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Tax reform through budget reconciliation may have success in   Congress, provided the senate can avoid a Filibuster.

Budget Reconciliation -- Current Path to Tax Reform?

As the consideration of comprehensive tax legislation (or a substantial tax cut) moves forward, “budget reconciliation” is advertised as the mechanism by which that legislation will be adopted.  So, what is “budget reconciliation” all about?

The Senate is currently divided 52-48, Republicans vs. Democrats.  In order to avoid a filibuster by the Democratic minority, 60 votes are required to end debate, which means at least some Democratic senators would be needed to forestall a filibuster and thereby allow legislation to proceed.  That is where budget reconciliation becomes key.  Reconciliation is a special legislative process created as part of the Congressional Budget Act of 1974.  One of the attributes of reconciliation is that a reconciliation bill cannot be filibustered -- thus allowing the Senate to pass a reconciliation bill with a simple majority vote (or 50 votes plus the vice president).  Another attribute is that the bill cannot increase the deficit beyond the fiscal years covered by the budget (which could cause proposed tax cuts to expire after ten or fewer years).  In addition to a number of other significant procedural limitations, there can be only one reconciliation bill under an annual budget for each of revenue, spending and debt.  If a single reconciliation bill has both spending and revenue provisions (which would be the case for tax legislation), no other reconciliation bill affecting spending or revenue is allowed.  To use reconciliation, a budget resolution needs to be adopted by Congress that includes “reconciliation directives” for specified Congressional committees.  While a budget resolution does not itself become law, reconciliation is a procedure for enacting parts of a budget resolution into law.  

Since 1980, some 20 budget reconciliation bills have been enacted into law, including major spending cuts during the first year of the Reagan presidency, several deficit-reduction programs during the 1980s and 1990s, welfare reform in 1996 and the major Bush tax cuts in 2001 and 2003.  The Restoring Americans’ Healthcare Freedom Reconciliation Act of 2015 was passed by Congress in an effort to repeal many of the provisions of the Affordable Care Act, but it was, not surprisingly, vetoed by President Obama.

The effort in 2017 to repeal and replace the Affordable Care Act under reconciliation did not succeed.  Will the road to tax reform through reconciliation be more successful?  We will know soon, as the march to major tax legislation has now begun in earnest. 

Richard Shapiro, Tax Director and member of EisnerAmper’s Financial Services and Corporate Tax Groups, has more than 40 years’ experience in federal income taxation, including the taxation of financial instruments and transactions, both domestic and international, corporate taxation and mergers and acquisitions.

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