By Joe Light

Bond market turbulence is giving ammo to fiscal hawks who want to bring down the cost of the tax bill, President Donald Trump's signature legislation. They probably won't succeed in lowering the overall price, but deductions that mostly benefit taxpayers in blue states are the most at risk.

Congress returns to Washington from recess on Monday. At the top of the to-do list for Senate Republicans is putting their stamp on a massive bill that, among other things, extends tax cuts passed during Trump's first term, adds new tax cuts for overtime and tips, and cuts spending on Medicaid and other programs.

The House narrowly passed the bill in May, and GOP senators have already said they want changes to the bill, which has been projected to add nearly $4 trillion to the federal debt over the next decade.

Complicating the effort have been signs that investors aren't as interested in Treasury bonds. In May, the yield on the 10-year Treasury rose 0.2 of a percentage point to 4.4%. The month was capped by Moody's stripping the U.S. of its AAA credit rating, a move that briefly pushed the yield on 30-year Treasury above 5%.

Lawmakers usually don't pay much attention to the bond market. The difference this time is the narrow Republican majorities in the House and Senate. House Speaker Mike Johnson (R., La.) has a 220-to-212 majority, allowing him to lose only three votes if all Democrats vote against the bill. Senate Majority Leader John Thune (R., S.D.) can also lose only three votes.

In late May, the House version of the bill squeaked through by a single vote. The Senate will make its changes, then pass it back to the House. The version signed off by both the House and Senate goes to the president's desk.

Some House lawmakers who weren't enthusiastic about the bill have been vocal about their dislike even since the May vote.

Rep. Chip Roy (R., Texas), who voted yes, posted on X that the fiscally conservative House Freedom Caucus "held our nose to vote it forward" and that the bill "must get better" in later versions.

House Freedom Caucus Leader Andy Harris (R., Md.), who voted "present," said he thought Elon Musk, the former head of the Department of Government Efficiency, was right after Musk criticized the deficit increases in the bill.

Tariff-related court decisions have added to the deficit concerns. Some lawmakers had pointed to an influx of hundreds of billions of dollars in tariffs as an offset to the bill's costs, which the Congressional Budget Office doesn't capture when it scores the tax bill. With two courts casting doubt on the legal authority of those levies, that revenue stream is in question.

Finally, Treasury auctions -- once a humdrum affair -- are showing cracks with bond investors showing scant appetite for U.S. debt as the deficit balloons.

"You are going to see a crack in the bond market. OK. It is going to happen. I tell this to my regulators. I'm telling you it's going to happen and you're going to panic," said JPMorgan Chase CEO Jamie Dimon at the Reagan National Economic Forum on Friday, arguing the so-called bond vigilantes are back.

The White House seems wary that the fiscal criticisms are picking up steam. At a media briefing on Thursday, press secretary Karoline Leavitt said the Trump administration believes the bill saves $1.6 trillion, citing the Council of Economic Advisers. The president, in a Truth Social post on Friday, criticized the CBO for projecting 1.8% annual economic growth and insisted it should have been higher.

"With just our minimum expected 3% Growth, we will more than offset our Tax Cuts (which will, in actuality, cost us no money!)," Trump wrote.

On Sunday, Treasury Secretary Scott Bessent told CBS that other parts of the administration's agenda will offset the costs of the bill. Tariffs will raise $2 trillion over 10 years, he projected, while cost savings and "a prescription drug plan with the pharmaceutical companies" could each provide another $1 trillion.

"So there's your four," he said.

The margins give fiscal hawks as much leverage as they're ever going to get to push for spending cuts in the bill. But the Senate probably still won't reduce the overall cost, said Raymond James policy analyst Ed Mills.

"The fact of the matter is that this 'one big, beautiful bill' is essentially the entirety of the Trump legislative agenda. If you're a Republican, you have a choice -- are you voting for or against the Trump agenda?" Mills said.

Still, senators might make some changes at the margin to bring down the cost. One potential target is the cap for SALT, or state and local tax deductions, said Beacon Policy Advisors managing partner Stephen Myrow.

Republican lawmakers in blue states including New York and New Jersey threatened to sink the House bill before striking a deal to raise the cap to $40,000 from $10,000 for married taxpayers making less than $500,000. The increase adds about $320 billion to the debt. Senators could tinker with the cap or the income limit to save money, Myrow said.

The pressure from fiscal hawks could also hamper moderate senators who want to reverse the House's cuts to Medicaid, Mills said. The House version would cut about $700 billion by introducing work requirements and removing coverage for immigrants who entered the country illegally. Some GOP senators have reservations on the cuts, leading some observers assume they'll be reversed, but "that might not be the case anymore," Mills said.

Bond investors might add drama as the bill is revised, but the best bet is still that the bill's overall cost doesn't come down much -- if at all.

"This is the largest bill by dollar amount in the history of the United States," Mills said. "The idea that it can pass without a hiccup along the way is not something we should expect. That said I don't see a scenario where they don't get this done."

Write to Joe Light at joe.light@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 02, 2025 11:25 ET (15:25 GMT)

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