A Trader’s Guide to the Budget Process Necessary to Achieve Substantial Business Tax Cuts

By Stuart E. Leblang  and Amy S. Elliott

The political crises plaguing Washington have become a problem for Wall Street, with profound implications for traders’ portfolios.  The market wants tax reform, and the best way to gauge its likelihood is to arm yourself with an intimate knowledge of the intricacies of the Congressional budget process.  Reconciliation, budget resolutions, the Byrd rule, PAYGO, scorekeepers—these all need to be successfully navigated in order for Washington to deliver the kinds of stimulative economic policies the market has been betting on since the election.

• There are two types of tax relief on the table. Comprehensive tax reform, which both lowers tax rates and broadens the tax base, and tax cuts, which would largely just lower rates.  Because tax cuts are less controversial (just winners, no losers), the thinking is that they will be easier to achieve.  But a sizeable tax cut could run afoul of Congressional rules that require a certain amount of budget discipline.
• The rules come into play because Congressional leadership has decided they likely cannot get 60 senators to vote for tax changes. But if they advance them using budget reconciliation, then they only need 50 senators and the Vice President to agree.
• The good news is that the rules that place constraints on enacting tax relief in budget reconciliation are not black and white, and in some cases they can be dispensed with by simple majority in advance. The bad news is that aggressive tax cuts will require careful manipulation of the rules and likely some changes—expansion of the budget window beyond 10 years—that could be hard for conventionalists to get behind.
• Even with White House scandals consuming so much attention on Capitol Hill, an effort to make major changes to the tax code can be resuscitated. There is still a lot of consensus among Republicans for tax reduction.

Budget reconciliation and its arcane and numerous rules are tricky.  We’ll walk you through them.

Budget Reconciliation and Why Congress is Slow-Walking Tax Legislation

If a bill changes laws that impact spending,^[1]taxing, borrowing or some combination, it can take advantage of fast-track procedures known as budget reconciliation.  One of the main benefits of reconciliation is that it only requires a majority for the bill to pass Congress and be sent to the President for his signature, making reconciliation bills ideal vehicles for legislation enacted by a partisan vote.

But budget reconciliation is even more powerful than that, because it must be preceded by a budget resolution containing instructions for drafting the taxing or spending bill.  The resolution is a chance for Congress to define the rules of the game and even waive some of the rights it usually gives its members to challenge provisions in legislation that would mandate responsible taxing and spending.  The budget resolution is also passed by a simple majority—potentially months before the details of the taxing and spending legislation are known—meaning it holds the key to tax relief’s prospects.

Congress is currently slow-walking the budget resolution that will determine the rules of the game for tax reform.  To understand why, you need a quick primer on the two steps of budget reconciliation:  the budget resolution, which contains the instructions and the rules, and the actual reconciliation bill.

Do not be thrown off by the budget aspect of this process.  The budget figures contained in the budget resolution (the first stage) are mainly just goals, although the Congressional Budget Act of 1974 prevents Congress from considering legislation that would exceed the budget resolution amounts if they are later enacted into law (for example, if the second stage is successful and the reconciliation bill is signed by the President).^[2] Lawmakers use a different process to appropriate or spend money each year.

Budget reconciliation bills are largely used as vehicles for law changes.  For example, Congress is currently using a budget reconciliation bill to repeal the Affordable Care Act (Obamacare) and replace it with the American Health Care Act (AHCA).  Each year, Congress generally gets one chance to use a reconciliation bill to make substantive changes in spending, taxing and borrowing.^[3]  Congress decided to use the FY 2017 reconciliation bill to get AHCA passed.  The fact that AHCA is riding along in an FY 2017 vehicle has no relevance to when the provisions will go into effect.  The only relevant time constraint on the FY 2017 vehicle is that it most likely should be enacted by the end of FY 2017 (September 30, 2017).^[4]

The word on the street is that the Senate parliamentarian has expressed concerns that if Congress takes too long to enact the FY 2017 reconciliation bill—the vehicle for AHCA—the bill may lose its privilege and have to be passed under regular order (subject to a supermajority vote in the Senate).  Once the fiscal year is over, it becomes hard to argue that it is truly a vehicle to enact fiscal-year budget goals.

Why does it matter?  If tax relief is also going to use reconciliation, then the thinking is it will be attached to the FY 2018 reconciliation bill, assuming lawmakers remain committed to passing AHCA.  The sensitivity regarding the timing of the FY 2017 reconciliation bill has caused lawmakers to hold off on taking any substantive steps to develop the FY 2018 budget resolution (the first step to an FY 2018 reconciliation bill that could carry broad tax changes).  If Congress moves too much of its attention to working on an FY 2018 budget resolution now before wrapping up work on the FY 2017 legislation, the FY 2017 bill risks losing its privilege.  While lawmakers are not prepared to give that up just yet, the delays are frustrating a market hungry for tax reform.

Of course, if AHCA goes up in flames, lawmakers could do one of two things.  They could shift gears to the FY 2018 budget resolution and assume the FY 2017 reconciliation bill is dead.  Or, because the instructions in the FY 2017 budget resolution were pretty vague, they could instead use the FY 2017 reconciliation bill for tax reform, assuming they had enough time to get it drafted and passed by October, which would be tough.  Plus, they would have to satisfy the $2 billion deficit reduction target.

The Beauty of Simple Majority and the Beast of the Budget Rules

Even getting a simple majority to vote for tax relief could be a challenge.  To understand, consider the numbers.  Republicans hold 55 percent of the seats in the House of Representatives and they hold 52 percent of the seats in the Senate.  If no Democratic senators vote for tax reform, then the effort can only stand to lose two Republican senators (assuming Vice President Mike Pence is willing to cast the deciding vote).  That is an extremely small margin of error.  The divisions within the House make it similarly tricky.  The Freedom Caucus is made up of about 31 hardline Republicans.  The Tuesday Group is made up of about 47 moderate Republicans.^[5]  And the Problem Solvers Caucus currently consists of 22 Republicans and 22 Democrats.  If any one of these groups votes against the bill as a block, that could doom tax reform.

