Washington: What to Watch Now

Markets surged on Monday after Treasury Secretary Scott Bessent said the U.S. would drop tariffs on most imports from China to 30% from 145%, effective Wednesday, while China would drop its 125% tariff on U.S. imports to 10%. No trade deal was announced—this was more of an announcement that the countries have agreed to talk. The "pause" will last 90 days while negotiations continue. While the market cheered the news, the hard work lies ahead as the two countries try to reach common ground on a dizzying array of complicated issues. President Donald Trump said on Monday that tariffs will go up if there is not a "comprehensive" agreement by the end of the 90 days.

Meanwhile, House Republicans unveiled tax cuts in massive budget bill. The House Ways & Means Committee on Monday released its plans for tax cuts. High-level initial takeaways include:

• Makes permanent the 2017 tax cuts that are set to expire at the end of 2025;
• Estate tax exemption amount increases to $15 million per person ($30 million for married couples), beginning in 2026;
• No tax on tip income through 2028;
• No tax on overtime hours through 2028;
• Makes the interest on auto loans tax deductible through 2028, with a cap of $10,000 and a phase-out beginning at $100,000 in income;
• Increases child tax credit to $2,500 from $2,000 for 2025-2028;
• Increases standard deduction to $16,000 from $15,000 for 2025-2028;
• Does not eliminate taxes on Social Security benefits, but adds a $4,000 special deduction for seniors, subject to income limits;
• Increases tax on endowments of colleges and universities to as high as 21% from current level of 1.4%;
• Increases the SALT deduction cap to $30,000 from $10,000 for couples earning less than $400,000—a provision that falls short of what several Republicans in high-tax states like California, New Jersey and New York have said they could support. 

The committee will begin consideration of the bill today, a process that is expected to take well into the night as Democrats are likely to offer dozens of amendments. But we expect the measure to pass through the committee. 

Elsewhere, the Energy & Commerce Committee will be considering its portion of the bill today as well—that is ground zero for an intense debate over cuts to Medicaid. And the Agriculture Committee is also meeting to vote on its part of the overall bill, including controversial changes to SNAP (food stamps) and Biden-era green-energy tax incentives. If/when all three committees approve the bill, it will be combined with the elements already passed by eight other committees to form the much-discussed "one big, beautiful bill." House leaders hope the full House can pass that next week, before Congress breaks for Memorial Day. That is not a slam dunk, but things are moving in that direction. The Senate would then take up the bill (and likely make many changes) in June.

The president signed an executive order on prescription drug pricing. The order signed Monday gives pharmaceutical companies 30 days to work with the administration to lower drug prices and promises additional regulatory action if there is no significant progress in six months. The White House is focused on why other countries pay less for medications than the U.S. and seeks to equalize pricing. But it is not clear whether the administration has the ability to force price changes. Previous attempts at "most favored nation" pricing have met resistance in the courts, but this executive order, to the surprise of many, stopped short of that language.

Treasury Secretary Bessent said last Friday that the debt limit would be breached in August. The timing of the so-called "X date" by which Congress must raise the debt ceiling or the nation will default on its debts has been the source of considerable interest on Capitol Hill. The August timeframe comes when Congress is traditionally in recess, meaning that the limit would need to be raised before Congress leaves Washington in late July. The massive tax- and spending-cut bill also includes a $4 trillion increase in the debt limit, which would likely take the issue off the table until sometime in 2027. But Congress needs to pass that bill before the end of July to ensure that the debt ceiling is not breached—and that timing could be tight.