Trump’s Tax Bill Could Worsen the Deficit—Here’s What It Means for Markets and Your Wallet

Last Friday, Moody’s fired a warning shot by downgrading the U.S. credit outlook, reigniting the debate over fiscal discipline in Washington.

Meanwhile, House Republicans are pushing for another round of tax cuts—and this time, the price tag could be even steeper, both for markets and for everyday Americans.

What’s in the Bill

House Republicans have introduced a new reconciliation bill aimed at extending Trump’s 2017 tax cuts while adding fresh breaks, such as tax relief on overtime pay and interest on car loans. The bill also proposes aggressive spending cuts—especially targeting Medicaid—to try and offset the cost.

But analysts like Henrietta Treyz of Veda Partners point out that the Senate is unlikely to support these politically painful cuts. Medicaid reductions, in particular, could kick millions off health insurance—a move that's already raising red flags among moderates.

So, while the bill may pass the House, once it reaches the Senate, those spending cuts will likely be watered down. If that happens, the cost of the bill balloons even further—adding to an already massive federal deficit.

Why It Matters

The core controversy boils down to one question: Where will the money come from to pay for these tax cuts?

The federal budget deficit hit $1.8 trillion in 2024 and is expected to climb to $1.9 trillion in 2025—more than 6% of GDP. That’s a level typically seen only during wars or financial crises.

If tax revenues fall while spending remains high, the government has no choice but to borrow more. That means issuing more Treasury bonds, which increases supply, pushes prices down, and sends yields (interest rates) higher. Higher yields ripple through the economy—raising the cost of mortgages, car loans, and other debt.

The Impact on Bond Markets and Interest Rates

As the deficit continues to widen with no credible plan to rein it in, bond markets are getting nervous. On Monday, yields on 10-year Treasuries edged higher. Thierry Wizman, strategist at Macquarie, described the situation as a “political and institutional breakdown” in Washington—where there’s no functional mechanism left to control budget deficits.

And it’s not just a concern for bond traders. When Treasury yields rise, borrowing costs across the board follow suit. That means higher mortgage rates, costlier car loans, and more expensive credit for businesses.

So while the tax cuts may offer short-term relief for some, the long-term consequence could be higher borrowing costs for everyone.

J.P. Morgan Asset Management’s David Kelly warns that the tax bill, combined with rising tariffs, could prevent the Federal Reserve from cutting interest rates as planned. That means long-term rates may continue drifting upward, further straining consumers’ purchasing power.

The Medicaid Controversy

One of the most hotly debated parts of the bill is the deep cuts to Medicaid. The Congressional Budget Office estimates the proposed reductions would save $715 billion—but at a heavy human cost. By 2034, 8.6 million fewer Americans would have health coverage.

That would make it the largest rollback in the program’s history. Medicaid currently covers around 78 million people, many of whom are low-income.

Even within the GOP, the cuts are sparking backlash. Sen. Josh Hawley (R-MO) recently called the proposal “morally wrong and politically suicidal” in a New York Times op-ed. If Senate moderates refuse to support the cuts—as expected—the bill either becomes significantly more expensive or fails entirely.

The SALT Deduction Debate

To help offset the cost of the 2017 tax cuts, Republicans had capped the state and local tax (SALT) deduction at $10,000, a move that angered residents of high-tax states like California and New York.

Now, as part of extending the 2017 cuts, moderate House Republicans from those same states are pushing to raise the cap. The new bill proposes increasing the SALT cap to $30,000 for joint filers earning under $400,000, but that might still not be enough to secure their support. If these moderates revolt, the bill could be dead on arrival in the Senate.

What This Means for Markets and You

1. Treasury Yields Could Keep Rising

More borrowing means more Treasury bonds in circulation. That leads to lower bond prices and higher yields.

In turn, that could mean:

Higher mortgage, car loan, and credit card rates
Delayed Fed rate cuts due to inflationary pressure from loose fiscal policy

2. Pressure on the Dollar and Global Markets

Moody’s has already cut the U.S. credit outlook to “negative.” If the deficit continues to deteriorate, the dollar could weaken over the long term, and foreign investors might begin to lose confidence in the U.S. debt.

That said, in the short term, the dollar remains the "least dirty shirt"—so don’t expect an immediate crisis.

3. Impact on Everyday Americans

Some upper-middle income households might benefit from lower taxes (especially if SALT caps are eased).
But cuts to Medicaid would hit low-income Americans hardest—millions could lose health coverage.
And with interest rates likely staying elevated, borrowing money to buy a home or car could become even more expensive.

Bottom Line

The U.S. is already staring down a $1.8 trillion deficit in 2024, with projections pointing to $1.9 trillion in 2025—more than 6% of GDP. That’s far above the 2–3% typically considered sustainable.

Instead of working to rein it in, Congress is now debating further tax cuts—including breaks on overtime pay and car loan interest—that could dig the fiscal hole even deeper.

As former Bank of America economist Ethan Harris put it: “Some kind of funding crisis seems almost inevitable… because that seems to be the only thing that will wake up Washington.”