Because it only requires a majority vote, budget reconciliation is the most streamlined way to get a bill passed.  Created by section 310 of the Congressional Budget Act of 1974,^[6]budget reconciliation has several key features:

1. Senate filibuster is prohibited and all votes are by a simple majority;
2. Debate in the Senate is limited to 20 hours and only certain amendments are allowed;^[7]
3. No provision in a reconciliation bill can include changes to the Social Security Act; and
4. What otherwise can and cannot be in the bill is defined by a set of precise instructions.

The instructions and some rules of the game, which are also passed by simple majority in a budget resolution, will be critical.  They give named committees jurisdiction to craft law changes by a set date that will make an impact on federal spending, taxing and/or borrowing by some specified minimum amount.  Then, once the actual changes to the law are drafted by the committees, they are combined into a single reconciliation bill and voted on.

For example, consider the instructions in the FY 2017 budget resolution Congress is using to enact AHCA.^[8] The resolution passed both chambers in mid-January and directed the relevant committees to report out a bill by January 27, 2017, that reduced the deficit by no less than $2 billion over a 10-year budget window.^[9] The $2 billion goal was not even that instructive, as AHCA was initially scored by the Congressional Budget Office (CBO) as reducing the deficit by $337 billion from 2017 through 2026.^[10]

Once the legislation is drafted, Congress votes on the bill under accelerated reconciliation procedures, which are constrained by, among other things, the Byrd rule and the PAYGO rules, explained in detail on the following pages.

The Byrd rule^[11]applies exclusively in the Senate.  It was designed to ensure that the streamlined reconciliation procedures were only used to enact legislation to effect deficit reduction, which was the original goal of budget reconciliation.^[12] The Byrd rule has been amended over the years and can be found in 2 U.S.C. §644.^[13] It has the effect of striking from a reconciliation bill any extraneous matter, generally defined as, among other things:

1. Any non-taxing or non-spending provision (providing no change in outlays or revenues);
2. Any taxing or spending provision that fails to follow the reconciliation instructions;
3. Any provision not within jurisdiction of the committee(s) named in the instructions; and
4. Any provision that would cause increased outlays or decreased revenues “during a fiscal year after the fiscal years covered by such reconciliation bill . . . and such increases or decreases are greater than outlay reductions or revenue increases resulting from other provisions in such title.”

It is this last point (found in 2 U.S.C. §644(b)(1)(E)) that is most critical for tax legislation.  The Byrd rule prohibits increased deficits in any year beyond the budget window.  But lawmakers can technically change the budget window in reconciliation instructions (see page 9 for more on that).

A lot of ink has been spilled on the Byrd rule, largely because most Hill watchers think Congress is unlikely to write it out of the law in the process of reconciliation.  But there are a host of other budget constraints that could provide similar threats to tax cut legislation.

The Pay-As-You-Go (PAYGO) Law and Other Perilous Budget Rules

While the Byrd rule provides no constraints on what happens during the budget window (only outside of it), there was a time when reconciliation required deficit reduction during the budget window.  Congress removed that requirement in 2015 (known as the Conrad Rule).^[14]

Now the primary budget rule that would require tax cuts to be offset during the budget window is referred to as Pay-As-You-Go (PAYGO), which was enacted in 2010 and can be found at 2 U.S.C. §933.^[15]

Each chamber has also had its own internal PAYGO rules,^[16]although the Senate’s PAYGO rules^[17] provide a more significant hurdle to tax relief.  If they are applicable, they can only be waived by a supermajority.

Beyond PAYGO, there are many other challenges lawmakers can raise if a bill does not fall within certain spending and taxing guardrails.  The long-term deficit point of order in the Senate is an example of these.  How much of a landmine could each of these be to legislation that proposes meaningful tax cuts?

• The PAYGO statute is law. It most certainly would apply to a reconciliation bill that changes the tax laws impacting federal revenues.  However, Congress could include a provision in the reconciliation bill stating that its effects won’t count for PAYGO purposes, as it did in 2015.^[18] It could also wipe the PAYGO scorecards clean before the end of the session in later legislation.
• The PAYGO statute does not explicitly prevent a deficit-raising law from being enacted. It just looks at the deficit impacts both 5 years and 10 years out^[19]and requires future legislation within the same Congressional session to provide enough increased taxes or reduced spending to zero out any deficit increases at those two points.^[20]  That means lawmakers would have until January 3, 2019, to pay the piper.  If not, sequestration cuts would be triggered.
• The PAYGO law’s 5-year point will be particularly challenging for dynamically-scored tax cuts, which tend to front-load revenue losses. Plus, the most radical tax revenue raisers under consideration (like a limitation on the deduction of net interest expense) often involve a multi- year transition period, so revenue gains would not show up until they are fully implemented.
• If they are applicable, the Senate’s PAYGO rules pose more of a direct threat to tax law changes, because they can be used to preemptively strike PAYGO-violating provisions from a bill before it becomes law.^[21] A senator acting from the floor during consideration of the law merely has to challenge the provision by raising a point of order, and if that PAYGO challenge is sustained, the provision is removed from the legislation.^[22]
• There are many other points of order lawmakers can raise when legislation is under consideration that could effectively strike an offending provision on the spot. We mentioned one of these earlier (in footnote 2).  It gives lawmakers the ability to challenge any bill that would—over the full budget window—cause revenues to be less than what was set forth in the budget resolution.^[23]
• There is also a point of order against legislation increasing long-term deficits.^[24]If a bill would increase the deficit by more than $5 billion (relative to current law) in any one of the four decades following the 10 fiscal years after the relevant budget year,^[25]a senator could challenge the provision.  Such point of orders can only be waived by a supermajority.

While this PAYGO/point of order discussion might seem to present endless obstacles to tax cut legislation, there is a bright side.  Any right to challenge that was brought about by a budget resolution (as many of the rules addressed so far were) can also be taken away in a budget resolution.

