Budget Reconciliation

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Budget Reconciliation

Budget Reconciliation: A Primer

With Republicans controlling both chambers of Congress and the Presidency, it is generally expected that the GOP will be able to advance its legislative priorities. Yet Republicans have just a four-vote margin in the Senate (52-48), which makes it difficult to pass legislation over Democratic objections. Under normal Senate procedures, it takes 60 votes to overcome a filibuster and enact legislation.

Budget reconciliation (“reconciliation”) is a special procedure initiated under the annual budget process that can be employed on a limited basis to bypass Senate filibuster rules and pass legislation with a simple majority in the Senate. This tool gives Republicans the option of passing tax reform or other legislative initiatives that primarily impact the federal budget on a party-line basis. In fact, Senate Republicans have already initiated one reconciliation procedure —using the budget process from last year—to pursue the repeal of the Affordable Care Act. Republican leadership intends to use a second reconciliation bill under the 2017 budget process to pass major tax reform later this year.

While reconciliation makes it possible to pass tax reform legislation this year without Democratic support, the outcome is far from guaranteed. As we explained in our estate tax and tax reform client pieces, there are a number of significant hurdles that Republicans must clear to enact major tax reform this Congress.

This primer will explain how this special Congressional procedure works, as well as how it is likely to impact the content and potential success of any tax reform legislation in 2017.

What is Reconciliation?

Reconciliation is a special procedure that allows lawmakers to pass tax and spending legislation on an expedited basis. The key point is that reconciliation allows certain legislation to be both brought to the Senate floor and passed by a simple majority vote. Normally, it takes 60 votes to break any filibuster and allow a floor vote.

[More specifically, it takes 60 votes to invoke cloture and allow a bill to receive a vote in the Senate – for more details on the Senate filibuster:https://www.senate.gov/reference/Index/Filibuster.htm]

How Does the Reconciliation Process Work?

Each year, the Administration submits to Congress its recommendations for federal taxes and spending in an annual budget for the upcoming fiscal year. Congress then develops a framework for the federal budget in a concurrent budget resolution, which must be agreed to by both Chambers, but is not signed by the President or legally binding. Rather, the concurrent budget resolution sets overall Congressional targets for mandatory spending, revenue, and/or debt limit changes for a designated timeframe, normally five or ten years, which is referred to as the “budget window.”

This concurrent budget resolution may include reconciliation instructions, which empower the Senate to pass reconciliation legislation in accordance with these instructions on an expedited basis with a simple majority vote. Reconciliation instructions also identify the relevant committees in both chambers that will develop the actual legislative policies and text within the Committees’ jurisdiction to meet the established targets—as well as the deadline for completing the work. If more than one committee receives instructions to produce legislation, the Budget Committee in the relevant chamber will consolidate the work of the tasked committees into one bill for floor consideration.

Reconciliation provides a number of provisions that allow for expedited consideration in the Senate, including: the ability to bring to the floor and pass the resolution by a simple majority, the ability to limit debate on the resolution to 20 hours, and a strict germaneness test which limits the number and content of permissible amendments.

In short, reconciliation allows the majority party to avoid the procedural hurdles normally available to the minority party to prevent legislation from being passed by a simple majority vote. In recent years, the reconciliation process has been used by one party to pass major legislative initiatives on a partisan basis. Reconciliation was most recently used in 2010 to pass the Affordable Care Act. In 2001, the Bush tax cuts were also passed using a reconciliation procedure, as were the Clinton tax increases in 1993.

What are the Key Limitations of Reconciliation?

Only legislation meeting certain parameters can be passed using reconciliation. There are three types of reconciliation bills that are permitted: spending, revenue, and debt limit bills. This means that up to three reconciliation bills can be introduced during a given fiscal year, but each category can only be used once. So, if a concurrent resolution contains both spending and revenue instructions, then only a reconciliation resolution involving the debt limit would be in order for the remainder of the fiscal year.

[Note: The reason Republicans can do both health care and tax reform this year is because Congress did not pass a FY2017 concurrent budget resolution in the 2016 calendar year (Congress is not required to pass a budget resolution every year). So Republicans are using last year’s FY2017 resolution to pursue repeal of the Affordable Care Act, and reserving the FY2018 concurrent budget resolution for tax reform later this year.]

Additional limitations on this process are referred to as the “Byrd Rule” after the late Senator Robert Byrd (D-WV). The Byrd Rule provides that:

  • Only changes that have a material impact on the budget may be included, which means that measures with little or no fiscal impact cannot be included;
  • The Social Security trust fund cannot be touched; and
  • The resolution cannot increase the deficit in any year outside of the specified budget window.

