Unpacking the One Big Beautiful Bill for the Middle Market

What changes does the One Big Beautiful Bill hold for middle-market businesses and the firms that invest in them? Michael Feuz, economist with ITR Economics, is back to talk through key provisions in the bill, what they mean for the middle market, and how businesses and investment firms should position themselves in response.

Read a transcript of the conversation below.

Middle Market Growth: Welcome to Middle Market Growth Conversations, a podcast for dealmakers discussing the trends shaping the middle market. I’m your host, Carolyn Vallejo, and this is a production of the Association for Corporate Growth. Today we’re joined by Michael Feuz, an economist with ITR Economics, to delve into the implications of the One Big Beautiful Bill for middle-market companies, private investors and the economy more broadly. Michael, welcome back to the podcast.

Michael Feuz: Yeah, thank you for having me again. It’s great to be back.

MMG: It’s great to have you back. And we do know you a little bit, but for our listeners that maybe aren’t too familiar with you, let’s first take a couple minutes get to know you a little bit. Can you tell us about your role and what you focus on at ITR?

MF: Yeah, absolutely. At ITR Economics, I am one of many economists. We have a lot of very smart economists. At ITR I am specifically on the speaking team, so that’s about six or so of us that go out on the road and speak at a lot of association meetings and conferences. So, for your listeners, they may have seen us out and about across the U.S. and even internationally. And then I guess I am the face of ITR with a book of clients. I meet with them, we forecast their business, and then I meet with them on strategy sessions, why we expect their business to do what over a 12-to-20 quarter period. We talk about the macroeconomic headwinds and tailwinds, what they can expect so that they can pull the right levers at the right time to either maximize growth opportunity or if there are going to be headwinds to mitigate the impacts of those headwinds, understanding what’s coming when it’s coming. So, hey, let’s make these moves now so that we can get in front the challenges, the obstacles are coming and work around them.

MMG: Great. So, you’re definitely a good person to pick your brain a little bit. But before we get into the One Big Beautiful Bill Act, let’s have a little bit of fun here. Can you tell me about your first job?

MF: First job ever was actually, I’m not sure what the laws were at the time, might have broken a few, because my mother took me to a farm down the road when I was either 12 or 13. I think she was sick of having me at home in the summer. And my mother is a great woman, but she is the daughter of two immigrants who came over after World War II from Italy. And she asked the farmer if he could put me to work. So, he paid me under the table to harvest his produce on his farm. I was a 12 or 13-year-old in the sun picking strawberries, green beans, all the other produce that he grew.

MMG: Wow, okay. So, you really jumped in there at a young age. Is there a lesson that you learned from that experience that you still take with you today?

MF: Probably the biggest one is attention to detail. You think you just pick, it’s just grab and pick. But I remember being put in the green bean field, which is brutal already because there is no shade. It’s not like you’re picking apples or cherries. It’s probably July and you’re handed this huge bushel and fill it up with green beans. And that’s pretty daunting because that’s a lot of green beans and just trying to get it done as fast as possible. But I think I destroyed the entire row of green bean plants because I was just ripping up the green beans and looking back at my row and it’s just chaos. So slow down—sometimes slow is smooth, but smooth is fast, right? Go a little slower, get a better result, be a little more attentive to detail. It’s the journey and [not] the destination sometimes.

MMG: Let’s jump in here and move on to the One Big Beautiful Bill Act. Everybody of course is talking about this. There are a lot of opinions and there’s a lot of analysis out there. Can you give us a big picture overview of what you think its most impactful economic provisions are?