The point of order under the Senate PAYGO rules and the point or order for legislation that increases the deficit over the long-term can preemptively be deemed inapplicable to reconciliation legislation in a budget resolution by a simple majority vote.

This is why the FY 2018 budget resolution, if it is used to pave the way for tax cuts in a subsequent reconciliation bill, will be so critical.  Even before lawmakers have a sense of what the actual tax legislation will look like, they will be asked to vote on the rules of the game and may decide by simple majority to dismiss some of the most powerful tools senators have to kill legislation.

But while a budget resolution could, for example, be used to make unavailable the Senate PAYGO rules as applied to a particular reconciliation bill, staff from the Committee for a Responsible Federal Budget told us that (at least since 1990) Congress has never attempted to amend the Byrd rule or create an exception to it in a budget resolution.  While the PAYGO statute has been dismissed in law, the Byrd rule seems to be more untouchable.

Reconciliation Instructions and the Budget Window

The two biggest pressure points in reconciliation will likely be the reconciliation instructions and the Byrd rule, which can be made easier to satisfy by extending the budget window.  These will be front of mind when lawmakers turn their attention to the FY 2018 budget resolution.

• The FY 2018 budget resolution will contain instructions for tax changes, including identifying a revenue target and defining the length of the budget window (the recent standard is 10 years). Because the Byrd rule mandates that legislation cannot increase the budget deficit outside of the window, a 10-year window for tax cuts will mean they will likely be temporary.
• It is possible, but not super likely, that Republicans would agree to a 20-year window for reconciliation. A longer budget window will make significant tax cuts easier.

The budget window’s importance is causing some lawmakers to consider changing the default 10-year window in reconciliation instructions for tax changes.  Remember that the instructions are passed by simple majority.  A longer window would make tax cuts easier, because—at least for Byrd rule purposes—the cuts do not have to be paid for within the window and only deficit impacts outside of the window would cause a Byrd rule problem.  Senate Finance Committee member Patrick J. Toomey, R-Pa., wrote May 4 that “nothing in the law prevents us from using a 20- or even 30-year time frame.”^[26] According to the Congressional Research Service, the longest budget window applied in this context was 11 years.^[27]

Given that changing the budget window from the default of 10 years will likely create new precedent that budget hawks may find disturbing, it could be difficult to find 50 senators that would agree to such a change.  Likely Republican detractors could include Sen. Susan Collins, R-Maine; Senate Budget Committee Chair Mike Enzi, R-Wyo.; Sen. Jeff Flake, R-Ariz.; and Sen. Orrin G. Hatch, R-Utah.

In the past, lawmakers navigated the Byrd rule prohibition on deficits outside of the budget window by simply sunsetting their tax cuts, reversing them out before the 10 years was up—as was done in the case of the 2001^[28] and 2003 individual tax cuts signed into law by President Bush.

It is important to remember that the Bush tax cuts reduced marginal income tax rates on individuals— not corporations.  Individuals do not have the same ability to accelerate income to take advantage of temporary tax cuts, meaning that tax cuts on individuals have less of a chance of creating budget deficits outside of the budget window when they are reinstated in year 10.  Unlike corporations, individuals do not currently defer their taxes through indefinitely reinvesting their foreign earnings offshore.  Nor do they accelerate net operating losses to avoid taxes.  If Congress decides to dramatically cut the tax rate on corporations on a temporary basis, that has a remarkable ability to impact how much revenue the federal government expects to collect outside of the budget window.

On April 25, 2017, the Joint Committee on Taxation wrote in a letter to House Speaker Paul D. Ryan, R- Wis., that cutting the corporate tax rate from 35 percent to 20 percent for only three years (2018 through 2020) would cause a “nonnegligible revenue loss” in the second decade “in part because companies would rush to repatriate money they are holding overseas during the tax holiday.  The result would be reduced taxes on those foreign profits in future years.”^[29] Given the second decade revenue loss, a 3-year business tax cut with no offsetting future revenue gains would violate the Byrd rule.

Speaking April 20, 2017, at the Institute of International Finance Policy Summit, George Callas, Ryan’s senior tax counsel, said that a move to territorial for even just one year, allowing for the repatriation of trapped cash, “has permanent revenue losses associated with it because of the way it will change corporate behavior . . . so you cannot do that” in reconciliation either, absent additional offsets.

Callas added that while a 2-year corporate rate cut might withstand the Byrd rule, such a move “would have virtually no growth effects.  It would not alter business decisions . . . . It would just be dropping cash out of helicopters on corporate headquarters for a couple of years.”  American Action Forum economist Douglas Holtz-Eakin predicted that a 2-year corporate rate cut would actually cause the business community to “write off the capacity of the Congress to get a sensible tax code, and they’d flee.”^[30]

Of course, if lawmakers think a temporary corporate rate cut is better than no rate cut, they can certainly come up with offsets—including tax increases that are permanent—to zero out the deficit change outside of the budget window, avoiding a Byrd rule problem.  Playing with phase-ins and phase- outs are also a favorite.  Whether they would find implementation of a new tax in year 9 to address deficit concerns outside of a 10-year budget window to be too gimmicky is a legitimate question.  Offsets and workarounds would have to be crafted carefully.  They should not be viewed as transparently unserious (a sunset that causes a massive future tax hike that lawmakers would never let happen).  Most Hill watchers are confident lawmakers could come up with a way to make some meaningful level of tax cuts pass muster under all of the various budget rule constraints that come along with reconciliation.

The Byrd Rule and the Power of the Senate Parliamentarian

Senate Parlimentarian Elizabeth MacDonough, who has served in the role since 2012, has some say in whether or not a provision runs afoul of the Byrd rule.  Keep in mind that lawmakers can also decide to fully disregard the Byrd rule, but they would need 60 senators to agree.^[31]

Sen. Ted Cruz, R-Tex., has suggested in the past that MacDonough can be overruled, as she simply advises the Senate’s presiding officer (likely Vice President Mike Pence or Senate President Pro Tempore Orrin G. Hatch, R-Utah) as to whether a Byrd rule point of order should be sustained (in which case the violating provision is automatically struck, absent a super majority vote to the contrary) or overruled.^[32]

But Hatch has indicated that he may not be a fan of reconciliation proceedings to begin with, let alone those that disregard the parliamentarian’s advice.  He has said that “the unrestricted right of amendment and debate” made the Senate the “worlds’ greatest deliberative body,” and abandoning those has created dysfunction.^[33] As Budget Committee Chair, Sen. Enzi will also play a critical role in navigating any budget rule challenges to reconciliation legislation.  Those familiar with Enzi feel strongly that he will not support any shenanigans viewed as blatantly political.  Setting aside the recommendations of the parliamentarian would squarely fall within that category.

