Tax Reform Now: Part 5

On October 19th, the Senate approved a $4 billion budget resolution, which now paves the way for passage of a tax bill using the budget reconciliation rules. This budget resolution passed 51-49 in the Senate, with Rand Paul being the lone Republican Senator to vote against it. As mentioned in Part 3 of “Tax Reform Now,” the House of Representatives previously passed a budget resolution with budget reconciliation instructions. The House’s budget resolution stated that any tax cuts must be offset by tax increases or spending cuts. The Senate’s budget resolution did not follow the House’s philosophy. Instead, the Senate’s budget resolution would add $1.5 trillion to the federal deficit over the next ten years.

The most important aspect of the Senate’s budget resolution is its inclusion of budget reconciliation instructions. These instructions allow a future tax bill to pass by a simple majority vote in the Senate. Typically, the political party in the Senate minority can filibuster a bill unless there are 60 votes to break the filibuster. By including the budget reconciliation instructions in the budget resolution, a future tax bill cannot be filibustered by Democrats if the tax bill adds $1.5 trillion or less to the federal deficit. There is a drawback to enacting tax reform using budget reconciliation. If a tax bill is passed using budget reconciliation, the Senate rules do not allow the tax bill to increase the federal deficit beyond the first ten years after its enactment. Like the Bush administration’s tax cuts enacted using budget reconciliation in the early 2000s, any tax cuts would be temporary and “sunset” after ten years.

Before the budget reconciliation instructions take effect, the House and Senate must pass identical budgets. Interestingly, the Senate’s budget resolution includes an amendment that allows the House to adopt the Senate’s version of the budget. Either the House will pass the Senate’s budget resolution without making any changes, or the budget resolution will go to a conference committee between the two chambers. It is common for a budget resolution to go to a conference committee. A conference committee usually takes a week or two to resolve any differences. However, the Senate’s budget resolution is expected to pass the House without the need for a conference committee because the Senate’s budget resolution included amendments that appeased House Republicans. Avoiding a conference committee speeds up the timeline for tax reform. If the Senate’s budget is passed by the House, the House Ways and Means Committee will draft the tax reform legislation. Republican leaders hope that the tax bill will be ready to be presented to the House by early November.

We hope this update has been helpful. As always, please let us know if you have any questions.