Budget Reconciliation: What is it and How Does it Work?

At a glance:

• The main takeaway: Congress is making a move towards a budget reconciliation plan, but what does that mean and how does it work?
• Impact on your business: To avoid bills being stalled during the legislative process, Congress can opt to use the reconciliation process to quickly advance fiscal legislation.  
• Next steps: Aprio’s Tax advisors can navigate you through the complex tax landscape and provide guidance on how to maximize the benefits of new tax legislation. 

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With the debt ceiling approaching and the annual budget deadline looming, Congress is working to finalize a budget resolution before the April 15^th deadline. Lawmakers are looking to fast-track the normal legislative process to avoid the filibuster which could otherwise cause delays. To achieve this goal, they intend to go through the rule system of budget reconciliation.

What is this expedited process for passing budgetary legislation? What are the benefits and challenges of this path? In this article, we answer these questions and more.

The basics of budget reconciliation

Established by the Congressional Budget Act of 1974 (the Budget Act), reconciliation occurs only if reconciliation directives are included in a budget resolution that is passed by both chambers of Congress. These directives outline the specific roles of committees in achieving the budgetary goals, directing them to make necessary changes in spending, revenue, deficits, or the debt limit. Affected committees must then draft bills to achieve these specified targets. Once prepared, the bills are sent to the House or Senate Budget Committees, which combine them into a comprehensive omnibus bill for full consideration by the respective chamber. Any differences between the reconciliation bills passed by the two chambers must be resolved before sending the bill to the president for signature. Budget reconciliation bills are due by June 15^th of the current year.

Historically, 23 budgetary bills have been passed using the reconciliation process. In fact, some of the most notable bills of the last eight years have passed through this expedited process, including the Tax Cuts and Jobs Act (2017), the American Rescue Plan Act (2021), and the Inflation Reduction Act (2022). These three prominent pieces of legislation highlight how reconciliation has become a key tool for advancing major policy changes.

At the time of publishing this article, the House and Senate budget committees have taken the first step in passing reconciliation bills. Each chamber has introduced its own reconciliation bill:

The divide between the House and Senate versions presents a challenge, with lawmakers needing to find common ground to move forward before crucial deadlines.

Key benefits of budget reconciliation

Budget reconciliation offers several key benefits through its fast-track process:  

• Simple Majority: Unlike most legislation, reconciliation bills can be passed in the Senate with a simple majority, circumventing the typical 60-vote threshold to overcome a filibuster.  Unanimous control of the presidency, House, and Senate typically results in a majority vote, reducing the need for extensive negotiation. Currently, the Republican Party holds a narrow majority in Congress, with a three-seat advantage in the House and a six-seat advantage in the Senate.
• Limited Debate: The Senate tradition of unlimited debate has allowed for the use of the filibuster, an action designed to prolong debate and delay or prevent a vote on a bill, resolution, amendment, or other debatable question. In the budget reconciliation process, debate is restricted to 20 hours in the Senate, ensuring that the bill moves swiftly through the legislative process. A final compromise between the House and Senate is also subject to a debate time limit of just 10 hours, equally divided and controlled by the majority and minority leaders.
• Restricted Amendments: Amendments to reconciliation bills must be relevant to budgetary issues or to the subject matter otherwise they can be removed by the Senate Parliamentarian. The amendments must also reduce the deficit or be deficit-neutral. There is no limit on the number of amendments that can be offered during the Senate’s initial consideration of the bill.

Restrictions on using budget reconciliation

Despite its many advantages, budget reconciliation has specific limitations:

1. Reconciliation Targets: Section 310(a) of the Budget Act provides that reconciliation can only be used for three primary purposes:
   • Changes to the statutory debt limit
   • Changes in revenues (i.e., taxes)
   • Changes in mandatory (direct) spending

Reconciliation cannot be used for discretionary spending, which is subject to the regular appropriations process.

2. Multiple Bills: Reconciliation may address these issues in a single bill or multiple bills, but it cannot address them more than once in the same fiscal year (the government fiscal year ends September 30). If a bill is passed addressing one of the three areas, no other bill can be introduced on that topic during the same fiscal year. This limitation can be particularly significant if the House and Senate disagree on strategy. For example, if one chamber passes a single bill covering all three topics, while the other intends to pass multiple bills, the reconciliation process between the two chambers could result in major amendments or make certain legislation impossible to pass within the fiscal year.

3. Byrd Rule: Codified into statute in 1985, The Byrd Rule, named after Senator Robert Byrd, places additional restrictions on what can be included in a reconciliation bill. It ensures that only provisions that have a direct budgetary effect are included. These restrictions include the following:
   • Measures that do not have a direct budgetary effect.
   • Provisions that worsen the deficit without achieving reconciliation targets.
   • Provisions outside the jurisdiction of the committee submitting them.
   • Measures whose budgetary effects are merely incidental to a non-budgetary policy change.
   • Provisions that increase deficits outside of the reconciliation window.
   • Any proposals affecting Social Security.

The Byrd Rule allows any Senator to raise a point of order if they believe a provision violates its guidelines, giving every member of the Senate the ability to influence the final bill. If the Senate Parliamentarian agrees with the point of order, the provision will be removed. However, this ruling can be overridden by a supermajority vote of 60 senators, which in our current congressional makeup would require some minority party support. Additionally, provisions that violate the Byrd Rule may remain in reconciliation legislation if no Senator raises an objection.

