The Big Picture: Why Retaliatory Tax Laws Are Introduced

As lawmakers in Washington work on their massive new proposal—cheekily dubbed the “One, Big, Beautiful Bill”—state legislators across the country are paying close attention. Why? Because what happens at the federal level, especially in terms of taxes and spending, could have a big impact on state budgets.

Take, for example, a proposed new deduction for car loan interest. Unless states act to separate their tax systems from the federal code (a process known as “decoupling”), this deduction—and others—could automatically apply to state income taxes too. That could shrink state revenues unless they step in with changes.

Then there are the proposed changes to programs like SNAP (formerly known as food stamps) and Medicaid. If passed, states would be on the hook for a larger share of SNAP benefits and admin costs. States with higher error rates in distributing benefits might even face federal funding cuts. On the Medicaid side, some states could see a drop in federal support for Medicaid expansion, particularly if they cover undocumented immigrants using their own funds.

There’s also a push to introduce work requirements and tighten eligibility rules for Medicaid. While that might lower enrollment—and reduce state costs—it could also leave some people without support. If states decide to fill those gaps on their own, expenses could rise sharply.

The tax changes are set to take effect as early as the 2025 tax year, while the benefit-sharing changes wouldn’t kick in until 2028. Here are some key points for state lawmakers to keep in mind:

• The higher standard deduction would become permanent and get a temporary boost of $1,000 for individuals and $2,000 for joint filers.

• A new deduction for car loan interest would be introduced.

• Tips and premium pay for overtime would become tax-free.

• The Section 179 expensing limit would jump from $1 million to $2.5 million.

• Full expensing under Section 168(k) would be extended temporarily.

• States would shoulder more of the SNAP benefit and administrative costs.

• “Quality control” measures could cut federal SNAP funds for states with too many errors.

• Medicaid work requirements would be implemented.

• States expanding Medicaid in the future might get less federal support.

• There would be new restrictions on how states use provider taxes.

• States using their own money to enroll undocumented immigrants could see a lower federal match.

Other changes—like raising the SALT deduction cap—won’t directly impact most state budgets but might influence how states design their tax policies. Some states already cap property tax deductions based on the federal limit. Also notable: the bill removes protections for state-level tax strategies that helped business owners avoid SALT deduction caps, which could create complications.

Lastly, the bill proposes a number of federal spending cuts. In some cases, that could mean savings for states if shared programs go away. But if those services are still needed, states may need to step in and cover the gap—leading to higher spending.

The bottom line? This bill could reshape both federal and state finances in significant ways. While supporters and critics disagree on how these changes will impact the broader economy, there’s no doubt that state lawmakers have a lot to think about as they watch this legislation unfold.

The U.S. Strikes Back: What the “One, Big, Beautiful Bill” Means for Global Tax Policy and Foreign Investment

On May 12th, the U.S. House’s Ways and Means Committee unveiled a key section of its major tax and spending package—what some are calling the “One, Big, Beautiful Bill.” Tucked inside this sweeping legislation is a set of provisions that could have big implications for how the U.S. interacts with the global tax landscape.

One provision, Section 899, stands out for being particularly bold. It’s a retaliatory measure aimed at foreign taxes that the U.S. sees as unfair or discriminatory. Along with a beefed-up version of the Base Erosion and Anti-Abuse Tax (BEAT), these changes could target specific policies abroad—especially those from countries that have imposed taxes on multinational companies in ways that affect U.S. firms.

Who’s in the Crosshairs?

While the bill is written broadly enough to apply to any country with “offending” tax rules, it’s really focused on three key types of foreign taxes:

1. The Undertaxed Profits Rule (UTPR): Part of the global minimum tax effort, known as Pillar Two, backed by the OECD.

2. Digital Services Taxes (DSTs): These target big tech companies and have been adopted by countries like France and Canada.

3. Diverted Profits Taxes (DPTs): Used in places like the UK and Australia to prevent companies from shifting profits to low-tax jurisdictions.

While these taxes were created to ensure global companies pay their fair share, the U.S. argues they unfairly target American firms. That’s where Section 899 comes in—it would hit foreign businesses from countries with these policies by raising U.S. tax rates on their operations and investments.

How Would This Work?

The proposed rules have two major parts:

• Higher U.S. Tax Rates on Foreign Investors: If your country has a DST, UTPR, or DPT, then any company or investor from there could face gradually increasing U.S. tax rates—up to 20 percentage points higher than normal. That includes both passive income (like dividends or interest) and active business income.

• An Expanded BEAT Tax: For large foreign companies, the bill would make BEAT stricter and more expensive. BEAT is meant to prevent companies from shifting profits out of the U.S., but critics say it already hits foreign investment harder than intended. The new version would raise the rate to 12.5%, eliminate certain tax credits, and widen its scope—making it far more burdensome.

