Long exposure of the US Capitol building

Prospects for budget reconciliation in 2025

Washington Council Ernst and Young
Washington Council Ernst & Young

Advisory services group that helps clients manage opportunities and risks associated with the legislative and regulatory process.

5 minute read 03 Dec 2024
Related topics
Tax

Republicans will control the Senate and House, meaning they can proceed with their plans for a budget reconciliation bill anchored by TCJA extensions.

In brief

  • Reconciliation allows legislation affecting revenue and mandatory spending to pass the Senate with only 51 votes.
  • The process must follow specific rules and process steps and places limits on what can be included in the legislation.
  • It has been used under the Bush, Obama, Trump and Biden Administrations to advance tax, health care, climate, and pandemic response legislation.

The 2024 election, and control of the House, Senate, and White House, will have a big impact on what happens with the many tax provisions that are scheduled to expire or increase in 2025. With a Republican sweep and total control of Congress and the presidency in 2025, GOP leaders have said they will use a process called “budget reconciliation” to enact that party’s favored approach to taxes. If the House and Senate approve a budget resolution providing for reconciliation instructions, the process permits legislation impacting revenues and mandatory spending to pass the Senate with 51 votes rather than the normal 60-vote filibuster threshold required for most other legislation — if it meets the strict budget reconciliation rules. There is no similar process benefit to using reconciliation in the House of Representatives, but since tax legislation must originate in the House, leaders there are laying the groundwork for how the chambers may work together. Speaker Mike Johnson (R-LA) met with Senate Republicans earlier in the year to discuss an ambitious and “aggressive” House plan for reconciliation in 2025.   

With Republicans in Congress planning to act early in 2025 on a budget reconciliation bill focused on extensions of the Tax Cuts and Jobs Act (TCJA) end-of-2025 expiring provisions and other issues, Majority Leader Steve Scalise (R-LA) said during a November 19 press conference that he “assembled all of the committee chairs last week to go through what we will be doing in budget reconciliation starting in January. This is going to be a busy process next year.” He continued, “We laid out a very aggressive first 100-day agenda addressing the things that would get our country moving again, that would focus on lowering costs and getting our economy moving, making sure there is no tax hike next year. If Congress takes no action, the Tax Cuts and Jobs Act under President Trump, many of those provisions from 2017 would expire, leading to a large tax hike on families.”

While the reconciliation rules are arcane, having some familiarity with the requirements and limitations will be important for those who are interested in the tax changes that could be considered through the reconciliation process in 2025.

How Republicans might use reconciliation

Congressional Republicans have been forthcoming about their plans to use the reconciliation process to address the tax changes coming in 2025: President Trump was elected along with a Republican-controlled Congress and they want to extend all of their signature 2017 TCJA provisions. Republicans are also looking at modifications or fixes to some of those provisions, including the three main international provisions: the Global Intangible Low-Taxed Income (GILTI), the Foreign Derived Intangible Income (FDII), and the Base Erosion Anti-Abuse Tax (BEAT). Trump has also suggested a possible further reduction in the corporate income tax rate.

Some Republicans have expressed an interest in repealing or limiting some or all of the clean energy incentives in the Inflation Reduction Act (IRA). Finally, some Republicans have even said they would like to use the process to make changes beyond the tax code.

What is reconciliation, and how does it work?

The budget reconciliation mechanism was created as part of the Congressional Budget and Impoundment Control Act of 1974. This act established the congressional budget process and provided the special reconciliation rules that were originally intended to ease Senate consideration of politically difficult deficit reduction legislation. In practice, the special rules have come to be used for purposes other than deficit reduction.

Reconciliation can be used to make changes in mandatory spending (but not Social Security), revenues or the debt limit. Reconciliation cannot be used to change discretionary spending – annual appropriations. Congress can combine all three topics into one bill or can handle them in three separate bills.