The impractical nature of such hypotheticals as applied to the FY 2017 reconciliation bill for AHCA is sinking in.  According to an article in The Washington Post, Sen. Roy Blunt, R-Mo., said March 22 “that overruling the parliamentarian on a Byrd ruling would virtually guarantee that the GOP health-care law would be challenged in court.”^[34] While there is precedent for dismissing a parliamentarian’s judgment (the last time that happened was in 1975)^[35]and precedent for firing a parliamentarian that makes unpopular rulings (in 2001, the Senate parliamentarian was dismissed after, among other things, he advised that only one tax-focused reconciliation bill could be considered per year),^[36]such incidents are extreme aberrations and should not be viewed as realistic options available to facilitate the enactment of legislation that changes the tax code.^[37]

The Scorekeepers and Who Ultimately Decides

It isn’t the parliamentarian that ultimately holds the power to determine whether legislation runs afoul of the Byrd rule’s prohibition on increased deficits outside of the budget window.  That power lies with the Senate Budget Committee,^[38]informed by the CBO and the Joint Committee on Taxation (JCT, which is currently chaired by House Ways and Means Committee Chairman Kevin Brady, R-Tex.).  CBO and JCT are the federal government’s official scorekeepers.

While the risk that the Senate parliamentarian’s advice will be set aside by the presiding officer is arguably low, the risk that Budget Committee Chair Enzi might take CBO’s interpretations of deficit increases outside of the budget window with a grain of salt when deciding whether to refer a provision to the presiding officer/parliamentarian is a bit higher.  Consider what happened in 2005.  As explained by University of Chicago Law School professor Daniel Hemel and Valparaiso University School of Law professor David Herzig,^[39]the Senate Budget Committee Chair at the time decided to make his own call when it came to whether the tax changes in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA, P.L. 109-222) violated the Byrd rule prohibition on increased deficits outside the window.

TIPRA extended certain of the 2003 Bush tax cuts^[40]—namely the reduction of the top rate on dividends and long-term capital gains from 20 percent to 15 percent—to last through 2010 (as opposed to through 2008).  Reconciliation instructions provided that the budget window for TIPRA was only 5 years (FY 2006 through FY 2010).^[41]

In its preliminary score for the bill, JCT found that the tax cut would have resulted in a net loss to the government of $30 billion outside of the budget window (between 2011 and 2015).  When lawmakers asked the Senate parliamentarian whether that would be enough to create a Byrd rule problem, they were told it would.^[42]  At the time, it was reported that Senate Finance Committee Chair Chuck Grassley, R-Iowa, was “working with the Congressional Budget Office ‘to see if we can get some scores that maybe will make it easier’ to get around the budget point of order.  In a March 1 Dear Colleague letter, Grassley cited a previous CBO letter in making his argument that the lower capital gains rates led to higher tax receipts than the CBO originally projected.”

Lawmakers ultimately decided to add a provision making it easier for taxpayers to convert their traditional individual retirement accounts (traditional IRAs provide for tax-free contributions but tax any distributions) into so-called Roth IRAs (which tax contributions but allow for tax-free distributions) after 2009.  Although the converted amounts are subject to tax at the time of the conversion, because future distributions would be tax-free, the overall provision would lose revenue in the out years.

The IRA conversion provision was estimated to raise enough revenue to offset the losses in only the first two years outside of the budget window (FY 2011 and 2012), but no more.^[43] Apparently that was enough to cause the Budget Committee Chair to not bother referring it to the parliamentarian as in possible violation of 2 U.S.C. §644(b)(1)(E).  At the time, the move drew criticism.^[44]  Especially since ultimately CBO concluded that “this legislation will reduce federal revenues . . . by $69.1 billion over the 2006-2015 period.”^[45]

There is fairly widespread belief that the Budget Committee has some latitude in its interpretation of budget deficit scores.  Martin A. Sullivan, chief economist and contributing editor for Tax Analysts, said May 1 that, “My understanding is that the budget committees can disregard the CBO and pick out their own numbers.  So I think if push came to shove, they could do something like that.”^[46]

A fundamental question—what is meant by “a fiscal year after the fiscal years covered by such reconciliation bill”—remains unanswered.  Could it possibly mean any year no matter how far into the future?  Could it only mean the first year outside of the budget window?  Or, as is the common understanding among tax policy wonks, does it mean the second decade after a 10-year budget window?  These are the kinds of interpretative questions that Sen. Enzi will be left to decide.

There are some lines, however, that most feel Sen. Enzi will not cross.  One is using non-official scorekeepers to come up with revenue estimates.  Such a possibility was floated by Sen. Bernie Sanders, I-Vt., when he asked CBO whether JCT’s macroeconomic analysis of tax bills was the most accurate.  He indicated that JCT’s dynamic scoring models are not as optimistic as those of the Tax Foundation.

Sanders wanted to know whether Congress could ignore JCT’s scores and “look instead to an outside group like the Tax Foundation.”^[47] In its April 6, 2017, response, CBO wrote simply that it “has found [JCT’s] analysis to be well-researched, thoughtful, and objective.”

A move that Sen. Enzi would likely support is including a provision in the FY 2018 budget resolution directing both the House and Senate to utilize estimates from CBO and JCT that are colloquially called dynamic—or more specifically that “incorporate the budgetary effects of changes in economic output, employment, capital stock, and other macroeconomic variables resulting from such major legislation” as was done in 2015.^[48] While the House regularly uses dynamic scoring as a result of a 2015 rule change (see House Rule XIII(8)), the Senate has not yet followed suit.

