Major overhauls by the Senate and a lengthy legislating process are now in store after House Republicans passed a budget resolution this week, the first step in extending a massive tranche of expiring tax provisions and cutting federal spending.
House Republicans approved the resolution framework for the major fiscal overhaul that they plan to pass through budget reconciliation, a legislative process that allows bills to bypass the filibuster and pass with only a simple majority in the Senate.
The process will be long, and while House Speaker Mike Johnson (R-CA) has said he wants to see the massive fiscal package that includes tax cuts by Memorial Day, negotiations will likely go beyond that. The only deadline is the end of this year when the critical tax provisions expire. Failing to act by then would result in tax hikes for most voters.
The backdrop
Republicans are working to extend and make permanent the 2017 Tax Cuts and Jobs Act, better known as the Trump tax cuts. To do so, they need to agree to a budget resolution framework.
The Senate was the first to pass such a framework, but it crucially did not include tax provisions. Senate Majority Leader John Thune (R-SD) pushed to do the reconciliation in two bills, the first being focused on border security and defense and the second on taxes.
President Donald Trump has suggested he would rather take the one-bill approach, in which all reconciliation priorities are bundled into “one big, beautiful bill.” Still, the Senate approved its smaller resolution without taxes as Plan B in case the bigger bill strategy fell through.
The House passed its budget resolution on Tuesday. As passed by the House, the budget resolution includes a $1.5 trillion floor for spending cuts, with a target of $2 trillion in spending cuts, and would allocate $4.5 trillion in net tax cuts for the House Ways and Means Committee, which is tasked with extending the 2017 Tax Cuts and Jobs Act and tacking on new tax cut provisions promised by Trump.
For tax-writing committees such as the House Committee on Ways and Means and the Senate Finance Committee to begin crafting tax policy, both chambers have to agree to a budget resolution framework.
Back to the Senate
Now that the House has passed its budget reconciliation resolution and Trump wants the Senate to focus on the one-bill strategy, the upper chamber will have a turn to rework the House resolution.
Finance Committee Mike Crapo (R-ID) has said that the Senate will not simply accept the House version of the plan but will alter it before voting.
Will McBride, vice president of federal tax policy at the Tax Foundation, recently told the Washington Examiner that his group estimates that a straight TCJA extension would cost $4.3 trillion, which fits within that $4.5 headline number.
Extra tax priorities the White House has outlined include eliminating taxes on tips, ending taxes on Social Security, eliminating taxes on overtime pay, adjusting the cap on state and local tax deductions, and introducing tax cuts for made-in-America products.
Adjusting the state and local tax deduction cap alone could lower revenues between $200 billion and $1.2 trillion, according to the Committee for a Responsible Federal Budget, meaning it could not fit into the $4.5 trillion total allowance. Cutting taxes on tips might cost the Treasury between $100 billion and $550 billion, and cutting taxes on Social Security could add up to $1.5 trillion more.
But crucially, Senate leadership has been pushing not only to extend most of the TCJA provisions, which would be costly, but also to make them permanent — adding to the cost and forcing some tough decisions if there is only $4.5 trillion to work with.
Sen. Lindsey Graham (R-SC), chairman of the Budget Committee, has said there would be a “major overhaul” of the resolution in the Senate.
Molly Reynolds, senior fellow of governance studies at the Brookings Institution, told the Washington Examiner that if the Senate returns a substantially different version of the resolution to the House featuring smaller spending cuts, it might have trouble getting through.
“One thing that the hardliners in the House GOP conference negotiated was a provision tying the amount available for tax cuts to the amount of spending cuts achieved, which suggests that they’d potentially be unhappy with a blueprint that involves a smaller level of cuts than what they agreed to,” she said.
Getting the House and Senate in sync on the resolution will be like threading a needle, but it is made trickier by the small margins in the House.
“It’s complicated. It’s hard. Nothing about this is going to be easy,” Thune said this week, according to the Hill. “There are some things that we need to work with the House package to expand upon.”
Baselines
In order to make the resolution cost less, at least on paper, Senate leadership has been pushing to use a “current policy” baseline for tax revenues instead of the typical “current law” baseline. The maneuver argues that the cuts would be a continuation of current policy and wouldn’t need to be offset.
Basically, if the Senate follows the current policy baseline, it will not show an extension of the existing Trump tax cuts as adding to the deficit — something that would give Republicans a whole lot more breathing room to enact Trump’s other tax agenda items, such as no taxes on tips and the elimination of taxes on Social Security.
Still, many questions remain about what will and will not be included in the updated budget resolution and the overall reconciliation package.
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For instance, before the election, Trump talked about cutting the headline corporate tax rate from 21% to 20% at one point, and he endorsed reducing the rate to 15% for companies that make their products in America. But now, there is very little talk about lowering the corporate rate.
“I’ve not heard anyone advocating for lowering the corporate tax rate,” Sen. Ted Cruz (R-TX) told the Washington Examiner this week.
