The constant changes in federal policy can feel overwhelming for any local government team. With the recent passage of H.R. 1, local finance officials and department leaders are now faced with a new mix of funding opportunities, regulatory shifts, and compliance challenges.
We understand that legislative changes at the federal level can significantly impact your operational and financial planning. We're in the trenches of financial management with you every day, so we get it.
This blog post will detail the key provisions of H.R. 1, focusing strictly on the legislative and documentation aspects relevant to Finance Directors, County Auditors, Payroll Directors, HR Personnel, Utility Directors, Park Managers, Library Accountants, and Fiscal Officers. We’ll break down the major impacts so you can better plan, budget, and position your community for resilience and growth.
(But please keep in mind that we are not lawyers or law experts. We just did some research and linked our sources at the end of the article. We highly advise you to consult with your legal team.)
Preview (TL;DR): H.R. 1, the "One Big Beautiful Bill Act," introduces a mix of new funding streams, grant rescissions, administrative requirements, and tax changes that will impact local governments, special districts, parks, libraries, and utility departments. And our VIP Software can help you with the changes.
The law introduces several new tax deductions and changes to existing ones that will require you to update payroll systems and be ready to answer employee questions.
Tip & Overtime Deductions: From 2025 through 2028, employees can take a new above-the-line tax deduction for qualified tips (up to $25,000) and qualified overtime compensation (up to $12,500 or $25,000 for joint filers). Because these are new deductions, your systems must be able to separately track and report these income streams. The IRS has indicated it will not update withholding tables for 2025, but new guidance is expected for 2026. See this Eide & Bailley article for more about tips and overtime changes.
Moving Expenses: The exclusion from gross income for employer-provided moving expense reimbursements has been made permanently taxable for most employees. The only exception is for certain members of the Armed Forces. This means you must now include these reimbursements in an employee's gross income and withhold payroll taxes.
Bicycle Expenses: The tax-free exclusion for employer-provided bicycle commuter benefits has been permanently eliminated. Any reimbursements for these expenses are now considered taxable income and must be reported on an employee's W-2.
Dependent Care Assistance: The exclusion from gross income for employer-provided dependent care assistance has been increased from $5,000 to $7,500 (or $3,750 for married individuals filing separately). You will need to adjust your payroll and benefits systems to reflect this new, higher limit.
Education Assistance: The exclusion for employer-provided education assistance (up to $5,250 per year) has been made permanent. Starting in 2027, this amount will be adjusted annually for inflation.
Review your current tracking methods: Evaluate how your current system handles tips and overtime. You'll need to confirm that it can distinguish between standard overtime pay and the premium portion of the pay required under the FLSA.
Establish a plan for 2025 reporting: Since the law is retroactive and the IRS is still working on guidance, you may need to use a "reasonable method" to approximate and report these amounts for the 2025 tax year. Work with your software provider to establish this methodology.
Monitor for IRS guidance: Stay informed about official communications from the IRS regarding updated forms, reporting requirements, and a list of occupations that qualify for the tip deduction.
Communicate with employees: Proactively inform your employees that while they will continue to see taxes withheld from their tips and overtime pay, they will be able to claim a deduction on their individual tax returns. This will help manage expectations and prevent questions about why their paychecks haven't changed.
Review FLSA classifications: Since the overtime deduction only applies to compensation required by the FLSA, it would be wise to review employee classifications to ensure they are correct and to clarify which employees are eligible. The deduction does not apply to employees who are paid a salary and receive overtime that is not required under the FLSA.
The law modifies several benefit programs and eligibility requirements that HR managers must be aware of to ensure compliance.
Paid Family and Medical Leave Credit: The business tax credit for paid family and medical leave has been made permanent. Starting in 2026, employers can claim a credit of up to 25% of wages paid to qualifying employees on leave, or on premiums paid for insurance policies that provide this leave. This provides a long-term incentive for offering such a benefit.
Child Care Credit: The business tax credit for providing child care to employees has been increased to 40% (or 50% for eligible small businesses), with a new maximum amount of $500,000 (or $600,000 for small businesses). This makes it a more financially appealing benefit to offer.
Federal Employee Health Benefits (FEHB): The Office of Personnel Management (OPM) is now required to conduct a comprehensive audit and verification process to ensure that only eligible family members are enrolled in the program.
Work Requirements: The law requires individuals in the Medicaid expansion population to engage in at least 80 hours of work, community service, or education per month to maintain eligibility. HR and social services departments may be tasked with verifying compliance for employees or residents who are on Medicaid.
The law provides several new sources of funding or opportunities for revenue that require your attention for budgeting and strategic planning.
Renewable Energy Revenue Sharing: The law establishes a new revenue-sharing mechanism for renewable energy projects on public lands. It specifies that 25% of revenues will be directed to the state and 25% to the county where the project is located.
Border Security Reimbursements: Two distinct funds are created to reimburse local governments for border-related costs.
A $10 billion fund, available through FY2034, will reimburse states and local governments for costs associated with border security actions taken on or after January 20, 2021.
