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Capitol Hill Recap: Taxes and the Shutdown

By Alex M. Parker
October 3, 2025
government building

Key Takeaways

  • The federal government began a shutdown this week following a lapse in appropriations.
  • Part of the partisan standoff involves enhanced credits for insurance on the Affordable Care Act exchanges.
  • The IRS has not yet released plans should the shutdown stretch on.
  • IRS working on transition guidance for first year of new tips, overtime deductions.
  • Democrats look to expand OBBBA tax benefits despite opposition.

You can time the start of a government shutdown to the minute—in this case, to 12:01 a.m. Wednesday morning, when funding for federal agencies stopped under the continuing resolution Congress passed in March.

The effects, though, take longer to register.

Democrats and Republicans failed to find common ground during a brief Monday meeting at the White House, one of the few times they’ve come together to discuss the situation. The House of Representatives passed legislation last month to continue funding the government at current levels—a “clean” continuing resolution, in D.C. parlance—but the measure failed to pass the Senate, after only a few Democratic senators voted in favor. 

Democrats insist they will not support a clean CR, and are hoping to use the impasse to push for policy changes. Chief among those is an extension for enhanced premium tax credits for the Affordable Care Act exchanges, which were first enacted in 2021 and extended in 2022. A few Republicans, including Senate Majority Leader John Thune, have said they’re open to discussing that issue–but not in a stop-gap funding measure, and not while the government isn’t open. 

Shutdowns aren’t spelled out in federal law. Rather, they’re an interpretation of the Anti-Deficiency Act, a 19th-century law that forbids departments or agencies from spending money not appropriated by Congress. In 1980, the attorney general wrote an opinion stating that in the event of a funding lapse, government agencies could not continue operating without violating the law. Later opinions and agency practices dictate that some employees, often deemed “essential” for protecting life or property, could still come to work. Since then, shutdowns have become more and more common as partisanship in Congress has skyrocketed.

The Internal Revenue Service issued a plan last week stating that it could use unspent Inflation Reduction Act funds to continue normal operations for at least five days after the lapse begins. It hasn’t spelled out any further shutdown plans. During the shutdown that stretched from December 2018 to January 2019 the IRS furloughed most of its staff, but recalled about half for the start of filing season. This year, the agency is already entering the shutdown with a reduced workforce following cuts by the Trump administration and Republicans in Congress.

According to the Department of the Treasury’s shutdown plan, many offices, including the Office of Tax Policy, will continue to perform core functions with reduced staff. (Which could include coordinating with Congress about tax policies that might be part of an agreement to open the government, the plan notes.) If the shutdown stretches beyond five days, it may recall “policy experts to address issues related to domestic and international economic affairs,” the plan states.

Past experience has shown that shutdowns can be chaotic and unpredictable—in Congress and in federal agencies. That will likely be even more true this time around, with an administration that has not been hesitant to revisit past practices. 

 

Recent Tax Pieces:

What's Behind the Health Care Fight That Led to the Government Shutdown – Selena Simmons-Duffin, NPR:

The enhanced tax credits are important for people who don't get health insurance through their job or a public program like Medicare or Medicaid. This year enrollment hit a record 24 million.

That is only about 7% of the U.S. population, but the people who rely on these plans are an influential group that includes small business owners, farmers and ranchers, says Cynthia Cox, vice president and director of the Program on the ACA at the nonpartisan health research organization KFF.

 

Some Democrats Want to Upsize Trump’s New Tax Cuts – Richard Rubin, The Wall Street Journal:

Under one proposal, “no tax on tips” would cover automatic gratuities, which now don’t qualify. Another bill would extend the “no tax on overtime” deduction to union workers, airline employees and others excluded by the current definition. A different piece of legislation would remove income taxes from Social Security benefits, effectively enlarging the new deduction for seniors that Republicans created and capped at $6,000 per person.

Democrats are seeking their tax-policy footing after Trump turned versions of his “no tax on—” campaign slogans into the “one big, beautiful bill” that is likely to deliver many Americans bigger refunds early next year.

“I disagree with all the policies, but he does tend to tap in to a feeling among voters,” said Rep. Angie Craig (D., Minn.). “Sometimes, the top-line feelings are real even if his solutions are going to make things worse.”

 

Employers Should Sit Tight for OBBBA Transition Guidance, IRS Says –  Benjamin Valdez, Tax Notes ($):

The IRS won’t impose penalties on employers that make a good-faith effort to report and separate qualified tips and overtime pay on employees’ Forms W-2 for tax year 2025, even if they miss some, IRS official Paul Ferrell said during the agency’s monthly payroll industry call on October 2.

“The written guidance on that is still being developed,” Ferrell said. “That’s the extent of what I’m able to share at this time.”

 

The EV Credit Is Dead. Long Live the EV Credit? – Marie Sapirie, Tax Notes ($):

Two notable events are about to take place in the automotive world. Ferrari — the preeminent Italian maker of superfast, superloud, super-expensive garage decorations — is days away from revealing its first fully electric vehicle, which will presumably also be fast and expensive, if not necessarily loud. And September 30 is the end of the line for the section 30D EV credit and most of its near relations in the tax code. While the two events may seem paradoxical, they share a root cause. Ferrari’s announcement responds to market demand and technological development. More surprisingly, Congress seems to have both recognized that those same market indicators mean that section 30D has outlived its ostensible purpose of getting the EV industry off the ground and responded appropriately by ending the subsidy. That rarely happens.

 

GOP Moves Closer to Nixing IRS Direct File – Kim Dixon, Bloomberg Tax ($):

Congress this week was set to receive a report examining options for an IRS-run public-private partnership to help Americans file taxes for free.

Sound familiar? That’s because the IRS already has such an option called Free File that was created two decades ago under President George W. Bush. Many big tax prep firms backed out of Free File in recent years, amid media reports that the firms hid their free options.

 

 

 

 

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About the Author(s)

Alex Parker

Alex Parker

Tax Legislative Affairs Director
Alex provides on-the-ground coverage and analysis of tax developments in our nation's capital, ensuring that Eide Bailly clients are well-informed about legal or regulatory changes that could affect them. He also closely follows the fast-changing and complex international tax sphere, including new projects at the United Nations, the G-20, and the Organization for Economic Cooperation and Development.

Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.