Congress rarely uses reconciliation to increase the debt limit, because for political reasons the majority will want the minority party to join in supporting the debt limit increase. The current debt limit suspension ends January 1, 2025. While the Treasury Department has the ability to use certain “extraordinary measures” to delay the date, it is expected that Congress will need to raise the debt limit by mid-2025.

How EY can help

  • Washington Council Ernst & Young

    Washington Council Ernst & Young (WCEY) is a tax, legislative and regulatory group within Ernst & Young LLP that combines the power of a leading professional services organization with the on-the-ground knowledge, personal relationships and attention to detail of a boutique Washington-insider firm.

    Read more

The process

With the dust settling following the election, the main focus now is speculation over forthcoming negotiations among Republicans to decide on a revenue target for the bill, determining how much of the cost of the bill will be paid for and how much will be added to the budget deficit.

 

The process begins with each house passing a “budget resolution” setting parameters for revenues and/or spending for the fiscal year. If Congress intends to consider a reconciliation bill, the budget resolution will include “instructions” to committees of jurisdiction to change spending or revenue (or both) to meet specific targets. The reconciliation instructions cannot prescribe specific policies to achieve the number targets.

 

The budget resolution must be approved by the House and Senate in the same form but is not signed by the president.

 

Typically, budget resolutions are approved in advance of the upcoming fiscal year (a fiscal year 2025 budget resolution would be approved during calendar year 2024, for example). Importantly, a budget resolution for FY 2025 (which begins October 1, 2024) has not been considered by Congress this year. However, Congress may approve a budget resolution at any point during the fiscal year (prior to September 30, 2025), meaning this vehicle will be available to the new Congress taking office in January 2025. The new Congress will also be able to use an FY 2026 budget resolution to create a separate set of reconciliation instructions next year, providing a potential path for two reconciliation exercises in 2025.

 

Republican leaders are confirming that two separate budget reconciliation bills will be available for enacting GOP-only proposals with a simple majority vote in the Senate in the next Congress – they will hold a 53-vote majority next year – rather than the 60-vote filibuster threshold that would apply to a tax bill considered under divided government. Reportedly, one may focus on extending the TCJA tax cuts. The second may focus on proposals Trump put forth during his campaign.

 

Once a budget resolution with reconciliation instructions is approved, the committees that are given instructions begin putting together legislation to meet the targets. In addition to meeting the targets set out in the resolution, a reconciliation bill must meet very specific rules to preserve its status and avoid a Senate filibuster. These rules are called Byrd Rules after former Senator Robert C. Byrd (D-WV). For example, each provision in the bill must affect revenues or spending in some way. Provisions that do not must be removed. This can pose a problem for tax legislation because grants of regulatory authority generally do not carry a revenue score but help ensure that Treasury implements the legislation as Congress intends.

 

 Another requirement is that a reconciliation bill must not worsen the deficit beyond the “budget window.” A budget resolution will specify this term, which is traditionally 10 years but could be shorter of longer if Congress wishes. One way that Congress meets this requirement of not worsening the deficit is to sunset tax cuts or to “pay for” tax cuts with other tax increases or spending cuts. The 2001 and 2003 tax cuts and the 2017 TCJA are well-known examples of tax cuts that were sunset to meet the reconciliation requirements.

 

 In the Senate, debate is limited to 20 hours and all amendments must be relevant to the underlying provisions of the bill. The 20-hour time limit for debate, germaneness requirements, and prohibition on filibustering the bill, are key reasons why lawmakers are often inclined to use the process to move major legislation with revenue implications.

Byrd rule deems extraneous proposals that:

  1. Do not produce a change in outlays or revenues.

  2. Produce changes in outlays or revenue that are merely incidental to the non-budgetary components of the provision.

  3. Are outside the jurisdiction of the committee that submitted the title or provision for inclusion in the reconciliation measure.

  4. Increase outlays or decrease revenue if the provision’s title, as a whole, fails to achieve the reporting committee’s reconciliation instructions.

  5. Increase net outlays or decrease revenue during a fiscal year after the years covered by the reconciliation bill unless the provision’s title, as a whole, remains budget-neutral.