In 2015, lawmakers also directed CBO and JCT to take into account the macroeconomic effects of the legislation for purposes of assessing the impacts during the “20-fiscal year period beginning after” the end of the relevant budget window.

Dynamic scoring is often brought up in the context of discussions concerning whether a tax reform package is revenue neutral.  Historically, revenue neutral tax reform is measured over the period of the budget window and is done using certain assumptions, namely that “a proposal will not change total income and therefore holds Gross National Product fixed.”^[49] Although this is sometimes referred to as a static score, it does take into account behavioral responses by taxpayers to changes in the laws.

In 2014, JCT published an official score of Dave Camp’s Tax Reform Act of 2014, which was widely represented as revenue neutral on a static basis, absent consideration of effects on growth.^[50] The net total line showed that over the 10-year budget window spanning from 2014 through 2023, the reforms resulted in a net increase in revenues of only $3 billion (decreasing taxes on individuals by $699 billion, increasing taxes on businesses by $697 billion and increasing revenues from stepped-up Internal Revenue Service enforcement by $5 billion).  On a so-called dynamic basis, JCT estimated that the reforms could spur a marginal increase in consumption from growth and employment of as much as 2.1 percent, resulting in additional revenues of as much as $700 billion over the 10-year window.^[51]

The takeaway on the dynamic scoring point is this:  While the FY 2018 budget resolution will likely provide that both the House and the Senate will use dynamic scoring for purposes of determining whether the reconciliation bill satisfies the budget rules, including the Byrd rule, the bump that such dynamic modeling would give to revenue estimates produced by the JCT likely will not be enough to reverse out all future deficit impacts of an even modest tax cut, absent other offsets (tax increases).

The Biggest Hurdle for Tax Changes—Agreement on an FY 2018 Budget

One very real problem with the most likely legislative vehicle for tax reform is that the FY 2018 budget is shaping up to be particularly contentious.^[52] There was already the sense that anywhere from 70 to 80 conservatives were prepared to fight to ensure that the spending goals outlined in the FY 2018 budget resolution represented a “glide path” to a balanced budget, but now it is looking like House Freedom Caucus Chairman Mark Meadows, R-N.C., wants even more.

According to a May 12 news report, Meadows and his ultra-conservative group, whose members are often associated with the Tea Party political movement, have decided they want to draft the FY 2018 reconciliation instructions broadly enough so that reconciliation can be used not just for tax reform but also for “overhauling the welfare system.”^[53]  As if tax reform was not going to be difficult enough.

But other House members are seeking to build consensus—not division.  The House Problem Solvers caucus is a group of 22 Democrats and 22 Republicans “attempting to form a bloc to deliver key votes for tax reform or infrastructure spending, two issues where they see the best potential for compromise.”^[54] It is not yet clear whether bipartisan coalitions like the Problem Solvers would actually have a shot at delivering key votes in reconciliation.  If 75 percent of the caucus agrees to vote a certain way, then everyone in the caucus is asked to vote that way (with limited exceptions).^[55] Although reconciliation is the most likely vehicle, there is a chance that tax changes could advance under regular order, and bipartisan support would matter much more in that case.

Agreement among Republicans over recommended budget numbers in the FY 2018 budget resolution will likely be challenging, but could be achieved by the end of 2017.

As complicated and convoluted as the budget process may seem, it ultimately comes down to politics.  If there is the political will to get something done, lawmakers can usually navigate the rules to find a way.  And as the White House becomes more distracted with other matters, lawmakers who are keeping their heads down may seek to build bipartisan coalitions focused on securing concrete achievements to provide fuel for their upcoming reelection battles.  While more radical tax changes seem to be less likely as each day passes, tax relief is something many lawmakers should be able to get behind.

^{[1] Reconciliation can only change mandatory spending but “has not been used to change ‘discretionary’ spending,” according to David Reich and Richard Kogan, November 9, 2016, “Introduction to Budget ‘Reconciliation,’” Center on Budget and Policy Priorities (http://www.cbpp.org/research/federal-budget/introduction-to-budget-reconciliation).}

^{[2] In addition, section 311(a)—2 U.S.C. §642—gives lawmakers the ability to challenge (raise a point of order) any bill (including a reconciliation bill) that would cause revenues (measured over the total budget window, generally the current fiscal year plus the following 10 fiscal years) to be less than the target that was set forth in the resolution.  Because Congress hasn’t yet decided whether to pass tax cuts (that manage to circumvent the Byrd rule) or tax reform, it could simply set a large negative revenue target as its goal in the budget resolution to ensure that it doesn’t violate section 311(a).  This occurred in 2001 when President George W. Bush and the 107th Congress used reconciliation to pass individual tax cuts.  The FY 2002 budget resolution that preceded the reconciliation bill set revenue and spending targets for reconciliation as follows:  “reduce revenues by not more than [$1.25 trillion] and increase the total level of outlays by not more than [$100 billion] for the period of fiscal years 2001 through 2011:  Provided, That [$100 billion] of these revenues and outlays shall only be available . . . for an economic stimulus package over the next 2 years.”  (See H. Con. Res. 83 for the 107thCongress, https://www.congress.gov/bill/107th- congress/house-concurrent-resolution/83/text.)  The spending goals (referred to as section 302 allocations) set forth in a budget resolution can also matter when it comes to budget scoring and baseline purposes.  Allocations from the most recently adopted budget resolution are used to determine the new baseline, which impacts whether pay-as-you-go (PAYGO) rules have been violated (see page 5).  For an example of this, see https://www.congress.gov/congressional-record/2017/1/17/senate- section/article/S340-1.  Keep in mind, however, that the allocations in a budget resolution can be revised after the fact.  See https://www.gpo.gov/fdsys/pkg/CREC-2017-03-24/pdf/CREC-2017-03-24-pt1-PgH2443.pdf#page=1.}