Who Would Be Affected?

This isn’t just theoretical—it could hit the majority of countries that invest in the U.S. According to 2023 data, countries affected by these measures account for over 80% of foreign direct investment (FDI) in the U.S. That includes key allies like France, Italy, the UK, Canada, and Australia—all of which have at least one of the tax policies the U.S. is targeting.

Interestingly, some countries like China and Japan might escape these penalties—at least for now—because they haven’t fully implemented the targeted taxes yet.

What’s the Bigger Picture?

This part of the bill could cause tension in global tax negotiations, especially with the EU. Many European countries have already committed to the global minimum tax, so reversing course isn’t easy. That makes it more likely that the U.S. will actually follow through with these retaliatory measures—unless there’s room for compromise.

But here’s the catch: while these provisions are meant to protect U.S. companies and raise revenue, they could also hurt the U.S. economy by discouraging foreign investment. Higher taxes on foreign businesses could mean less capital flowing into American jobs, infrastructure, and innovation.

There’s also concern that the law doesn’t give U.S. officials enough flexibility. For example, if a country pauses its digital tax or delays Pillar Two implementation, there’s no clear path to pause or suspend the U.S. retaliation. That could make it harder to negotiate smarter deals or avoid unnecessary economic fallout.

In Summary:

This bill’s new tax rules are aimed at pushing back against global tax policies that the U.S. views as unfair. While the goal is to level the playing field, the broad scope and aggressive nature of these measures could have real consequences for international relations—and for investment in the U.S. The big question is whether this hardline approach will spark better cooperation, or just add more tension to an already complex global tax landscape.

What’s the Real Economic Impact of These Tax Policies?

According to estimates from the Joint Committee on Taxation (JCT), the proposed retaliatory tax policies could bring in about $116 billion over the next decade. That sounds like a big win for U.S. revenue—but keep in mind, these numbers come with a lot of uncertainty. While they help make the overall tax package look more affordable on paper, that revenue depends on one big “if”: if other countries don’t drop their digital services taxes (DSTs) or the undertaxed profits rule (UTPR).

Here’s the catch: the way the U.S. is planning to retaliate could hit foreign direct investment (FDI) hard. And that’s a problem. FDI is generally great for the U.S.—it brings in foreign capital and ideas, creates jobs, boosts productivity, and helps companies reach more consumers. If the tax changes make the U.S. less attractive to foreign investors, it could end up hurting the very workers and consumers the policies aim to protect.

Even if these retaliatory measures never actually kick in, just the uncertainty around them might already be discouraging investment. And the ironic twist? These taxes would hit foreign businesses, not the foreign governments responsible for the tax policies the U.S. opposes. So essentially, we’d be punishing our most cooperative economic partners, instead of directly addressing the real issues.

What’s Behind the U.S.-EU Tax Disagreement?

A big part of this tax standoff involves the European Union. If we want to avoid economic fallout, both sides will need to find common ground on some long-standing international tax disputes.

Traditionally, countries get to tax income where value is created—where the actual product or service originates. But with the rise of digital business models, it’s become harder to figure out where that value is really being created. European countries, which are often the end market for U.S. tech giants like Google or Amazon, feel they deserve a bigger slice of the tax pie. That’s partly why many of them implemented DSTs—as a sort of “temporary fix” until a global solution (like Pillar One) is agreed upon.

From the U.S. perspective, though, DSTs look like an unfair way to single out and tax American tech companies. And when it comes to the UTPR, many U.S. policymakers see it as overreach—an attempt by foreign governments to force the U.S. to follow their tax rules, even within our own borders. Lawmakers like Chairman Jason Smith view this as a challenge to U.S. fiscal sovereignty.

At the end of the day, maybe it all comes down to politics. It’s much easier for European lawmakers to raise taxes on big U.S. companies than on their own citizens. That makes U.S. firms a convenient target, regardless of the broader economic consequences.

Is Washington Taking a Page from the “Brussels Effect”?

It looks like Washington might be borrowing a strategy that’s been successful in Europe. By locking these retaliatory tax measures into law, the U.S. gains a few clear advantages.

First, it gives lawmakers some budget flexibility, thanks to the Joint Committee on Taxation’s (JCT) revenue score, which makes the overall tax package easier to pass. Second, it makes these policies more permanent and less vulnerable to shifting political winds, unlike something like Section 301 tariffs that can be dialed up or down depending on who’s in office. And third, it gives the U.S. a leg up in international talks because tax policy is handled at the national level in EU countries, not by the EU as a whole—so if European countries can’t agree on a unified approach, the U.S. may be in a stronger negotiating position.

But this rigidity is a double-edged sword. The more locked-in these retaliatory measures are, the harder it is for any administration to adjust them in response to real-time global developments. That could increase the risk of unintended economic fallout.