The Senate Parliamentarian plays a critical role in the reconciliation process as an unelected official responsible for interpreting Senate rules and determining whether provisions in a proposed bill violate the Byrd Rule. Elizabeth MacDonough, who has held this position since 2012, has made rulings that have shaped several key legislative outcomes. In the coming months she will exert significant influence over the provisions that are allowed into the final congressional bill.

Although the Byrd Rule applies only to actions taken by the Senate, it effectively limits what the House can insist upon when reconciling differences between the two chambers. Since provisions that violate the Byrd Rule can be removed by the Senate Parliamentarian, the House must navigate these restrictions when drafting its own version of reconciliation bills. This ensures that both chambers remain aligned within the confines of the rules, influencing the final outcome of the legislation.

The six-step process of budget reconciliation

1. Baseline Projections: The nonpartisan Congressional Budget Office provides baseline projections to the House and Senate. The office provides financial projections for all congressional consideration including:

1. Departmental operation costs for the upcoming year
2. Cost/savings of proposed legislation

During reconciliation these are the figures that must net to remain budget neutral when considering new legislation or the national debt.

2. Drafting: The House and Senate separately draft resolutions. Each respective bill must include instructions for the upcoming fiscal year beginning October 1st. In addition to the restrictions listed above, these bills must meet the set targets and avoid increasing the deficit. Once proposals have been balanced or reconciled, they must be approved and delivered to the respective committees that oversee those areas of government.

3. Committee Fund Allocations: The committees affected by a budget bill have discretion and significant power over how they allocate funding within the departments they oversee. Assuming there are no specific provisions in the bill set by Congress, this may involve increasing spending in certain departments even when the total budget has been reduced. Ultimately, the committees aim to find the best areas to allocate funds to meet congressional restrictions and preserve the intended outcomes.

4. Budget Committee Omnibus Bill: Once all committees affected by congressional budgetary reconciliation have created a proposal to meet the congressional demands, they submit their proposals to the Budget Committees of the House and Senate. The Budget Committees take each of the sub committees’ proposals and combine them into one larger omnibus bill that is then submitted to the House and Senate for a vote. The Budget Committees are not allowed to change anything of substance within the bills even if the bills fail to meet target goals. If only one committee was affected by congressional reconciliation this step is skipped, and the committee’s budget is passed directly to the house and senate to be passed.

5. House/Senate Conference Committees: Differences betweenusing the House and Senate Omnibus bills must be addressed. Ultimately, only one bill can be passed, so a conference committee is formed to reconcile these differences. As with the Senate’s time constraints, this process is also limited under reconciliation rules to just 10 hours. When the House and Senate are not drafting similar bills, this stage can lead to significant amendments or limit Congress’s ability to address certain items initially intended for inclusion. While nothing new can be added to the bill at this point, provisions can still be struck, even if they contribute to savings or affect the net budget.

6. Presidential Approval/Veto: After all differences are reconciled, the bill is presented to the President for signature into law or veto. If vetoed, the bill is sent back to Congress, where it can be adjusted or overridden with a two-thirds vote in both chambers. The difficulty in passing a bill that has been vetoed and the requirements of garnering minority party support, creates incentives for lawmakers to draft a proposal that are likely to be approved by the president.

The bottom line

Ultimately, while budget reconciliation is an expedited process compared to normal bill passage, significant hurdles remain. Despite the majority presence in both chambers of Congress, challenges, such as the need for a balanced budget, the restrictions on what can be included in a reconciliation bill, the necessity of reconciling proposals with committees, and the need for both chambers to agree on differences creates a substantial risk that the proposed legislation may not include every item the current administration hopes to see.

For the bill to be successful, Republicans in the House will need to consider the Senate’s restrictions to prevent issues during the consolidation process. Additionally, the Senate will need to be cognizant of the Byrd Rule and the germane nature of provisions as any rule struck down by the Senate Parliamentarian will be difficult to overturn. Both budget bills will face severe content limitations despite the current administration’s extensive list of priorities. Achieving budget neutrality will be challenging due to some of the proposed legislation. This will be the Senate’s only bill for each of the specific financial areas that will be passable for the fiscal year and failure to pass a bill could have serious financial consequences for the nation.

Additionally, the bill must be crafted with the president’s approval in mind, as any veto would be very challenging to override without support from the minority party. Given these constraints, the bill will likely require significant concessions to ensure its passage. The drafting of the reconciliation bill must take all these factors into account to have a realistic chance of success. Failing to meet any of these key requirements could risk losing crucial votes necessary for passage under the framework.

Securing the agreement of the House, Senate, and Executive Republicans prior to voting will be essential as conflicting ideas between the House and Senate or the other mentioned threats could cause enough discord among the majority leaders that the bill will fail to pass, and a government shutdown becomes a significant risk. However, the ability to pass legislation with a simple majority vote means that, despite these challenges, reconciliation remains one of the most effective tools for advancing budgetary legislation and is already being considered for this year’s budget proposals.

Aprio’s Tax Advisors are closely monitoring the tax landscape and are prepared to help you navigate the potential changes.

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