A Primer on the Budget Reconciliation Process

As we await the outcome of the upcoming US elections, we know that whoever controls the White House and Congress will confront one of the biggest tax debates in US history in 2025.

It is possible that one party wins full control of the White House and both Houses of Congress. When a single party has achieved this full control, they have ready access to a unique legislative mechanism, the budget reconciliation process, that allows them to expedite the consideration of legislation on fiscal policy, e.g., taxes, debt and spending. A key benefit of this expedited process is the ability to avoid the Senate filibuster, which means the bill would require a simple majority vote in the Senate rather than 60 votes.

When the same party has controlled the White House, Senate, and House of Representatives, that party has used the reconciliation process to enact major legislation. Examples include the George W. Bush-era tax cuts; the Deficit Reduction Act of 2005; the Health Care and Education Reconciliation Act, which implemented many of the provisions of the Affordable Care Act; the Tax Cuts and Jobs Act of 2017; the American Rescue Plan of 2021; and the Inflation Reduction Act of 2022. Congressional Republicans have already publicly stated their interest in the reconciliation process to address the numerous tax cliffs coming in 2025.

Reconciliation is a complex process and has several unique features compared to the regular legislative process. In this update, we provide 1) an overview of the reconciliation process, 2) a potential timeline for such a process in 2025, and 3) each party’s goals in utilizing the reconciliation process.

How Does the Reconciliation Process Work?

Reconciliation is a multistep process that begins with the adoption of an identical budget resolution by the House and Senate. The budget resolution includes instructions or parameters for the subsequent budget reconciliation legislation. A budget resolution is solely an agreement between the House and Senate. It is not legislation that must be signed into law by the President. The President has no formal role in establishing the budget resolution.

The instructions in the budget resolution give direction to Congressional Committees. The most important instruction is the fiscal instruction that the Committees must meet. For example, the resolution may instruct a Committee to produce legislation that will reduce the deficit by a specific dollar amount or cut (or raise) taxes by a specific dollar amount. Every instruction must have a fiscal component to it. The subsequent budget reconciliation legislation may only contain legislation that has a fiscal impact. Thus, legislation that changes US statutes or regulations but does not increase or decrease federal revenue or mandatory spending is not eligible to be included in the budget reconciliation legislation.

A budget resolution can provide up to three separate budget reconciliation processes for each federal fiscal year: one for revenue, one for outlays or spending, and one for the debt limit. Recent budget resolutions have combined the revenue and outlay processes into one, thereby allowing Congress to include both in a single budget reconciliation package.

Once the House and Senate have agreed on a budget resolution, Congress begins crafting the reconciliation legislation. Each Committee that is given instructions in the budget resolution produces legislation that increases or decreases revenues consistent with the resolution. The legislation produced by each Committee is then aggregated by the Budget Committee, and the combined legislation goes to the respective body’s floor for a vote.

When budget reconciliation packages include tax changes, the legislation starts in the House as required by the US Constitution. After House passage, the reconciliation legislation goes to the Senate, where it can be amended. If the Senate amends the reconciliation legislation, then the House would need to vote on the amended legislation, or the bills would need to be reconciled by a joint House-Senate Conference Committee.

As noted above, perhaps the most important advantage of the reconciliation process is that the legislation needs only 51 votes to pass the Senate (including a vote cast by the Vice President if a 50-50 tie). The Senate process also includes the infamous “Byrd Bath” through which the Senate Parliamentarian is required to review the legislation to ensure only legislation with a fiscal impact is included in it. The Byrd Bath process is generally adversarial, with whichever party is in the minority in the Senate presenting arguments to the Parliamentarian as to why a provision(s) should be stripped from the legislation while the party that is in the majority defends the inclusion of these provision(s).

After Congress has completed the legislative process, either via the establishment of a Conference Committee or in a series of back-and-forth votes, the final reconciliation legislation must be signed by the President to be enacted into law.

What Might Be the Timeline for the Reconciliation Process in 2025?