^{[3] Congress is not limited to considering only one reconciliation bill each fiscal year, but if a single bill “is overwhelmingly devoted to” revenues, for example (as a tax bill would be), then it must wait until the following fiscal year to address revenues in reconciliation again, according to David Reich and Richard Kogan, November 9, 2016, “Introduction to Budget ‘Reconciliation,’” CBPP (http://www.cbpp.org/research/federal-budget/introduction-to-budget-reconciliation).}

^{[4] Technically, the only time constraint provided for in reconciliation rules is that the House must complete action on the reconciliation legislation before it can “consider any resolution providing for an adjournment period of more than three calendar days during the month of July” of the relevant fiscal year.  No time constraint is mentioned with respect to the Senate’s consideration.  See page 84 of August 2015 “A Compendium of Laws and Rules of the Congressional Budget Process,” House (http://budget.house.gov/uploadedfiles/a_compendium_of_laws_and_rules_of_the_congressional_budget_process.pdf).}

^{[5] See https://www.washingtonpost.com/graphics/politics/ahca-house-vote/?utm_term=.be42acf078ea.}

^{[6] See https://legcounsel.house.gov/Comps/93-344.pdf (pages 26-30).}

^{[7] While debate is limited, time consumed reading or voting on amendments does not count against the 20 hours.  According to sections 310(d)(1) and (d)(2), amendments that increase spending or decrease revenues are not allowed.  The Senate may be forced to consider amendments in an accelerated procedure referred to as “Vote-A-Rama.”  For a more detailed walk-though of the reconciliation process, see Megan S. Lynch and James V. Saturno, January 4, 2017, “The Budget Reconciliation Process:  Stages of Consideration,” Congressional Research Service (https://fas.org/sgp/crs/misc/R44058.pdf).  See also, Robert Keith and Bill Heniff Jr., August 10, 2005, “The Budget Reconciliation Process:  House and Senate Procedures,” Congressional Research Service (https://digital.library.unt.edu/ark:/67531/metacrs7304/m1/1/high_res_d/RL33030_2005Aug10.pdf).  See also, Rebecca M. Kysar, 2011, “Lasting Legislation” University of Pennsylvania Law Review, Vol. 159:  1007 (http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1097&context=penn_law_review).}

^{[8] S. Con. Res. 3—A concurrent resolution setting forth the congressional budget for the United States Government for fiscal year 2017 and setting forth the appropriate budgetary levels for fiscal years 2018 through 2026 (https://www.congress.gov/bill/115th-congress/senate-concurrent-resolution/3/text).}

^{[9] The instructions were restrictive enough to prevent certain healthcare changes from getting through.  For example, some Republicans wanted the Obamacare repeal and replace bill to allow insurers to sell across state lines.  However, such a change would have been under the jurisdiction of the House Judiciary Committee, which was not given authority in the reconciliation instructions.  In addition, lawmakers and their staffs were exempted from the waivers in the repeal and replace legislation because their healthcare falls under the jurisdiction of the Homeland Security and Government Affairs Committee, which also was not named in the instructions.  (See April 28, 2017, “The Byrd Rule and Its Effects on Health Reform:  A Short Guide,” Committee for a Responsible Federal Budget, http://www.crfb.org/blogs/byrd-rule-and-its-effect-health-reform-short-guide.)}

^{[10] See https://www.cbo.gov/publication/52486; although AHCA was later amended and its more recent score projected deficit reductions of only $150 billion (https://www.cbo.gov/system/files/115th-congress-2017-2018/costestimate/hr1628.pdf).  An updated CBO score is expected to be released May 24, 2017.}

^{[11] See https://legcounsel.house.gov/Comps/93-344.pdf (pages 32-35).}

^{[12] Heniff Jr., Bill, November 22, 2016, “The Budget Reconciliation Process:  The Senate’s ‘Byrd Rule,’” Congressional Research Service (https://fas.org/sgp/crs/misc/RL30862.pdf).}

^{[13] It originated in Section 313 of the Congressional Budget Act of 1974.}

^{[14] See “Demystifying Reconciliation:  Understanding the Process, Its Benefits, and Its Limitations,” Steptoe & Johnson LLP (http://www.steptoe.com/assets/htmldocuments/Steptoe%20-%20Reconciliation%20Publication.pdf).}

^{[15] The Statutory Pay-As-You-Go (PAYGO) Act of 2010 (P.L. 111-139)}

^{[16] The House is considering wholesale reform of its rules, including eliminating the PAYGO law and replacing it “with a process for establishing binding limits on spending and debt” (http://budget.house.gov/budgetprocessreform/faqs.htm).}

^{[17] The Senate’s PAYGO rule, which can be found in Section 201 of the FY 2008 budget resolution (S. Con. Res. 21, https://www.congress.gov/bill/110th-congress/senate-concurrent-resolution/21/text), can be waived by a vote of 60 senators.  See also Rachelle Holmes Perkins, 2017, “Breaking the Spell of Tax Budget Magic,” Columbia Journal of Tax Law, 6 Colum. J. Tax L. 1 (https://taxlawjournal.columbia.edu/article/breaking-the-spell-of-tax-budget-magic/).}

^{[18] Congress included a provision in the Medicare Access and CHIP Reauthorization Act of 2015 (P.L. 114–10) stating that “the budgetary effects of this Act shall not be entered on either PAYGO scorecard.”  (See https://www.gpo.gov/fdsys/pkg/PLAW- 114publ10/html/PLAW-114publ10.htm.)  There are other ways around the federal PAYGO law.  Provisions of otherwise PAYGO- relevant legislation can be designated as “emergency legislation” pursuant to PAYGO law section 933(g)(1) (or section (4)(g) of the original Pay-As-You-Go Act of 2010).  If such a designation is not challenged, the budgetary effects of the provision are not counted in the PAYGO scorecards.  However, a senator can raise a point of order to strike such an emergency designation from the legislation unless 60 senators disagree.  On March 25, 2010, when the Senate was considering Obamacare legislation (technically, the Health Care and Education Reconciliation Act of 2010, which became P.L. 111-152), there were several motions addressing section (4)(G)(3).  See https://www.gpo.gov/fdsys/pkg/CREC-2010-03-25/html/CREC-2010-03-25-pt1-PgD344.htm.}

