RPS Washington Watch: Upheaval a Precursor to Massive Policy Agenda (as of 3/11/25)

By Mike Townsend

With Donald Trump back in the White House and narrow majorities in the Senate and House of Representatives, Republicans have full control of Washington for the first time since 2018. The first weeks of the new administration have demonstrated the scale of change that is underway in the nation's capital, with dozens of executive orders and other actions upending decades of norms and recasting the power of the presidency. Republicans have outlined a massive policy agenda, including wide-ranging tariffs, sweeping immigration reforms, a major tax bill, historic cuts to government spending, a debt ceiling increase, a reduction in regulations, and more. But narrow margins in Congress could complicate the agenda.

Here's a look at the new lay of the land in Washington and some of the key issues retirement plan professionals, advisors, and investors should be following in 2025.

Republicans must navigate narrow majorities

Perhaps the biggest threat to the policy agenda is the razor-thin margins on Capitol Hill. Republicans have a workable 53-47 majority in the Senate. That's short of the 60-vote supermajority needed to overcome a filibuster, and there are perhaps a half-dozen Republican senators with an independent streak (so not every issue is a slam dunk).

But the more complicated situation is in the House of Representatives, where Republicans have a 218-214 majority, with three vacancies. Republican leaders can only lose one of their members on any vote. Keeping all House Republicans aligned on key issues has been a huge headache for party leaders in recent years, but that's what will be needed to move legislation forward. Two of the vacancies will be filled by special elections in early April, which should give Republicans additional breathing room.

"Budget reconciliation" process will be key

Republicans plan to use budget reconciliation to move their priorities through Congress. It's a parliamentary process designed to expedite consideration of budget-related legislation. It features limited time for debate, limited amendments and, crucially, can be passed in both chambers with a simple majority vote, bypassing the need for a 60-vote supermajority in the Senate. It's a common strategy when there is unified government in Washington. Republicans used it in 2017 to pass the Tax Cuts and Jobs Act, the sweeping tax-cut bill that was a hallmark of Trump's first presidency. Democrats used it in 2021 to pass the American Rescue Plan, the $1.9 trillion post-COVID economic stimulus package, and again in 2022 to approve the Inflation Reduction Act, which lowered some prescription drug prices and boosted green energy, among other provisions.

Republicans have been debating whether to use the budget reconciliation process to pass one gigantic bill or two smaller ones. House Republican leaders, cognizant of their tiny majority, have pushed the one-bill strategy, arguing that a massive "something for everyone" bill that encompasses taxes, border security, government spending cuts, a debt ceiling increase, energy measures, and other priorities stands a more realistic chance of passing the House. Republican senators, however, have advocated for a two-bill approach, favoring quick passage of a bill with immigration/border, energy, and defense provisions that puts a win on the board in the early days of the new administration. That would allow more time to negotiate a second, more complicated bill that deals with taxes, government spending, and the debt ceiling, which could be approved later in the year. By late February, each chamber passed their own version of a "budget resolution," the details-free blueprint that outlines the targets for taxes and spending. The two chambers still need to agree to the same outline to move the process forward. And then the far more complicated process of working out the specific details for every tax and spending provision will commence. It's likely to take months to negotiate a deal.

Tariff threats create uncertainty for the markets

Tariffs were a cornerstone of the Trump campaign. He spoke regularly of imposing across-the-board tariffs of 10-20% on all imports, with higher tariffs on imports from China. But economists generally agree that tariffs, which are not paid by foreign countries but by U.S. companies that import goods and materials from overseas, can increase inflation and impede economic growth. Consumers tend to bear the brunt of tariffs, as companies pass on the cost by increasing prices. 

Companies and investors have been confused by Trump's tariff policies. He did not impose broad tariffs right away, instead ordering government agencies to scrutinize trade issues and report back by April. But in early March, tariffs went into effect on imports from Canada and Mexico, roiling the markets and triggering a response from our neighbors. Days later, some of the tariffs were paused for 30 days, sowing confusion in the markets about whether tariffs are a temporary use of leverage in negotiations or the start of a longer trade war. Tariffs on products, including steel, aluminum, pharmaceuticals, semiconductors and automobiles, are slated to kick in later in March or in early April, though those could be delayed. The president also plans to launch "reciprocal" tariffs to match the levies imposed by other countries, but has not yet spelled out the details.