An additional $10 billion fund, available through FY2029, will reimburse states and local governments for costs associated with U.S. border security.
The Department of Justice also provides $3.5 billion to reimburse states and units of local government for costs related to locating and apprehending criminals.
Rural Health Program: The law provides $10 billion per fiscal year from FY2026 through FY2030 for a new program to support health care in rural areas. States will apply for financial allotments, and local rural healthcare providers can benefit from the resulting funding for technology and workforce training. States are not required to contribute any matching funds.
Low-Income Housing Tax Credit (LIHTC): The law expands the LIHTC program by increasing the federal allocation to states by 12%. It also lowers the tax-exempt bond financing threshold from 50% to 25%.
Outer Continental Shelf (OCS) Revenue Cap: For Alabama, Louisiana, Mississippi, and Texas, the annual cap on revenue distribution from the Gulf of Mexico Energy Security Act is increased from $500 million to $650 million per year.
Water Infrastructure: The bill provides $1 billion in funding to the Bureau of Reclamation for construction and associated activities that increase the capacity of existing surface water storage or conveyance facilities.
Several previously available grants and funding programs have been terminated or had their funds rescinded. Your budgets and departments relying on these funds will need to find alternative sources.
EPA Grants: The law rescinds funding for a wide range of programs that provided grants and rebates to local governments. These include grants to replace medium- and heavy-duty vehicles with zero-emission vehicles and funding for diesel emissions reductions.
Greenhouse Gas Reduction Fund: The $27 billion Greenhouse Gas Reduction Fund, which provided financial and technical assistance to communities, has been repealed and rescinded.
Federal Highway Administration (FHWA) Grants: Unobligated balances for the Neighborhood Access and Equity Grant Program, which provided grants to states and local governments for transportation projects, have been rescinded. This also applies to funds for the Low Carbon Transportation Materials Grants program.
NOAA Grants: Funding for the National Oceanic and Atmospheric Administration (NOAA) programs that provided financial or technical assistance to states for conservation, restoration, and preparation for extreme weather has been rescinded.
Your departments will face new verification and reporting mandates, which may require additional staffing, software, and training.
Medicaid Eligibility Checks: State agencies must:
Beginning no later than FY2030, check the Social Security numbers of enrollees against a new CMS system on at least a monthly basis.
Beginning in FY2026, check the Social Security Administration's Death Master File quarterly to identify deceased enrollees and providers.
Medicaid Redeterminations: Eligibility for the Medicaid expansion population must now be redetermined every six months (up from annually).
Medicaid Work Requirements: States will be required to implement a work or community service requirement of at least 80 hours per month for the Medicaid expansion population. The law provides $200 million to states and $200 million to the CMS for FY2026 to help with implementation.
Expedited Environmental Reviews: Project sponsors can now pay a fee of 125% of the anticipated costs to the reviewing agency to expedite an environmental review (EA or EIS).
Unemployment Verification: State agencies that administer federal unemployment programs must verify that an individual's income does not exceed $1 million and must provide for the recovery of any overpayments.
It is important to note that the provided law does not contain any provisions to cut or eliminate federal funding for libraries. But the law does make changes to federal student aid, which may increase the demand for your library's assistance with financial aid applications and career resources.
Pell Grant Eligibility: The law changes how a student's eligibility for a Pell Grant is calculated by including foreign income and other non-federal grant aid. Because many patrons rely on the library for assistance with the Free Application for Federal Student Aid (FAFSA), library directors and staff should be aware of these new eligibility rules.
Workforce Pell Grants: The law creates a new Workforce Pell Grant for students in short-term workforce programs (150 to 600 clock hours). This could increase demand for library resources related to vocational training, career readiness, and certificate programs.
Municipal Bonds: Although lawmakers debated removing tax-exempt status from municipal and private activity bonds as a revenue offset, the final version of H.R. 1 preserves both tax exemptions.
SALT: The bill temporarily raises the State and Local Tax (SALT) deduction cap from $10,000 to $40,000, with phaseouts starting for households earning over $500,000. The cap will increase by 1% each year through 2029 before returning to $10,000 in 2030.
Opportunity Zones: The bill makes the Opportunity Zone program permanent. For investments made beginning in 2027, deferred capital gains can be deferred for five years after the investment is made. This replaces the previous system where gains were deferred until December 31, 2026, or until the investment was sold. The previous additional 5% step-up in basis for investments held for at least seven years is eliminated.
Navigating the complexities of H.R. 1 requires more than just knowing what's in the law; it demands the right tools to adapt and thrive. Our Visual Intelligence Portfolio (VIP) offers powerful solutions that help local government officials respond to these new mandates and opportunities. The following sections will show you how VIP's integrated features can simplify compliance, optimize financial management, and automate key processes across your organization.
The VIP Accounting and VIP Analytics modules are central to managing the financial impacts of the new law.