MF: Yeah, so a lot [is] in the bill, [it’s] over 900 pages. I certainly haven’t sifted through all of them, but I think the biggest part of this bill, and there’s a lot to like, and there’s a lot to not like, and there’s plenty to disagree over in, in that as well. But I think the biggest takeaway is the growth side of it, is supply side. And what I would want to characterize that is not all deficits are equal. We’re certainly driving up the deficit. We can talk about that as we go farther on the conversation. But one, it permanently codifies the 2017 Tax Cuts and Jobs Acts, preventing an increase in taxes after this year, after 2025. With that, it raised the standard deductions, it expands the child tax credit. It does have those exempts on tips and overtime through 2028. So, with that, it helps boost some disposable income for families. That’s supply side. So, it’s good for the consumers. And then on the business side, it restores, and we’ll talk more about it, I’m sure the 100% bonus depreciation, it accelerates cost recovery, it increases the qualified business income deduction. Again, same thing, supply side. It, it, it, it’s focused on growth in some of those aspects. There, there’s plenty to critique in there, but I think that that’s the big, the big win. I think the areas where people are going to disagree moreover, I think what I just listed some folks might want to critique. I think you have to be a little bit more partisan with the first three. But I think farther down you have the medic Medicaid and snap cuts, right? They’re basically trying to cover their costs because we’re going to grow the debt, we’re going to grow the deficit, and we’re going to keep taxes the same, not let them go up, and we’re going to lower it in a few other areas. So where do we save that money? Medicaid, Snap cuts, transfer payments, welfare programs, repeals, clean energy credits, right? If you are, consider yourself green. If you think we need to be moving to, you know, net zero if that’s very important to you, you know, EV purchase rebates, energy credit, solar industrial investment into those areas. All that was under the inflation reduction act as it was called. Those are gone. It increases spending on defense and border security. And then also the one that I think is interesting that I’m still don’t have a good opinion on yet, but is the AI regulation where they basically just said, Hey, no state regulations on AI for the next 10 years. Put a moratorium on that just kind of makes it only federal, which to be I guess a little provocative. It means a bunch of 70-year-olds in the Senate who can’t work their iPhone gets to regulate AI essentially, which we’ll see. We’ll see. I mean, I’m still trying to force through the thought process on that one before I have too strong of opinion.

MMG: You’re not the only one, I’m sure. And you mentioned this, but this bill’s massive, over 900 pages and we’re going to dig into some of the details here. But you know, in terms of its net effect on the economy, there are a lot of differing opinions out there—whether it’s going to be a net negative because it enlarges the deficit or a net positive because it boosts GDP. You mentioned not all deficits are equal. So, what is the net economic effect going to be, you know, both in the short term and kind of in the longer term here?

MF: So short-term effect, short and sweet, it’s going to boost growth. As I said, this deficit spending is more supply-side driven, so it begs that question, are all deficits equal, and by supply-side driven, between ‘25 and ‘28, because after ‘28 we’re going to have a new administration, whether that’s the pendulum swinging back to the Democrats or you know, Vance-Rubio or whoever the Republicans got next. This bill over the next three years is going to drive entrepreneurship. It’s going to spur private investment. And the hope there is that the economy’s going to grow enough to cover the deficit. So, the expectations from the Trump administration, I think is more, hey, we’re going to grow revenue with tariffs to cover that deficit. We’ll see if it happens. My crystal ball’s a little foggy on that, but I think if we got one of the economists under the Trump administration [to] sit down, that’s the answer. We would get the opposite of a supply side deficit.

To just kind of further explain that comment on “all deficits are equal” would be one more demand-side or what we got during COVID. So that would entail, instead of tax cuts, we would get more direct government spending, stimulus checks, infrastructure spending, transfer payments, infusing money directly into the economy. So supply is more, I guess cliche, get out of the way and let things naturally, organically fall into place. Demand side is, hey, let’s intervene. Let the politicians, let the bureaucrats shape the economy to a vision, to the policy goal vision. Now that’s a very pure way of defining it. I don’t think either party is one or the other purely. So, avoid a little partisanship there. Tariffs and industrial policy, which the Trump administration and the Republicans love, that falls under demand side, that’s direct intervention. So they’re not pure, we’re not all supply side on one side demand side on the other larger social spending, which tends your typical Democrat tends to prefer, or subsidies, you know, the Green New Deal or the infrastructure spending was under President Biden as well as the IRA, the green stuff that’s more on demand side, but both parties will toy with both. So, it’s not a team A or B, but though those are the two ways you can approach it.

