Intro: HM: This is DC Dynamics, a podcast about what’s coming up in US tax policy, with a look to the past as our guide. I’m Heather Meade, head of our Washington Council EY Health team, and I’m joined by our newest member of our WCEY tax team — but a long-time pro on the inner workings of DC — Lisa Wolski. In this episode, we are going to look to the past of budget reconciliation, which is a process that can be used to pass large revenue bills in Congress when the House, Senate, and the White House are controlled by the same party. And, at least over the past couple decades, it has been mostly used for — you guessed it — tax and health bills. And this could happen again in 2025 if either party sweeps total control of Congress and the Presidency. Could Congress use “budget reconciliation” to enact that party’s favored approach to the tax cliff of Tax Cuts & Jobs Act, or TCJA, provisions that expire at the end of 2025, plus throw in some additional items? I am going to start by asking my friend, Lisa.
Lisa, you worked in Republican leadership and you have been involved in the reconciliation process on the Senate side. What is the major advantage of this process?
LW: Thanks, Heather. Yes, I’ve worked on my share of tax reconciliation bills. As you know, budget reconciliation allows the Senate to pass legislation impacting revenues and mandatory spending with 51 votes rather than the normal 60-vote filibuster threshold required for most other legislation, as long as it meets the strict budget reconciliation rules. And this has been pretty consequential. Rarely does one party have 60 or more votes in the Senate. The last time was in 2009, when President Obama briefly had a 60-vote Senate majority until the death of Senator Ted Kennedy (D-MA). Republican Senator Scott Brown’s (R-MA) election to the Senate in January of 2010 ended the supermajority. Absent 60 votes, budget reconciliation provides the only opportunity for one party to pass a bill under their own parameters, without compromise.
HM: Right — and looking back, that was incredibly significant, because separate health reform bills were approved November 2009 in the House and on Christmas Eve 2009 in the Senate, BUT the two sides could not agree on a unified approach before a special Senate election in Massachusetts ended Democrats’ 60-vote majority. Even with 59 Democratic votes, Democrats still did not have enough votes and had to use reconciliation to amend the Senate bill and pass the legislation.
II. LW: But having a majority is still no guarantee. Remember when Republicans used reconciliation to try to repeal the Affordable Care Act (ACA) in 2017?
HM: Right. That was in 2017, when Senator John McCain (R-AZ), Republican of Arizona, famously gave a thumbs down to a reconciliation bill amendment to repeal the ACA. That 2017 repeal amendment was considered under the FY 2017 budget reconciliation process, and after the unsuccessful vote, they quickly pivoted back to your favorite topic — tax reform, taking a second bite out of that reconciliation apple by drafting a second budget resolution, for FY 2018, with new instructions that produced the TCJA.
LW: Right! And that two bites at the apple could be the case next year. Let’s recap the basic budget rules for our listeners. Each year, the majority party in each house of Congress is supposed to write a budget resolution. The budget resolution sets out the budget parameters for the year and is agreed to by both the House and the Senate but is not signed by the President. A budget resolution sets out the total appropriations amounts for the year and can, if Congress wishes, provide for up to three reconciliation bills: one to address taxes, one to address spending, and one to address the debt limit. But if they combine topics — say taxes and spending — then Congress can only do one reconciliation bill. There’s no penalty for missing the deadline, however, and this year Congress did not pass an FY2025 budget resolution. That fact gives the next Congress the ability to use both the FY2025 and the FY2026 budget resolutions to set up reconciliation bills. That means the next Congress could do two reconciliation bills that combine taxes and spending, or even the debt limit. If Republicans control both the House and Senate next year, it is all but certain they will use the reconciliation process to extend the 2017 Tax Cuts and Jobs Act, much of which expires at the end of 2025 as you said. But they are also thinking about other priorities that could be addressed with a reconciliation bill.
It’s worth noting that 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 on January 1, 2025, but the Treasury Department has the ability to use certain “extraordinary measures” to delay the so-called “X date” by several months. It is expected that Congress will need to raise the debt limit by sometime in mid-2025.
III. HM: So, we can see why both parties would want to use reconciliation to pass their top priorities (for example, Democrats still have their eye on the expiring ACA tax credits and the child tax credit), but Congress can’t use the process for everything they want. There are guardrails: 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), who is still the longest serving Senator in history. A main requirement is that each provision in the bill must affect federal revenues or spending in some way. Provisions that do not meet this requirement must be removed. And we have seen this in practice a few times over the years. During the ACA repeal debate, for example, non-revenue aspects like eliminating essential health benefits and permitting insurers to sell policies across state lines were found to violate the rule, because while they affected company revenue, they didn’t affect federal revenue.
LW: This can pose a problem for tax legislation, too, because grants of regulatory authority generally do not carry a revenue score but help ensure that Treasury implements the legislation as Congress intends. This could be even more important after the Supreme Court struck down the doctrine of Chevron deference, which will limit flexibility in writing regulations — and tax regulations are some of the most complex and important. There is also a Byrd Rule requirement 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.
Unlike the Bush tax cuts, however, the TCJA included provisions that didn’t sunset the corporate and international tax provisions. While Republicans made the corporate rate permanent in order to encourage economic growth, which helped with their macroeconomic score, they may also have been betting that both parties would feel more pressure to keep the individual income tax cuts in place, to prevent a tax increase on voters, than they would feel about keeping the corporate rate constant. We’ll see if that was a smart bet next year.
IV. HM: These considerations are usually apparent well before the bill hits the Senate floor. Members and staff typically take care to scrub any potential Byrd rule violations to avoid the problems a violation could cause. So, those rules aside, the basic process for reconciliation begins with each house passing a “budget resolution” setting parameters for revenues and/or spending for the fiscal year, as you mentioned previously, Lisa. If Congress intends to consider a reconciliation bill, the budget resolution will include “instructions” to committees of jurisdiction to change spending or revenue, or usually both, to meet specific targets. The reconciliation instructions cannot prescribe specific policies to achieve the number targets. Lisa, setting these target spending or revenue numbers can be difficult, right?
LW: Yes, this was definitely an issue in 2017. After an intraparty debate over the size of the deficit that the tax reform bill would permit, then-Budget Committee Chairman Bob Corker (R-TN), a Republican from Tennessee and a moderate, somewhat reluctantly agreed to vote for the budget resolution to increase the deficit by $1.5t over the budget window, with increased revenue spurred by economic growth being an important consideration. Debt and deficit concerns have only increased in the intervening years, which may again make it more difficult to arrive at a revenue limit, even among Republicans.
V. HM: Ok, well, we won’t know if reconciliation is a possibility for next year or, if so, which party will get to use it, but it’s never too early to become familiar with this process that seems to come up in Congress with more frequency.
LW: Yes. While the reconciliation rules are arcane, understanding 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.
HM: Very true and that is an excellent message to end on. Just a reminder, Washington Council EY has an Alert on reconciliation that you can find on EY.com to learn more. That’s all for now. This has been DC Dynamics.