Project Accounting & Grant Tracking: With VIP Accounting’s Project Accounting and Grant Tracking features, finance teams can organize financial data by funding source, track expenditures over time, and produce reports that align with federal grant compliance standards. When overseeing grant-funded projects, it is important to document costs accurately, follow federal reporting requirements, and maintain a clear audit trail—practices that foster transparency and support continued funding.
Budget Control & Forecasting: With VIP Analytics, you can leverage forecasting tools and what-if scenario modeling to assess the fiscal impact of both lost funding and new revenue streams. These features empower finance directors and treasurers to make informed, data-driven decisions and develop strategic plans that adapt to evolving financial landscapes.
General Ledger: VIP Accounting's General Ledger feature is capable of supporting multiple levels of account segmentation. This allows you to capture granular details—including state and county allocations—within a single system. This approach simplifies the reporting process and also enhances transparency and accountability for all stakeholders.
Accounts Payable (P2P Automation): While not a direct mandate, the law's overall focus on fiscal responsibility makes cost-cutting a priority. Our AP automation tool streamlines invoice and claims processing, which can lead to significant cost savings by reducing the need for physical checks. This helps you improve operational efficiency and reduce fraud risk.
The law introduces new tax changes and administrative requirements that directly affect employees, making payroll and HR software crucial for compliance.
Payroll Processing: The law introduces new, temporary tax deductions for qualified tips (up to $25,000) and overtime compensation (up to $12,500). The VIP Payroll platform can handle this by customizing the time entry and reporting processes to separately track these income types. It also ensures accurate withholding for changes. Like making moving and bicycle expenses taxable, and the new, higher tax-free exclusion for dependent care assistance ($7,500).
Employee Self-Service: The VIP Employee Portal reduces the administrative burden on payroll and HR departments. Employees can use the portal to view their pay stubs and tax forms like W-2s without manual intervention from your team. This is particularly useful as the law's tax changes may lead to an increase in employee questions. You can even use the News & Info section to inform your employees of any upcoming changes to mitigate the questions before they pop up.
Task & Time Tracking: The new Medicaid work requirement stipulates that individuals must complete at least 80 hours each month engaged in work, community service, or educational activities. Departments can use the time entry tools in the Employee Portal, along with VIP Talent Management’s task-tracking capabilities, to monitor, verify, and document these hours efficiently. This approach supports compliance and simplifies the administrative workload associated with these new federal mandates.
Personnel Budgeting: The VIP Analytics module's personnel budgeting software helps you plan for future compensation changes. Its what-if scenario tools can model the fiscal impact of salary adjustments and new benefits, which is essential for long-term workforce planning in response to the law.
The law's environmental and funding changes will require utility directors to manage their departments with enhanced precision and fiscal discipline.
Financial Integration: The law rescinds grants for several environmental programs, which may force utility directors to seek alternative funding for projects. With VIP Utility Billing and VIP Accounting working together, it allows for a comprehensive, real-time view of financial data. This helps you justify capital projects and set rates based on accurate, up-to-date information.
Flexible Billing & Reporting: VIP Utility Billing has smart billing tools, with features like high/low alerts and full billing history. These help you stay accurate and efficient. This is vital when the financial landscape shifts and you must become more self-reliant on your own utility revenues.
The law's new administrative mandates and the need for data security make a robust, cloud-based platform essential for all local government departments.
Enhanced Security & Disaster Recovery: The law requires more frequent data verification, such as quarterly reconciliations with the SSA Death Master File for Medicaid enrollees. VIP Cloud is built with multiple layers of security and robust encryption to safeguard sensitive information. It also offers comprehensive disaster recovery capabilities to support business continuity and maintain compliance with data integrity standards.
Scalability & Reduced Overhead: The increased administrative workload from Medicaid redeterminations every six months will require a scalable IT solution. The VIP Cloud platform can handle increased data processing and storage without the need for costly on-premise hardware. This frees up IT directors to focus on strategic initiatives rather than system maintenance.
Flexibility & Mobility: With new mandates and potential for staff to work on various projects, the ability to log in from anywhere is important. VIP Cloud provides the remote access and flexibility needed for departments to respond to the law's changes quickly and effectively.
Local government finance teams face new legislation each year. Staying informed, collaborating across departments, and proactively planning are your best strategies.
At Software Solutions, we believe the best way to handle complexity is through clarity, agility, and a continued commitment to serving public sector missions. By leaning into modern financial tools and staying connected to the evolving legislative environment, your department can stay resilient, maximize value, and keep your community moving forward—no matter what federal law is passed next.
We'll continue to monitor the implementation of H.R.1 and provide further updates as details unfold. Our goal is to make sure you remain financially resilient and continue to serve your communities effectively.
Or view our webinar on the FLSA.
Sources for this article:
White House - https://www.whitehouse.gov/obbb/
United States Congress - https://www.congress.gov/crs-product/R48571
IRS - https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions
National League of Cities - https://www.nlc.org/article/2025/07/11/local-impacts-from-congress-one-big-beautiful-bill/
Eide & Bailley - https://www.eidebailly.com/insights/alerts/2025/overtime-pay-and-tips