^{[19] Anytime a law subject to the PAYGO statute is enacted, CBO estimates new revenue and new spending associated with the legislation, which it then logs on PAYGO scorecards (for a rolling five-year period and a rolling 10-year period) kept by the Office of Management and Budget (OMB).  The Senate’s PAYGO rules measure the deficit impact over a 6-year period and an 11-year period, but in practice those are no different than the periods in the federal PAYGO statute because the 5- and 10-year periods are considered in addition to the current year, whereas the Senate lumps the current year into the periods.  See Bill Heniff Jr., August 4, 2015, “Budget Enforcement Procedures:  The Senate Pay-As-You-Go (PAYGO) Rule,” Congressional Research Service (https://fas.org/sgp/crs/misc/RL31943.pdf).}

^{[20] The PAYGO statute is only violated if the deficit increase is caused by the new law.  This distinction is critical.  The increase is measured as compared to existing law (the baseline).  Because the costs of many tax provisions, including so-called tax extenders, are part of the current-law baseline, they do not have to be offset to be made permanent.  See Robert Keith, April 2, 2010, “The Statutory Pay-As-You-Go Act of 2010:  Summary and Legislative History,” Congressional Research Service (https://democrats-budget.house.gov/sites/democrats.budget.house.gov/files/documents/CRS-stat-paygo.pdf).}

^{[21] Another interesting point about the Senate PAYGO rules is that legislation enacted earlier in the same calendar year that reduces the deficit can be used to help offset any potential PAYGO issues in subsequent legislation—unless the earlier legislation was a reconciliation bill.  That means that all of the deficit reduction that will potentially be achieved in the FY 2017 reconciliation bill (carrying AHCA, preliminarily estimated to reduce the deficit by $150 billion over 10 years primarily through Medicaid cuts) cannot be used to offset deficit increases (presumably from tax cuts) in an FY 2018 reconciliation bill, assuming both are enacted in 2017.  Specifically, the Senate’s PAYGO rules provide that:  “If direct spending or revenue legislation increases the on-budget deficit or causes an on-budget deficit when taken individually, it must also increase the on-budget deficit or cause an on-budget deficit when taken together with all direct spending and revenue legislation enacted since the beginning of the calendar year not accounted for in the baseline under paragraph (5)(A), except that direct spending or revenue effects resulting in net deficit reduction enacted in any bill pursuant to a reconciliation instruction since the beginning of that same calendar year shall never be available on the pay-as-you-go ledger and shall be dedicated only for deficit reduction.”}

^{[22] However, the Senate PAYGO rules have an out (similar to that in the PAYGO law) for emergency legislation (Section 204 of the FY 2008 budget resolution, S. Con. Res. 21).}

^{[23] For an extensive chart of all of the various points of order available to lawmakers, see James V. Saturno, October 20, 2015, “Points of Order in the Congressional Budget Process,” Congressional Research Service (https://www.senate.gov/CRSpubs/814bf855-39fc-4626-9356-4235537a6f89.pdf).}

^{[24] See Section 3101 in S. Con. Res. 11 for the 114th Congress, https://www.congress.gov/bill/114th-congress/senate- concurrent-resolution/11/text.}

^{[25] See section 203 of the FY 2008 budget resolution (S. Con. Res. 21, https://www.congress.gov/bill/110th-congress/senate- concurrent-resolution/21/text).}

^{[26] Toomey, Patrick Joseph, May 4, 2017, “How Republicans Can Make Tax Cuts Permanent:  Congress should not allow deficit projections to derail its chance to enact permanent reform,” Bloomberg View (https://www.bloomberg.com/view/articles/2017-05-04/how-republicans-can-make-tax-cuts-permanent).}

^{[27] Heniff Jr., Bill, November 22, 2016, “The Budget Reconciliation Process:  The Senate’s ‘Byrd Rule,’” Congressional Research Service (https://fas.org/sgp/crs/misc/RL30862.pdf).}

^{[28] Of note, the 2001 Bush tax cuts brought about by the Economic Growth and Tax Relief Reconciliation Act or EGTRRA of 2001, P.L. 107-16, passed by a vote of 62 to 38 in the Senate (https://www.congress.gov/bill/107th-congress/house- bill/1836/actions).  Some have pointed out that in 2001, CBO was predicting a budget surplus of $5.6 trillion for 2002 to 2011.  However, such a surplus would have no impact on how easy or difficult it is to satisfy the Byrd rule prohibition on increased deficits outside of the budget window.  Bernasek, Anna, May 14, 2006, “‘Temporary’ Tax Cuts Have a Way of Becoming Permanent,” The New York Times (http://www.nytimes.com/2006/05/14/business/yourmoney/14view.html).}

^{[29] Paletta, Damian and Max Ehrenfreund, April 25, 2017, “Republicans’ plan to cut corporate taxes would lead to massive revenue losses, congressional accountant finds,” The Washington Post (https://www.washingtonpost.com/news/wonk/wp/2017/04/25/republicans-plan-to-cut-corporate-taxes-would-lead-to-massive-revenue-losses-congressional-accountant-finds/?utm_term=.e473505ebe81).}

^{[30] https://www.c-span.org/video/?427261-4/institute-international-finance-policy-summit-tax-policy}

^{[31] “What is reconciliation?” Tax Policy Center Briefing Book (http://www.taxpolicycenter.org/briefing-book/what-reconciliation).}

^{[32] Ferris, Sarah, October 22, 2015, “Cruz suggests ignoring Senate parliamentarian for ObamaCare repeal,” The Hill (http://thehill.com/policy/healthcare/257771-cruz-suggests-ignoring-senate-parliamentarian-to-pursue-obamacare-repeal).}

^{[33] https://www.hatch.senate.gov/public/index.cfm/2014/7/hatch-restore-the-senate-to-the-world-s-greatest-deliberative-body}

