Tax Reform and Reconciliation

Most of the core provisions of the Tax Cuts and Jobs Act (TCJA) enacted during the first year of President Donald Trump’s first term in the White House are scheduled to expire on Dec. 31 of this year, including lower individual tax rates.

Section 199A tax benefits for pass-through entities like S-Corps and LLCs, and Section 163(j) caps on business interest deductibility. Extension of those expiring provisions will dominate the public policy debates in Washington for the next four to six months.

While Republicans control both the White House and Congress, the legislative majorities are narrow enough to garner usage of the same procedural mechanism they used to enact the TCJA in 2017—reconciliation. The magic of reconciliation is that it effectively allows passage of legislation with a simple majority and not the 60 votes that are otherwise needed in the Senate. Given their 53-47 edge in the Senate, Republicans therefore can enact such legislation without the need for any Democratic support whatsoever.

A lot will be written and discussed about the reconciliation process in the coming months because its requirements and procedural idiosyncrasies will, to some extent, drive what can—and cannot—be done through the TCJA reauthorization effort. Here, we explore the material elements of that process.

Reconciliation Basics

There are two major stages to the reconciliation process:

(1) Adoption of reconciliation instructions in a budget resolution; and (2) Enactment of reconciliation legislation implementing changes to revenue and spending law.

A budget resolution can only provide for one reconciliation bill for revenue, spending, and the debt limit. Therefore, under the applicable rules, if a reconciliation bill has both spending and revenue provisions, then a subsequent reconciliation bill affecting spending or revenues is prohibited within that fiscal year.

Reconciliation is especially impactful in the Senate because, generally, there is no mechanism for limiting the amount of time proposed legislation can be debated unless at least 60 senators vote to end that debate. Reconciliation bypasses this requirement by imposing a fast-track process that limits the debate time and by requiring only a simple majority for enactment.

Historically, Congress has enacted 23 reconciliation bills. They generally focus on key policy initiatives such as tax, healthcare, welfare, or student loan program reform. The most recently enacted reconciliation bills are the 2022 Inflation Reduction Act, the 2021 American Rescue Plan Act, and the TCJA itself.

What Are Reconciliation Instructions?

The process is initiated by passage of a budget resolution in both chambers that includes reconciliation instructions for specified committees of jurisdiction. Any legislative committee with jurisdiction over spending, revenue, or the debt limit may be directed to report reconciliation legislation. The instructions require each named committee to develop legislation within its respective jurisdiction that relates to those three areas. Each committee drafts the requisite legislation, and the budget committees are then charged with packaging all of those drafts into a single reconciliation bill.

How Is Reconciliation Considered in the House?

In the House, once the Budget Committee has reported the compiled reconciliation measure, floor consideration is typically governed by a special rule reported from the House Rules Committee that dictates the maximum time for debate and what amendments will be permitted. Traditionally, no amendment is allowed that would increase spending or decrease revenue levels relative to the base bill without equivalent decreases in spending or increases in revenues (i.e., it must be deficit-neutral), unless the rule specifically modifies or waives this requirement.

In addition to these special rules, the House rules allow for a motion to recommit the bill before the House votes on final passage. Because members from the minority party have preference to make this motion, this allows the minority party one final opportunity to offer amendments to the bill.

How Is Reconciliation Considered in the Senate?

In the Senate, the first step in the reconciliation process is filing of a “motion to proceed,” which is subject to a simple majority vote. Once the motion to proceed is agreed to, debate on the underlying bill is limited to 20 hours, with debate on any amendment limited to two hours, equally divided between the majority and minority.

Even after the 20 hours have expired, there is no limit to the number of amendments (or motions) senators may offer. This unlimited amendment loophole, though rarely employed, may prove particularly advantageous to senators wishing to stall a reconciliation bill’s advance. Senators can offer amendments and force votes until they physically are no longer able to do so. At some point, however, the chamber proceeds to final passage.

What Is the Byrd Rule?

The Byrd Rule, named for the late West Virginia Senator Robert Byrd, makes “extraneous” reconciliation bill provisions and amendments subject to parliamentary objections (“points of order”). The rule protects the rights of the minority and is codified in statute, making this a rare instance when federal law, and not chamber rules, governs the Senate process.

Under the rule, any provision that does not change the level of spending or revenues is “extraneous” if it:

• Does not have a budgetary effect (i.e., does not change outlays or revenues);
• Worsens the deficit when a committee fails to achieve its reconciliation target; X Is outside the jurisdiction of the committee that submitted the provision;
• Produces a change in outlays or revenues that is merely incidental to the non-budgetary change;
• Increases deficits for a fiscal year outside of the reconciliation window; or
• Changes Social Security.

A point of order can be raised by any senator; the opinion of the Senate parliamentarian typically dictates whether that point of order should be sustained. If it is, the provision is stricken. Sixty votes are required to overturn the point of order determination. If, however, no senator makes an objection, an extraneous provision is not stricken.

Technically, the parliamentarian’s rulings are advisory and can be overruled by the presiding officer. While Senate Majority Leader John Thune (R-S.D.) has signaled he would oppose such efforts, he will almost certainly come under pressure to overrule the parliamentarian on extraneous Republican policy priorities.

Looking Ahead

The next few months are going to be rough and tumble. While the Republicans do not have to sway any Democrats to get a TCJA reauthorization bill done through reconciliation, they do have to persuade each other. Even when the House fills its three open seats, Republicans still will not be able to lose more than two votes to get something passed.

You likely will hear a lot about the reconciliation rules and requirements as part of their internal discussions and disputes with one another and, later, as part of the Democrats’ TCJA reauthorization disruption strategies. We hope you now feel better equipped to follow those debates.

Stay tuned for a deeper dive into what is at stake substantively in reconciliation coming in a later issue.