News & Insights

Tax Savings from OBBBA Portend a 2026 Spending Spree

Congress passed the One Big Beautiful Bill Act (OBBBA) last summer, implementing a wide range of tax and spending cuts for individuals and companies. With 2026 upon us, it won’t take long to start seeing the economic effects of the bill, as many of the provisions should prompt consumer spending and business investment this year.

For individuals, the bill reduced income taxes retroactively starting with the 2025 tax year, which means millions of families will receive larger-than-average tax refunds in 2026. They will also see an increase in their take-home pay starting this year as tax withholdings will be lower. Higher-income taxpayers will benefit from an increase to the State and Local Tax (SALT) deduction, which now allows filers who itemize to deduct up to $40,000 (raised from $10,000). Lower-to-middle-income families will see plenty of benefits as well, thanks to increases in the standard deduction and child tax credit, a new tax deduction for tips and overtime hours, a bonus deduction for seniors and deductible interest on loans for domestically produced autos.

These and other tax code changes will result in higher take-home incomes, fueling second-quarter consumer spending. Individuals at the lower end of the income spectrum are more likely to spend an unexpected cash influx out of necessity, whereas wealthier families are more apt to save or invest it. Benefits accruing to working class families will narrow the gap between wealth cohorts in our K-shaped economy.

Several significant changes under the OBBBA will also lower business taxes. The bill reinstates 100% bonus depreciation for eligible property acquired and placed into service after Jan. 19, 2025, allowing businesses to deduct the total cost of qualifying business assets in year one, rather than amortizing the expense over time. Companies can also claim an immediate deduction of 100% of expenses for domestic R&D activities and new production facilities. There is a 30% tax credit for new investments in manufacturing equipment and facilities along with a preferential 15% corporate tax rate for U.S.-based manufacturers. The corporate alternative minimum tax has been eliminated. Altogether, the OBBBA modifications should provide a tailwind for an economy that has most recently been growing in excess of 3%.

Distribution of OBBBA Tax Benefits Across Income Levels

Source: Oxford Economics

Bank Lending Rising – But Direct Economic Benefit May Lag

Banks have been generally tightening their lending standards for the past three years. Traditional lending categories, including consumer loans, residential and commercial real estate loans, and commercial and industrial loans, were mostly flat in 2025. The lending growth that has occurred has been concentrated in loans to non-bank financial institutions funding private debt and equity.

Bank lending to private equity and private debt funds is seen as lower risk because borrowers are often better capitalized, professionally managed and well-diversified when compared to individual businesses and consumers. Private equity and debt firms are effectively becoming the underwriters of bank lending, with debt firms using loans to leverage their funds and investments.

The recovery for small businesses has been uneven, with uncertainty high, particularly for small importers still exposed to the risk of new global tariffs. While overall capital expenditures have been buoyed by big tech companies’ AI and software boom, small firms’ capital expenditures haven’t rebounded because they lack resources. Small companies stand to be next stage beneficiaries of AI development.

Equity funds are using funds for subscription lines, creating bridge loans to smooth out the lending process for their portfolio companies while they wait for a capital infusion from their investors. This differs from the traditional model in which banks lend directly to small businesses to support growth; instead, the new approach injects capital into emerging and growing businesses in a potentially more efficient and professionally managed way. However, this two-step process does lengthen the time between increases in bank lending and growth in real economic activity.

U.S. Bank Lending Year-Over-Year

Source: Federal Reserve Economic Data

U.S. Bank Lending by Category: Year-Over-Year Change

Source: Federal Reserve Economic Data

Productivity is Most Important Factor Sustaining Economic Growth

The latest Bureau of Labor Statistics productivity report, released in early January, shows an increase of 4.9% in the third quarter of 2025, on an annualized basis. This marks the second consecutive quarter with productivity growth above 4%, a very encouraging trend. Year-over-year growth was a more modest 1.9%, but still strong compared to an average 1.5% during the pre-pandemic business cycle. Labor productivity (measured by dividing total output by hours worked) is critical for non-inflationary growth amid a stagnating workforce.

The BLS also reported that unit labor costs dropped by 1.9% in the third quarter, even as hourly compensation increased by 2.9%. This allows companies to raise real wages without increasing prices as their output grows.

There may be additional changes on the horizon when the BLS publishes the final revisions to its 2025 employment data, which was delayed due to the government shutdown. Preliminary estimates made last August suggest that workforce numbers may be adjusted downward by as many as 900,000 jobs, meaning that labor productivity was likely even higher than previously reported.

These numbers are a primary focus of the Federal Reserve’s analysis on interest rates. This highlights the importance of improving worker output in an economy with a shrinking labor pool, as well as the risks of a labor shortage creating a wage-price spiral that could mean the end of this current boom. Higher productivity helps contain inflation, an important data point supporting the case for lower interest rates.

History suggests a large shift in productivity may cool inflation more than expected, justifying a more dovish Fed policy. In the mid-1990s, Federal Reserve Chairman Alan Greenspan predicted that the rise of the internet would create a productivity boom. Despite rising inflation and much to the chagrin of many of his critics, he declined to raise interest rates substantially. He was proven right when productivity numbers were revised after the fact to reflect a strong productivity surge that kept inflation at bay. The development of widely dispersed artificial intelligence could be a replay of the internet boom, supporting the more dovish position of some Fed governors.

Labor Productivity Quarter-Over-Quarter Annualized

Source: Federal Reserve Economic Data

Unit Labor Costs Quarter-Over-Quarter Annualized

Source: Federal Reserve Economic Data

About Frost Investment Advisors, LLC

Frost Investment Advisors, LLC, a wholly owned subsidiary of Frost Bank, one of the oldest and largest Texas-based banking organizations, offers a family of mutual funds to institutional and retail investors. The firm has offered institutional and retail shares since 2008.

Frost Investment Advisors' (FIA) family of funds provides clients with diversification by offering separate funds for equity and fixed income strategies. Registered with the SEC in January 2008, FIA manages more than $5.3 billion in mutual fund assets and provides investment advisory services to institutional and high-net-worth clients, Frost Bank, and Frost Investment Advisors’ affiliates. As of Dec. 31, 2025, the firm has $4.9 billion in assets under management, including the mutual fund assets referenced above.

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This commentary is as of Feb. 9, 2026, for informational purposes only and is not investment advice, a solicitation, an offer to buy or sell, or a recommendation of any security to any person. Managers’ opinions, beliefs and/or thoughts are as of the date given and are subject to change without notice. The information presented in this commentary was obtained from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not indicators or guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification strategies do not ensure a profit and cannot protect against losses in a declining market. All indices are unmanaged, and investors cannot invest directly into an index. You should not assume that an investment in the securities or investment strategies identified was or will be profitable.

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