Pathways to budget reconciliation in 2025

The House has passed an FY2025 budget resolution with the main goal of extending Tax Cuts & Jobs Act (TCJA) provisions expiring at the end of 2025 in a budget reconciliation bill that can pass Congress with GOP-only votes. The availability of the reconciliation process means Republicans won’t have to compromise with Democrats to advance tax cut extensions in the Senate, where a budget reconciliation bill meeting strict criteria can pass with a simple-majority vote rather than the 60-vote filibuster threshold that applies to most other legislation. But Republicans will have to compromise among themselves, as not only will the fractious House need to assemble a bill, the same budget resolution and same reconciliation bill must pass both the House and Senate in order to use the special process.

Nor will fitting Republican tax cut aspirations within the $4.5 trillion Ways & Means reconciliation instruction be easy. House Budget Committee Chairman Jodey Arrington (R-TX) has said the $4.5 trillion net instruction will cover a 10-year extension of expiring TCJA provisions, and that other tax cut proposals, including those put forward by President Trump, could be paid for with other revenue offsets like paring back Inflation Reduction Act (IRA) energy tax credits. Ways & Means Chairman Jason Smith (R-MO) has said the instruction for a $4.5 trillion net deficit increase for tax cuts will likely allow for only an eight- to nine-year extension of TCJA provisions if the Committee also includes some of President Trump’s campaign tax proposals, which include exempting from tax tip income, overtime, and Social Security benefits.

According to a Congressional Budget Office (CBO) report from May 2024, a 10-year extension of expiring TCJA tax provisions would cost $4 trillion/10 years, not including interest costs. Bonus depreciation is included in that figure but addressing TCJA pre-cliffs on 5-year R&D amortization and the calculation for interest expense deductions (earnings before interest, taxes, depreciation and amortization (EBITDA) changed to earnings before interest and taxes (EBIT) could be $200 billion more, according to unofficial reports, leaving little room for other tax cuts.

Top Senate Republicans, including Majority Leader John Thune (R-SD) and Finance Committee Chairman Mike Crapo (R-ID), have advocated using a current policy baseline that wouldn’t count the cost of extensions of tax cuts currently in place for purposes of the reconciliation rules, which is seen as providing the best chance for making the tax cuts permanent. Chairman Smith also supports the current policy approach rather than the current law baseline under the House resolution. Leader Thune has said talks with the Senate parliamentarian are underway and it is his view that the Budget Committee Chairman determines the baseline, in this case Senator Lindsey Graham (R-SC).

Some Republican members of the Senate Finance Committee said they won’t support a tax bill without making TCJA provisions permanent, and that demand must be weighed against the views of deficit-conscious members who will likely insist that tax cut extensions be offset. Of course, when a unified budget is reached and reconciliation legislation is negotiated, any number of tax proposals will be up for debate, including a possible increase in the state and local tax (SALT) deduction cap above the $10,000 set by the TCJA.

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 process. 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.

Once a budget with reconciliation instructions is approved, the committees that are given instructions begin putting together legislation to meet the targets. The rules are geared mainly toward the Senate, where the majority can avoid a filibuster but also where minority rights have very strong protections. That’s why the rules are so circumscribed — to afford as much protection to the minority as possible, even as they are giving up the filibuster. 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 named 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 or 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. The Byrd Rule deems extraneous provisions that:

• Do not produce a change in outlays or revenues
• Produce changes in outlays or revenue that are merely incidental to the non-budgetary components of the provision
• Are outside the jurisdiction of the committee that submitted the title or provision for inclusion in the reconciliation measure
• Increase outlays or decrease revenue if the provision’s title, as a whole, fails to achieve the reporting committee’s reconciliation instructions
• Increase net outlays or decrease revenue during a fiscal year after years covered by the reconciliation bill unless the provision’s title, as a whole, remains budget-neutral
• Change Social Security

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 a “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 process, only in the sense that it allows the Senate majority to avoid a filibuster – 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. These bills have spanned different timeframes, some moving fast and others less so. In recent years, ARPA and the TCJA moved quickly through Congress. The IRA and ACA resulted from longer processes that required resolving difficult political issues.

There have been several instances of provisions being knocked out of prior bills for running afoul of reconciliation bills:

• A minimum wage increase was ruled to violate reconciliation rules for the Build Back Better Act in 2021, the precursor to the IRA in 2022, because the budgetary impact would be “merely incidental” to its underlying policy intent.
• 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.
• 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.

Already there are questions about whether a current policy baseline will pass muster under reconciliation rules. There has long been the expectation that, under a current policy baseline, each of the provisions would need to be modified in some respect to meet the budget reconciliation requirement that proposals have some revenue impact. A current policy baseline hasn’t been used in reconciliation in recent memory. Advocates mostly point to the practical example of using the approach for the extension of the Bush tax cuts at the end of 2012, but that occurred in a bipartisan bill that was not subject to the budget reconciliation process. While some observers say a bipartisan package offers the best chance of creating lasting tax policy, compromise on the many tax issues to be considered under a TCJA extension bill would be difficult, hence the exploration of pathways to budget reconciliation in 2025.