Update on Budget Reconciliation

The initial step in the budget reconciliation process requires both chambers of Congress to pass a budget resolution. Speaker Johnson (R-LA) initially intended for the House Budget Committee to mark up a budget resolution last week. However, leadership and key factions of the Republican party have yet to agree on top-line numbers. Once an agreement is reached, the more challenging work commences. The House Budget Committee must report out the measure (Republicans can afford to lose the support of only two of their members on the Committee), the full House must pass it (depending on when the resolution is brought to the floor, Republicans might need unanimous support from their side of the aisle), and the Senate must pass an identical budget resolution.

President Trump met with House Republicans last Thursday to outline his tax priorities for the eventual budget reconciliation package. His list included previous demands such as permanently extending all tax cuts set to expire per the terms of the 2017 Tax Cuts and Jobs Act (TCJA); eliminating taxes on tip income, Social Security payments, and overtime pay; and introducing new tax cuts for domestic manufacturing income. However, it also included new proposals to end the carried interest tax break used by private equity and hedge fund managers, terminate “special tax breaks for billionaire sports team owners,” and expand the state and local tax deduction. The scores attached to these proposals will depend on the details, but the cost of the tax cuts the President aims to enact should exceed the revenue gained from the proposed tax increases by an estimated $5 to $11 trillion.

Meanwhile, the Senate has decided to advance its own budget resolution. According to a draft released last Friday, this measure would authorize more than $340 billion in new funding for border security, defense, and energy programs, fully offset by spending cuts, leaving tax issues for a second reconciliation package later in the year. The budget resolution includes instructions for the Senate Finance Committee but not for the House Ways and Means Committee, leading some to believe that the offsets will come primarily from cuts to Medicaid. Under the terms of the resolution, instructed committees would have until March 7th to draft their sections of the reconciliation package.