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Tax reform is being held hostage by the Affordable Care Act, which is currently ahead of tax reform in the legislative queue.

Budget Reconciliation-Potential Path to Tax Reform

Clearly, tax reform is one of President Trump’s priority issues.   On the other hand, major tax reform by its nature takes time.  For example, the Tax Reform Act of 1986 – the most comprehensive tax package in the last 30 years – took 13 months between House Ways and Means Committee markup and final enactment. And, there are numerous issues that appear contentious even amongst the majority Republican House and Senate members and their core constituents, most significantly a border-adjustment tax which would in effect impose a tax on American imports while exempting American made exports from income tax calculations.

Apart from this, there are procedural considerations that weigh heavily on the process and make the August recess a challenging if not impossible date to satisfy.   If it is assumed that Democratic senators will substantially act as a bloc against Republican-generated tax legislation, then a mechanism called “budget reconciliation” may need to be utilized.

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 may 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 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 (even 50 votes plus the vice president).  In addition to a number of other significant procedural limitations, there can be only one reconciliation bill under each 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 a great extent, tax reform is being held hostage by efforts to repeal and replace the Patient Protection and Affordable Care Act, which is currently ahead of tax reform in the legislative queue.  It too may well require a reconciliation bill to get enacted.  Because both the Affordable Care Act repeal and replace and tax reform have both tax and spending components, they cannot be passed through reconciliation under the same budget resolution, unless they are part of the same legislation – possible, but certainly a particularly formidable undertaking -- or unless the Affordable Care Act repeal is withdrawn, which is highly unlikely.

Since 1980, some 20 budget reconciliation bills have been enacted into law.  In 2015, 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.

Is budget reconciliation a path to reform?  Stay tuned.

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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