from capital deepening.

We don’t foresee the law directly affecting our view of financial institutions or structured finance asset classes. However, we could see negative implications for these sectors if effects of the legislation result in weaker economic growth than we expect.

The law contains significant spending cuts in some areas, but raises spending in others. We don't expect the government deficit to decline to the U.S. Treasury’s stated goal of 3% of GDP over time. In fact, we believe that the deficit could rise in the next couple of years, absent a strong revenue pick-up from buoyant economic growth.

The effect of the new legislation on the U.S.'s deficit and debt trajectory will also depend on the effect of the new tax measures on GDP growth. The debt trajectory will also depend on the increase in fiscal revenue from recent and likely upcoming increases in trade tariffs, and to a lesser extent on other measures to deregulate and cut administrative costs.

The legislation's debt ceiling increase also staves off near-term operational and financial disruptions by deferring the next debt ceiling debate until after the 2026 midterm elections.

CreditWeek, Edition 81

Contributors: Lisa Schineller, Satyam Panday, Shripad Joshi, Nora Wittstruck, Gregg-Lemos Stein, and David Tesher

Written by: Darcy Fenlock and Molly Mintz