MMG: The last time you were on the Conversations podcast, you mentioned how ITR foresees another Great Depression in the 2030s. That is a scary thought for a lot, if not most, people. Do you think this bill changes that timeline or how you see a potential depression shaping up?

MF: So instead of that short-term growth we just talked about, this is that long-term view going out farther than five years. One short answer, no, this doesn’t change our outlook [over] the long term of this bill. We’re continuing to grow the deficit. We’re continuing to grow the debt. It basically puts us well on our way to the 2030s. My personal view was this was a key opportunity to maybe not prevent the 2030s, but to help lessen the pain. I don’t know what degree it could have been. I can’t tell that. And I think we missed the mark on that this time around. And I don’t think there’s another opportunity coming. But long-term, if we continue to grow the deficit at a higher ratio to GDP than historically, what we have done, this is certainly going to drive things directly towards our 2030s outlook.

And over the next five years, even while we are growing, which is great for businesses, it’s going to help drive higher inflation over the coming years, which is that battle of the bottom lines. And just to maybe put that in a little more context, historically, since World War II, our deficit has run around two and a half to 3%. That’s been our average ratio [of the] deficit to GDP ratio. This bill puts us around 6 to 7%. So, what does this mean? Well, again, we bring in a Trump administration economist, he says it’s fine, we’re not going to actually run that because we’re going to have all this revenue from tariffs. Great. If we get that and we can hold a 3% because our revenue goes up, fantastic. But let’s assume we don’t, and at least explain what that would mean. That would mean the government, the treasury’s going to have to issue more debt. They’re going to have to sell more long-term bonds. If you’re going to increase the supply of bonds you’re selling and the demands does not rise, you have to lower the cost of the bonds. How do you lower the cost of bonds? You sell them at a higher rate. Bonds directly set the interest rates more so than the federal fund rates. Right now we’re selling bonds at about close to 4.5%. Mortgage rates tend 2-2.5% greater than that. That’s our 7% mortgage rates. If we have to sell them at five, five and a half percent, that’s higher interest rates across the board for consumers. We’ll see—economists, we are the ultimate buzzkill at a party. Someone once called economics the dismal science. I like to continue to deliver on that description. So with the 2030s, we’re well on our track there.

MMG: Let’s maybe turn our attention to something potentially a bit more positive. I want to zero in on middle-market businesses. This bill has a couple big changes for business owners and operators. Can you tell us about some of the provisions in the bill and how they might positively impact the middle market?

MF: Yeah, so let’s be positive. I am an optimist by nature despite choosing this career path. So, there’s a lot of positive things and good news in this bill, especially for the middle-market businesses, those small to medium. So, I mentioned a few of them at the beginning, but let’s break ’em down. Number one, we’ll just start at the top. Restoring the 100% bonus depreciation. This is fantastic. This allows a business to immediately deduct 100% of the cost of qualifying equipment or assets. So machinery, vehicles, computers in the year it’s purchased rather than over time. This is fantastic. This is great for businesses. It is going to front load the tax benefits. It’s going to free up more cash flow for a business to spend and invest. So, this is pro-growth. We’re incentivizing expansion of the economy in this bill. This is great for small and medium businesses. Obviously, the more capital-intensive you are, the more benefits you’ll have here. But this is a great benefit. Number two, the cost recovery, kind of along the same lines as bonus depreciation, but the bill does change in a positive direction how quickly a business can write off expenses from capital investments and all the way to R&D costs. So again, we’re driving our research and developments. This is pro-growth. And then third, the increase in the qualified business income deduction or the QBI; this is specifically huge for small and medium-sized businesses. Pass-through businesses, those sole proprietorships partnerships, S corps, they can now deduct up to 20% of their business income from their taxable income. And this lowers their effective tax rate. This should be viewed as a direct income tax cut on entrepreneurship.