^{[34] DeBonis, Mike, March 22, 2017, “What the Freedom Caucus wants in the GOP health-care bill, and why it’s not getting it,” The Washington Post (https://www.washingtonpost.com/news/powerpost/wp/2017/03/22/what-the-freedom-caucus-wants- in-the-gop-health-bill-and-why-they-arent-getting-it/?utm_term=.3b8aa3909329).}

^{[35] Young, Jeffrey, February 16, 2010, “Healthcare reform and reconciliation a bad mix, ex-parliamentarian says,” The Hill (http://thehill.com/blogs/blog-briefing-room/news/81273-healthcare-reform-and-reconciliation-a-bad-mix-ex-parliamentarian- says).}

^{[36] Rosenbaum, David E. May 8, 2001, “Rules Keeper Is Dismissed By Senate, Official Says,” The New York Times (http://www.nytimes.com/2001/05/08/us/rules-keeper-is-dismissed-by-senate-official-says.html).}

^{[37] “Senate leaders almost never overrule the parliamentarian,” according to Sheryl Gay Stolberg, March 13, 2010, “Parliamentarian in Role as Health Bill Referee,” The New York Times (http://www.nytimes.com/2010/03/14/us/politics/14rules.html?ref=topics).}

^{[38] “Section 312(a) stipulates that the Budget Committee determines outlay and revenue levels in a given fiscal year.  This information is given to the Presiding Officer in order to assist in evaluating a provision’s budgetary impact to determine whether it passes the Byrd Rule’s first, second, and fifth tests,” where the fifth test is that under 2 U.S.C. §644(b)(1)(E), according to James Wallner, March 23, 2017, “A Parliamentary Guide to Enforcing the Byrd Rule in the Reconciliation Process,” The Heritage Foundation (http://www.heritage.org/political-process/report/parliamentary-guide-enforcing-the-byrd-rule-the- reconciliation-process).}

^{[39] Hemel, Daniel and David Herzig, December 2, 2016, “The Art of the (Budget) Deal:  Who Holds the Trump Card on Reconciliation?” Whatever Source Derived (https://medium.com/whatever-source-derived/the-art-of-the-budget-deal- 14f2d4b0167c).}

^{[40] The 2003 Bush tax cuts can be found in the Jobs and Growth Tax Relief and Reconciliation Act (JGTRRA) of 2003 (P.L. 108-27).}

^{[41] H.Con.Res. 95, https://www.congress.gov/bill/109th-congress/house-concurrent-resolution/95/text.}

^{[42] Elmore, Wesley, March 6, 2006, “Parliamentary Maneuvering Delays Tax Reconciliation Conference,” Tax Notes, 110 Tax Notes 1020.}

^{[43] April 2009, Yin, George K. “Temporary-Effect Legislation, Political Accountability, and Fiscal Restraint,” New York University School of Law (84 N.Y.U. L. Rev. 174 2009) (http://www.law.virginia.edu/pdf/faculty/hein/yin/84nyu_l_rev174_2009.pdf).}

^{[44] Elmore, Wesley, April 3, 2006, “Senate Budget Chair Not Opposed to Controversial Revenue Raiser,” Tax Notes, 111 Tax Notes 15.}

^{[45] See https://www.cbo.gov/sites/default/files/109th-congress-2005-2006/costestimate/hr4297pg0.pdf.}

^{[46] May 1, 2017, at an event hosted by Tax Analysts and Georgetown University entitled “Trump’s Tax Plan:  A Closer Look” (https://www.facebook.com/pg/georgetownlaw/videos/?ref=page_internal).}

^{[47] See https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52523-qfrs.pdf.}

^{[48] This has been provided for in past budget resolutions.  See S. Con. Res. 11, https://www.congress.gov/bill/114th- congress/senate-concurrent-resolution/11/text#toc-idED3CC97DD0EB47DE99BF62E0B14C3B56.}

^{[49] See https://www.jct.gov/other-questions.html.}

^{[50] November 18, 2014, “Technical Explanation, Estimated Revenue Effects, Distribution Analysis, And Macroeconomic Analysis Of The Tax Reform Act Of 2014, A Discussion Draft Of The Chairman Of The House Committee On Ways And Means To Reform The Internal Revenue Code (JCS-1-14),” Joint Committee on Taxation, (https://www.jct.gov/publications.html?func=startdown&id=4674).}

^{[51] It is important to note that Camp’s plan was also distributionally neutral—meaning that the various income tax brackets generally realized similar gains or losses from the tax changes.  Although when you look at the specifics, Camp’s reforms resulted in a fair bit of redistribution.  For example, in 2023, individuals in the $500,000 to $1 million income bracket would have faced an average increase in their federal taxes of 2.4 percent while individuals in the $10,000 to $20,000 income brackets would have faced an average decrease in their federal taxes of nearly 50 percent.  More recent proposals including House Republicans’ “A Better Way” Blueprint for Tax Reform have not publicly aspired to achieve distributional neutrality.}

^{[52] Rubin, Richard and Kate Davidson, May 18, 2017, “GOP’s Path to Tax Changes Slowed by Upcoming Budget Fight:  Intraparty battles over deficits, military spending, tax cuts must be resolved first,” The Wall Street Journal (https://www.wsj.com/articles/gops-path-to-tax-changes-slowed-by-upcoming-budget-fight-1495120246).}

^{[53] See McPherson, Lindsey, May 12, 2017, “Freedom Caucus May Push for More Than Tax Overhaul in Next Budget:  Reconciliation instructions for overhauling welfare system among issues caucus plans to discuss, Meadows says,” Roll Call (http://www.rollcall.com/news/politics/freedom-caucus-may-push-tax-overhaul-next-budget).}

^{[54] LaRocco, Paul, May 14, 2017, “Thomas Suozzi faces early frustrations in Congress,” Newsday (http://www.newsday.com/long-island/politics/thomas-suozzi-faces-early-frustrations-in-congress-1.13633333).}

^{[55] See https://www.c-span.org/video/?427540-3/washington-journal-representative-tom-suozzi.}