  6. Contain provisions regarding Social Security.

In practice

  • During the ACA repeal debate, non-revenue aspects like eliminating essential health benefits and permitting insurers to sell policies across state lines were found to violate the rule.

  • During the TCJA, the budget impact of a policy to expand 529 savings accounts to home-school expenses was challenged by Democrats and found to be incidental to the non-budgetary policy around education.

  • Revenue-raising provisions taking effect in the later years of the budget window are understood to have enabled permanency of the TCJA corporate rate cut by clearing the prohibition on decreasing revenue in years beyond the budget window.

An unlimited number of amendments may be offered and voted on even after 20 hours of debate have expired. Later amendment votes are typically held in rapid succession with only perfunctory explanation — a process known colloquially as “vote-a-rama.”

As with other legislation, differences between House and Senate reconciliation bills are typically resolved through a conference committee, though the process of appointing conferees can be lengthy if the minority chooses to exercise its right to pursue motions to instruct conferees. A conference can be avoided altogether if both chambers pass identical versions of the bill —something the leaders in each house will push to achieve. While reconciliation provides for an expedited procedure — the measures are privileged in the Senate, and time limits are imposed on debate — the process can still take several months.

There were three tax reconciliation bills enacted under the Bush Administration and GOP-led Congress in place through 2006: the 2001 “Bush tax cuts” legislation; a second bill in 2003 highlighted by a reduction in capital gains and dividend taxes; then the 2005 bill (enacted in 2006) to push those reductions out to 2010. Under the Obama Administration, Democrats enacted the Affordable Care Act (ACA) in 2010, which Republicans tried to repeal under the Trump Administration before enacting the Tax Cuts & Jobs Act (TCJA) in 2017. In the Biden Administration, Democrats enacted the American Rescue Plan Act (ARPA) COVID-19 pandemic response bill in 2021, which included provisions on health care, taxes and other issues. The Inflation Reduction Act (IRA), a climate-centric bill with substantial health care provisions, which was whittled down from the broader Build Back Better Act, was enacted in 2022.

Following are thumbnails of some of these bills.

Figure 1
Figure 2
Figure 3
Figure 4

Summary

Budget reconciliation is central to both parties’ strategies if either sweeps the House, Senate and White House. Republicans could use reconciliation to extend the 2017 tax legislation, while Democrats might use it to support middle- and lower-income taxpayers and increase taxes on corporations and higher-income taxpayers. The process, which bypasses the Senate’s 60-vote filibuster threshold, is limited to mandatory spending, revenues and the debt limit. It begins with a budget resolution and follows strict rules to prevent deficit increases beyond a budget window. Reconciliation has been used frequently in recent years to enact tax and health care legislation. 

About this article

Washington Council Ernst and Young
Washington Council Ernst & Young
Advisory services group that helps clients manage opportunities and risks associated with the legislative and regulatory process.
Related topics
Tax

How the tax cliff is impacting tax policy and the 2024 US elections

Prepare your business now for uncertainty ahead. With the 2017 tax cuts set to expire and a $78 billion tax bill in limbo, Martin Fiore, Deputy Tax Leader says business leaders need to prepare for headwinds while seeking opportunities. Learn about how the tax cliff is impacting tax policy and the 2024 US elections.

Find out more

Related articles

Episode 19: Super Bowl of Tax Pregame

In DC Dynamics episode 19: Super Bowl of Tax Pregame, Ray Beeman and Ryan Abraham walk though possible scenarios for how the Tax Cuts & jobs Act extension could be addressed if the election outcome is a red or blue wave—if one party sweeps—or if there is a divided government.

16m 4s

Expiration and change dates of various tax provisions may increase focus on tax policy

Several tax provisions are scheduled to sunset or change over the next few years, which may be a focus in an election year.

Washington Council Ernst & Young

Budget reconciliation basics

Budget reconciliation allows 51-vote Senate passage of revenue and spending bills under certain parameters.

Washington Council Ernst & Young

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.