My view is, when you want to look at the health of the economy is look at the new businesses started, small businesses started. How inviting are you to entrepreneurship in your economy? Entrepreneurship entails taking risks and then being rewarded for those risks. Meaning if you take a risk and you create a good idea that brings benefit to your customers, to consumers, to the economy, you should be able to reap the rewards of that. An increase in the QBI deduction this directly helps encourages further entrepreneurship. It’s going to reward them further for taking on the risk of going into business and starting something. It also puts more cash for small and medium firms for money that they can reinvest, which drives real growth. So, just in summary, three main provisions that’s great for the mid-market businesses here is one bonus depreciation. The 100% accelerated cost recoveries two and expansion of the QBI deduction. This is pro-growth policy. Focus on creating an environment that helps drive growth over the next five years or so.

MMG: Okay. All right. That’s great news. But there are two sides to the coin. What’s the other side? What’s the downside of this bill and its impact on middle-market businesses?

MF: The big one, I mean, it’s already been a concern that’s top of our mind, but it kind of goes back to saying that deficit spending, that’s going to drive more inflation. It’s going to mean higher interest rates. It’s the battle of the bottom line. We’ve been preaching this to all of our clients that, hey, these next five years [are] going to be years of growth. Your top line is going to do great. It’s the bottom line that is going to be a continual mounting challenge. Protecting your margins, preserving your profits. That’s the  real challenge that this bill’s going to create. Government spending drives inflation, higher deficits are going to drive higher interest rates. That’s the headwinds. But those were going to be the headwinds regardless before this bill came into existence. This bill just maybe helps further exacerbate, maybe exacerbate’s too strong, I don’t want to give this bill too much credit. We were already at a tough spot to begin with, but it certainly doesn’t help alleviate these headwinds either.

MMG: What about specific industries that might see a particularly strong impact from the bill, positive or negative, compared to some other industries? What sectors are you looking at here?

MF: Yeah, positive—I mean, auto sticks out right away from the fact that they’ve gotten a little, this is more on the demand side, I guess, so it’s that other side that you think more Democrat. If you’re thinking partisan politics one, they get a subsidy, but the consumers, you can write off $10,000 worth of your interest rates on your car payments if it’s a U.S.-manufactured vehicle. So that’s specifically favoring you know, our automakers here, right? It’s encouraging something. So, the auto sector should get a little bit of a boost. Similarly, I think broadly, construction, capital equipment markets fare very well. Manufacturing that’s heavily domestic. So those boons that we talked about, that’s going to spur capex spending. So that’s going to help drive modernization of facilities and then add in the tariff protection. That’s a boost to manufacturing. And then small businesses, those pass-through firms that we talked about. So that QBI that helps drives entrepreneurship and then ones that are labor-intensive. Those tip and overtime tax exemptions that will benefit those labor-intensive firms. So, I’m thinking about service sector right now like lawn care companies, pest control, HVAC, plumbers, electricians, those will benefit very well from this. Folks that will probably have a tougher time: If you were green energy-intensive and you just had a lot of cuts that could be tough. The shifts in the Medicaid spending are going to change a little bit how folks exposed to the healthcare market might have to pivot a little bit, but I’m thinking more positive here. And I think the small firms on the service side are going to do very well because of this.

MMG: Let’s turn our attention to the investor side. The legislation also includes a few tax changes that are set to affect private equity and other asset managers. Can you tell us about that?