The Byrd Rule can be waived with the support of 60 Senators, but given current political dynamics, it is hard to see it being waived during this Congress.

How Do Limitations of Reconciliation Impact the Odds of Tax Reform?

Because reconciliation legislation cannot involve matters for which the fiscal impact is only incidental, it rules out a number of potential policy reforms and makes achieving others more difficult. Republicans face this limitation in their attempts to repeal the Affordable Care Act, since many provisions of the law address matters that do not materially impact the federal budget. Tax reforms, however, fall squarely within the spending and revenue categories, and may generally be included in a reconciliation bill.

A major constraint on the scope and duration of any tax reforms under reconciliation is the requirement that reforms must be revenue-neutral in the years following the budget window specified in the reconciliation instructions. The House Republican Tax Reform Blueprint [click here for AALU’s analysis of the Blueprint] calls for deep across-the-board rate cuts as well as estate tax repeal that will require significant revenue offsets to achieve deficit-neutral reform. According to an analysis of the House Republican Blueprint by the Tax Policy Center, federal revenues would be expected to decrease by $4 trillion in the first ten years, plus another $8 trillion in the second ten-year budget window. Republicans plan to use dynamic scoring, which will help bring down the cost, but it can only do so much. Even the Tax Foundation, a conservative think tank whose work has been touted by Ways and Means Chairman Kevin Brady (R-TX) and other Republican leaders, estimates that the Blueprint would reduce revenues by $191 billion in the first ten years—even when using dynamic scoring.

One way of dealing with the requirement of budget neutrality in years following the budget window is to sunset any tax reform legislation—i.e., after ten years, all the tax changes would disappear, and the law would revert back to the previous tax regime. This approach was followed with the Bush tax cuts in 2001. As many will recall, those tax changes—including estate tax repeal—were scheduled to end after ten years. Of course, having tax rates revert to previous levels is fairly straightforward, despite inevitable disruptions. However, the plan put forth by House Republicans in their Blueprint doesn’t just cut rates, but significantly restructures major parts of our tax code. Sunsetting such tax reform legislation would be exponentially more disruptive.

In short, it is one thing to pass tax reform with across-the-board tax cuts and then have a political fight about how much deficits will increase and how much growth will be created down the road. It is another thing to get an official Congressional score that tax reform legislation will not increase deficits over the long-term. In other words, the reconciliation process provides a hard ceiling on the length of time that tax reform can run up the deficit. Additionally, there are political risks to passing tax reform through reconciliation. One reason major tax reform is so difficult to enact is that it will necessarily impact a large number of stakeholders, and those that are negatively affected tend to make a lot of noise. That’s why tax reform, like Reagan’s landmark 1986 Tax Reform Act, is typically a bipartisan affair; both parties bear responsibility. If Republicans go it alone, they will own all of it. Just look at what happened with the Affordable Care Act. Democrats passed it through reconciliation on a party-line vote in 2010, and owned all of the inevitable problems that implementation of a complex health care law involves. Republicans successfully used this issue in campaigns over the last six years.


There is no doubt that Republicans are serious about passing major tax reform this year. Republican leaders such as Senate Finance Chairman Orrin Hatch (R-UT) and Ways and Means Chairman Kevin Brady (R-TX) have discussed their desire to enact bipartisan tax reform, but given the current environment in Congress and the framework of tax reform outlined by Speaker Paul Ryan (R-WI) in his Blueprint, it is very unlikely that Democratic support will materialize. While both parties desire tax reform, they are far apart in terms of goals and parameters.

Reconciliation allows Republicans to bypass Democrats and pass tax reform on a party-line vote. Yet as we’ve explained, there are a number of significant hurdles to completing tax reform, and the reconciliation process has its own limitations.

AALU is fully engaged as tax reform legislation develops in the 115th Congress. We are meeting with Members and staff to educate them about the importance of life insurance products and our concerns with potential tax reform provisions, in addition to our engagement with our industry partners. Our volunteer Estate Tax and COLI/NQDC Working Groups are up and running. As tax reform legislation develops over the next weeks and months, we will keep our members informed of all the key developments

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  • Megan Susan Lynch, “Reconciliation Directives: Components and Enforcement,” Congressional Research Service, April 15, 2010.
  • “Reconciliation 101,” Committee for a Responsible Federal Budget, December 6, 2016. Available at: http://crfb.org/papers/reconciliation-101.