While the 2025 Congressional calendar has not been established yet, we can reasonably assume the new Congress will come into session sometime during the second week of January. Before Congress turns to the reconciliation process, the House and Senate will need to accomplish various initial organizational tasks, such as electing the Speaker of the House and establishing Committees.  

Once those tasks are completed, the reconciliation timeline will depend on who wins the Presidency and control of Congress. Republicans in Congress, particularly House Republicans, have been outspoken about their intention to use the reconciliation process to address the 2025 tax debate. House Republicans also face more pressure to move quickly and expand the scope of reconciliation legislation to address more than just tax policy. In particular, House Republicans will need a legislative path to increasing the statutory debt limit (as will House Democrats, if they win the majority). The current suspension of the statutory debt limit expires January 1, 2025. “Extraordinary measures” will give the US Treasury some flexibility to extend the deadline for action but not to extend it indefinitely.

So House Republicans may see the reconciliation legislation as an option for addressing the debt limit as well. If so, House Republicans will want to move extremely quickly, enacting the budget resolution as early as the first calendar quarter, attempting to pass the reconciliation legislation before the August recess. However, as discussed, the House and Senate must first agree on a budget resolution, which means that the House’s pace is still dependent upon the Senate.

The process in the Senate is likely to be slower. In 2017, under full Republican control, it took until December 20 for the final reconciliation legislation that enacted the Tax Cuts and Jobs Act to pass both the House and Senate.

In contrast, under Democratic control, it is less likely that the debt limit needs to be addressed via the reconciliation legislation. Democrats have historically been able to pass legislation to increase the statutory debt limit without needing special legislative tools. So Democrats may not need the reconciliation process to address the debt limit.

Differences in the pace of action between the House and Senate would exist under Democratic control as well as Republican control. The final vote on the Inflation Reduction Act came on August 16, 2022, nine months after the House passed the initial version of the reconciliation legislation. However, in 2025, given the pending expirations of many key tax policies by the end of the year, Democrats will not want the process to take as long as it did for the Inflation Reduction Act.

In fact, Democrats will face a strong incentive to complete the reconciliation legislation before breaking for Congress’ traditional August recess. Expanded subsidies for the purchase of insurance under the Affordable Care Act are one of the many tax policies that expire at the end of 2025.

Insurance providers typically set rates for the subsequent year in the fall. So to avoid the pending expiration of these insurance subsidies impacting costs for consumers, Democrats may want legislation that extends these subsidies to be enacted before the fall of 2025.

What Might Reconciliation Legislation Entail?

As noted, any reconciliation legislation in 2025 will address the many pending expirations of tax policy in 2025 but also likely address other tax policy as well. Most provisions of any reconciliation legislation will likely concern tax policy. However, in addition to tax policy, Congress and the Administration may see the reconciliation process as a vehicle for addressing other goals.

For example, as noted above, Republicans may use reconciliation legislation to address the debt limit. Republicans may also seek to use one of the tactics advanced by Democrats in the American Rescue Plan and the Inflation Reduction Act by including mandatory appropriations. Historically, spending by a federal agency is considered discretionary spending and not typically included in reconciliation legislation where the fiscal impact of the legislation must be a mandatory policy or one that will execute without any need for additional action by Congress.

Perhaps the best example of a mandatory appropriation is the one for the Internal Revenue Service enacted as part of the Inflation Reduction Act. Republicans could use this approach to provide increased funding for border security. Republicans could also use the reconciliation process to promote oil and natural gas exploration in a manner analogous to the provisions included in the Tax Cuts and Jobs Act. Democrats have already used the reconciliation process to address health care policy such as insurance and drug costs, and they could do so again. As part of efforts to raise revenues to address other changes in law or to reduce the deficit, either party could also use the reconciliation process to require the Federal Communications Commission to auction electromagnetic spectrum for mobile services.

In short, should either Party obtain full control as a result of the 2024 elections, they will certainly look to the budget reconciliation process as an important tool to achieve their legislative goals.