The result has been uncertainty for companies, consumers, and the markets. Since peaking at an all-time high on February 19, the S&P 500 was down nearly 9% by March 11. Are the tariff threats just a negotiating tactic, or do they signal a fundamental reordering of US trade policy that could have significant economic impact? Investors are eager for clarity.

Tax changes are coming

Major tax legislation was always a given in 2025. That's because all of the individual provisions in 2017's Tax Cuts and Jobs Act are set to expire at the end of the year, including lower individual income tax rates, the higher standard deduction, and the larger exemption amount from the estate tax. Republicans plan to extend the tax cuts, though for how long is less certain. While the president pushes for making all of the expiring provisions permanent, the math may force Congress toward a shorter extension, perhaps five years.

Also less certain: what will happen to a variety of tax proposals President Trump floated on the campaign trail. He proposed ending the taxation of tip income, overtime pay, and Social Security benefits. He also called for a corporate tax reduction and lifting the cap on the state and local tax (SALT) deduction. Including all these ideas is not realistic, but eliminating the tax on tip income is a reportedly a top priority. The SALT tax deduction debate will also be one to watch, as Republican lawmakers representing districts in high-tax states like California, New Jersey, and New York have said they won't support a tax bill that does not include an increase in the current $10,000 cap. Doubling it to $20,000 for married couples seems to have momentum, but some Republicans would like to see a larger increase.

DOGE dominates discussion 

Reducing government spending is another top priority of the new administration, but few anticipated the sweeping and unprecedented steps taken by Elon Musk and the Department of Government Efficiency (DOGE) in the first weeks of the new administration. The DOGE has led the way in gutting agencies like the U.S. Agency for International Development and the Consumer Financial Protection Bureau, firing employees across the federal government, pausing federal funding for programs, and finding other ways to slash expenditures. Many of the DOGE's steps are being challenged in the courts, and it's likely that the Supreme Court will ultimately have to decide many of the legal questions surrounding the effort. Keep an eye also on whether Capitol Hill begins to push back as Members of Congress hear from frustrated constituents. Lawmakers are always generally for reducing government spending—until those cuts begin to affect their voters back home.

Congress will need to raise the debt limit

The debt ceiling, the congressionally mandated cap on the total amount of debt the United States can accumulate, was suspended in mid-2023 as part of a bipartisan agreement. But that suspension expired on January 1, 2025. The Treasury Department began taking "extraordinary measures" in January to ensure the nation does not default on its debts. Those measures are temporary, typically buying Congress four to six months of additional time. By mid-2025, Congress will have to raise the debt limit, something that will be tricky in an all-Republican Congress.

Debt ceiling battles have been ferocious in Congress in recent years, with the debt recently exceeding $36 trillion. In 2023, Congress came within a day or two of the first-ever U.S. default before a last-minute bipartisan deal was reached to suspend the debt ceiling. Market volatility has typically increased if there is uncertainty about when and whether Congress will lift the cap.

House Republican leaders included a $4 trillion debt ceiling increase in their budget outline, but ensuring it passes won't be easy. Seventy-one House Republicans voted against the debt ceiling agreement in 2023. A handful of congressional Republicans have never voted for a debt ceiling increase. That creates an uncertain atmosphere as another vote approaches this year. Yet despite years of complaints and frustration on Capitol Hill, Congress has never failed to raise or suspend the debt ceiling before the default date. The exact path to that end in 2025 is unclear, but expect lawmakers to ensure default is avoided once again.

Retirement savings issues on the back burner

While it seems like almost everything in Washington has been turned upside down in recent weeks, retirement savings is one policy area that hasn't been a target. With the two SECURE Acts passing in the last six years and many of those provisions just now going into effect, further changes to retirement savings are not a high priority. And so far retirement savings incentives have not been a focus for potential change in the tax code, though that could change later this year. Department of Labor priorities in recent years, including the fiduciary rule and rules about the use of ESG factors in retirement plans, are all but certain to be shelved.

Cryptocurrency is an area of particular focus for the new administration and efforts there should also have bipartisan backing in Congress. There is a growing consensus in Washington that strengthening investor protections, reducing fraud, and clarifying the roles of various regulatory agencies in the cryptocurrency space is a top priority. Expect that to be a rare area of common ground for the two parties.

There will be a lot to keep track of in 2025, with executive orders, major tax legislation, trade tensions, and more on the horizon. Don't be surprised if market volatility is a regular feature this year as investors and companies sort out the short- and long-term impacts of sweeping policy initiatives.