The Reconciliation Process for Tax Legislation

Budget reconciliation is a specialized legislative pathway in the United States Congress designed to expedite certain budgetary and fiscal measures. It is a procedural tool linked to the federal budget process that allows bills related to spending, revenues, and the federal debt limit to pass the Senate with a simple majority of 51 votes.

This process bypasses the Senate’s usual 60-vote requirement to end debate on a bill, which is necessary to overcome a filibuster. By removing the threat of a filibuster, reconciliation provides the majority party a route to enact policy changes without needing support from the minority party. This enables the passage of tax and spending legislation that might otherwise fail to secure a supermajority.

Reconciliation translates the fiscal priorities outlined in a congressional budget resolution into binding law. While the budget resolution itself is non-binding and does not require the president’s signature, it contains instructions that compel committees to draft legislation achieving specific financial targets. This link between the budget blueprint and legislative action makes reconciliation an instrument for implementing a party’s economic agenda in a partisan political environment.

The Reconciliation Framework and Its Rules

The reconciliation process is governed by the Congressional Budget Act of 1974, which established its procedural framework. A component of these regulations is the Byrd Rule, named after Senator Robert C. Byrd. The rule’s function is to ensure reconciliation is used for its intended purpose of deficit reduction and conforming law to the budget resolution by preventing the inclusion of “extraneous” matter in reconciliation bills.

A provision is considered extraneous if it does not produce a change in government spending or revenues. If a legislative provision has no fiscal impact, it cannot be included in a reconciliation bill. This prevents using the protected process to pass non-budgetary policy changes.

Another test is whether a provision’s effect on spending or revenues is “merely incidental” to its non-budgetary components. If a provision’s primary purpose is policy-related rather than budget-related, it can be stripped from the bill even if it has a fiscal impact.

The Byrd Rule also prohibits provisions that would increase the federal deficit for a fiscal year beyond the “budget window” covered by the reconciliation instructions, which is often ten years. This constraint prevents Congress from passing legislation that creates short-term savings but leads to larger long-term deficits.

The Senate Parliamentarian, a non-partisan advisor, is responsible for interpreting and applying these rules. Senators may raise a “point of order” against any provision they believe violates the Byrd Rule. If the Parliamentarian agrees, the provision is stripped from the bill unless 60 senators vote to waive the rule, re-imposing the supermajority requirement for that specific item.

The Step-by-Step Legislative Process

The legislative journey of a reconciliation bill follows several steps:

• Both the House and Senate adopt a concurrent budget resolution. This blueprint is not law but contains “reconciliation instructions,” which direct specific committees to draft legislation altering spending or revenues by a set amount by a certain deadline.
• The designated committees, such as the House Ways and Means and Senate Finance Committees for tax law, then draft legislative text to meet their assigned financial targets.
• The House and Senate Budget Committees package the various pieces of legislation from all instructed committees into a single, comprehensive omnibus reconciliation bill.
• When the bill reaches the Senate floor, debate is strictly limited to 20 hours. This time limit prevents a filibuster, and once it expires, the Senate must proceed to a final vote.
• The 20-hour debate limit often leads to a “vote-a-rama,” a period where senators can offer an unlimited number of amendments, resulting in dozens of rapid-fire votes that can last for many hours.
• If the House and Senate pass different versions of the bill, the differences must be resolved, which is done through a conference committee. This compromise version must then be passed by both chambers before it is sent to the president.

Major Tax Acts Enacted Via Reconciliation

Reconciliation has been the vehicle for significant tax legislation, allowing policy shifts to pass with a simple majority. A prominent example is the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA overhauled the U.S. tax code by reducing tax rates for corporations and individuals to stimulate economic growth, and it was passed using reconciliation to overcome unified opposition in the Senate.

One of the TCJA’s provisions was the permanent reduction of the corporate income tax rate from 35% to a flat 21%. The act also changed individual income taxes by lowering rates, nearly doubling the standard deduction, and introducing a 20% deduction for pass-through business income.

To comply with the Byrd Rule’s prohibition on increasing the deficit beyond the ten-year budget window, nearly all individual tax changes were temporary. As a result, these provisions are scheduled to expire at the end of 2025, demonstrating how reconciliation rules shape the long-term structure of legislation.

The Inflation Reduction Act of 2022 was also enacted through the reconciliation process. This legislation had multiple objectives, but its tax-related goals were to address climate change through clean energy incentives and to raise revenue through changes to corporate taxation.

The act’s tax provisions included the creation and extension of tax credits for clean energy and energy efficiency. For instance, it introduced a revised tax credit of up to $7,500 for the purchase of new clean vehicles and created new credits for home energy efficiency improvements. On the revenue side, the law established a 15% corporate alternative minimum tax for corporations with profits over $1 billion and a 1% excise tax on corporate stock buybacks.