MF: Yeah, so private equity certainly going to benefit from what we’ve talked about, the hundred percent bonus depreciation that to them equals immediate write offs. This is going to boost the internal rate of return. The IRR, the QBI, which we’ve already talked about, is great for businesses, that’s going to help improve the net earnings. It’s going to raise their exit valuations as the economy’s starting to pick up. Right now, we’re already seeing mergers and acquisitions starting to increase. So I think PE is going to do very well the next five years. Oh, it’s been interesting to follow private equity over the last couple years since COVID because there’s certainly been, it’s a changing and evolving type of group. I’ve seen one, we saw the big tech downturn when the Silicon Valley bank had their disruptions, a little run on the bank there, especially as PE was no longer had such a long view on their returns with higher inflation and the changing value of the dollar, they wanted the return sooner. So, we’re no longer accepting razor thin margins. I’ve seen a lot of the rise of private equity playing more in those service sectors I just mentioned. Those ones that are more on the, if you think about it from demand-driven, they’re interested in the firms that are, if disposable or discretionary spending is being tightened, what aren’t you cutting? You’re not cutting your pest control because if you have termites, you have to address it. You’re not cutting your HVAC expenditures. If your air conditioning is not working and it’s July, you’re getting it fixed. You know, the plumbing, right? Those types of companies, electricians, private equity is very intrigued in those now. And I think this bill helps further drive some PE activity and helps increase their exit valuations.

MMG: Now, we like to close out a lot of these conversations by offering some actionable advice for businesses and investors. On the business side, what should business owners and operators do with all of this information? What steps should they take to move forward?

MF: We’ll start with number one. So, prior to the bill, we’re stressing to all of our clients, right now, 2025, is the time to be invested in your business because our forecasts we’re pointing towards this year being both the low point for inflation, so the cost of capex spending, as well as the low point of interest rates. So, lock in your fixed rates, take advantage of the interest rates, not going to see a better interest rate environment for the rest of the decade. And now at this point, the benefits that are going to help further drive capex spending and even stresses. Now you need to be investing in your business with the focus on efficiency gains and productivity gains to reduce the need for labor growth. Meaning you want to protect the labor you have, the employees you have, they’re important, they have a lot of knowledge. How are you making their lives better out on the job? How are you making them more effective at their job, more productive? And our outlook is over the next five years roughly, you’re going to feel about a 28% increase in the cost of labor. So about 5% a year, give or take. That’s significant. So that further stresses the importance in making investments in your business from technology to capital equipment that just makes you better at preserving and protecting your margins. Number two, I would stress having very aggressive growth, growth goals for the next five years. Any cost cutting you need to do from, let’s say tariff impact, it needs to be in mind. Does this limit my ability to grow these next five years? Because we want to grow, we want to take market share. You want to expand into other markets as we get ready to enter the 2030s.

And with the 2030s in mind, that brings up to probably the number three that I would want to stress is diversify the markets you serve and sell into over these next five years. That will make you more resilient in the 2030s, right? If you have all your eggs in one basket, you’re risking a lot. You want to play in a lot of different markets. It just makes you more resilient. Probably if I could add one more is audit your business, evaluate your products and offerings, understand which are profitable, which are not as profitable as maybe you thought or think. Figure out if you can address those ones that are not profitable. And if you can’t, ask yourselves, is the juice worth the squeeze? And consider moving away from those, focusing on what you do well and what is truly profitable is only going to add to making you a more resilient business and avoid wasting your time on what isn’t. It might sound harsh, but lose the losers essentially, especially as we approach the 2030s.

MMG: A lot of that guidance and advice is applicable to investors, but what other actionable advice can you give them at this point?

MF: I mean, one, take advantage of this environment over the next three years, but I would be investing in markets where demand is sticky, right? Kind of what we talked about with PE, right? Service sector type jobs that we already mentioned that are demand resilient, so when there’s demand disruption, you’ve got to stick with them. The tech sector, the innovations we’re making on AI, we have quantum mechanics or quantum computing coming up that’s eventually going to merge with AI. That sector is going to be a pretty one, you want to keep the pulse up from investing, but the bigger question from investors is when discretionary spending is on the chalk dropping block, you know, what is kept? What can’t we live without? Focus on those industries.

MMG: All right. Michael Feuz with ITR economics—economists may not be a favorite at parties, but we love to have you here on the podcast. Thank you so much for joining us.

MF: Absolutely. It was great to be here. I look forward to coming back sometime soon.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

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