Elections Make Budget Reconciliation a Tool for Significant Legislation Early Next Year

Following the results of the 2024 elections, Republicans will have unified control of the federal government with President-Elect Donald Trump's inauguration on Jan. 20, 2025, and the seating of the 119th Congress on Jan. 3, 2025. In the U.S. House of Representatives, Republicans will have a very slim majority due to a narrow election and the subsequent departure of several members, with pending special elections to fill their seats. Assuming that Republicans maintain their House majority, they will be able to pass legislation either by reaching across the aisle or staying unified in a budget reconciliation process. Party unity proved very difficult for the House Republican majority in the 118th Congress, but the presence of President Trump and a Senate majority may help the party work together next Congress.

In the U.S. Senate, Republicans will have a 53-seat majority but not the necessary 60 votes to overcome the legislative filibuster (absent an unexpected change to Senate rules). Therefore, the Senate similarly will be limited in terms of legislation to bipartisan measures or use of the budget reconciliation process, the latter of which provides a limited pathway to passing legislation with a majority vote.

This alert will discuss the process of budget reconciliation – including both the powers it provides the narrow Republican majority and the limitations it imposes. It also will cover the potential implications of budget reconciliation for tax policy in the 119th Congress and the key committees that will be involved throughout. A key takeaway is that budget reconciliation is not a magic wand – it is a strict process that allows slim majorities to pass legislation that produces specific changes to mandatory spending, revenues or the debt limit, while also preventing them from doing so in a fashion that are merely incidental to those aims.

Budget Reconciliation: Process, Powers and Limitations

In addition to the need for House Republicans to maintain their majority and remain unified on major legislation, another critical impediment to passing legislation in the 119th Congress is the 53-seat Republican majority in the Senate. Under Senate rules, ending debate and bringing a matter to a vote typically requires unanimous consent or the affirmative vote of three-fifths of Senators (typically 60 votes).

Although this is rarely an issue with bipartisan legislation, it allows a minority party with at least 41 members to block legislation. However, the budget reconciliation process allows certain matters, with limitations, to pass the Senate with a simple majority vote (or 50 votes plus a tiebreaking vote from Vice President-Elect JD Vance, acting in his constitutional role as Senate president).

The budget reconciliation process was established by the Congressional Budget Act of 1974. The original purpose was to allow expedited procedures for making certain changes to substantive law so that revenue and spending levels are brought into line with a budget resolution for a particular fiscal year (FY), with the goal of ultimately reducing federal deficits. However, over time, both parties in Congress found ways to use the budget reconciliation process to enact policies that do not necessarily reduce deficits.

Though budget reconciliation is a powerful tool for the political party holding the majority in each chamber and the White House, its 1974 enabling legislation limits its use. Specifically, the budget reconciliation process can be used only for one of three purposes, or a combination thereof: 1) to change the U.S. statutory debt limit, 2) to make changes in revenues or 3) to make changes in mandatory spending. A provision that has no impact, or a merely incidental impact, on any of these three items cannot be included in the budget reconciliation process.

The process historically has been used by Democrats and Republicans alike. Since its enactment, the process has been used to enact law 23 times, including by Republicans to enact the Tax Cuts and Jobs Act of 2017 (TCJA) – signed by then-President Trump – and most recently by Democrats to enact the Inflation Reduction Act of 2022.

Budget Resolutions

Budget resolution provides numerical targets for committees to achieve, but it does not detail what specific legislative changes should be made to reach the targets. For instance, in the case of TCJA, the budget resolution required the House and Senate tax committees to each provide a proposal that would not increase the deficit by more than $1.5 trillion inside the 10-year budget window, but it did not include specific instructions to the tax-writing committees how to accomplish that requirement.

Congress generally has authority to establish whatever targets it chooses in reconciliation, but in order to increase the deficit, certain statutory requirements must be met or else waived under the 60-vote threshold in the Senate. For example, TCJA required separate legislation removing its deficit increases from the statutory PAYGO scorecard in 2017 to avoid a mandatory sequester.

Under the Congressional Budget Act of 1974, Congress can consider up to three budget resolutions for the purposes discussed above for any given fiscal year. However, due to constraints in the congressional schedule, there typically is only one budget resolution for a fiscal year and it can address multiple reconciliation purposes (e.g., both tax policy and mandatory spending). In addition, because the fiscal and calendar years are not the same, it often is possible for reconciliation to occur once each fiscal year, yet twice in a calendar year.

The next Congress will begin in the middle of FY 2025, most likely operating under a continuing resolution pursuant to statutory budget caps, but not a budget resolution. The Republican-controlled Congress could quickly pass a budget resolution for FY 2025 to address tax reform and other urgent matters, then on Oct. 1, 2025, pass another budget resolution for FY 2026 to begin a second reconciliation process in the same calendar year. The next Congress potentially could have a third reconciliation round using a FY 2027 budget resolution in the last few months of 2026. 

The Byrd Rule

The "Byrd Rule" is named after former Sen. Robert C. Byrd (D-W.Va). In 1990, out of concern that the budget reconciliation process was being used for purposes outside of three noted above as required, the Byrd Rule, which was previously just a Senate procedural rule, was codified into the Congressional Budget Act of 1974.

Waiving the Byrd Rule requires a vote by three-fifths of all senators. In most cases, appealing the ruling of the chair requires only a simple majority vote. Once the presiding officer has been overruled, the Senate is considered to have adopted a new precedent that remains in effect indefinitely. This procedural maneuver was used most recently to lower the threshold for presidential nominees and judges in 2013 and again in 2017. However, most budget points of order are subject to three-fifths vote of the entire Senate, not a simple majority, making it unlikely the Byrd Rule could be circumvented in the same way cloture was for nominations and judicial appointments.

Generally speaking, under the Byrd Rule, "extraneous" provisions subject to a point of order include provisions that:

• do not produce a change in outlays or revenues or a change in the terms and conditions under which outlays are made or revenues are collected
• produce an outlay increase or revenue decrease not in compliance with the budget resolution
• produce a change in outlays or revenues which is "merely incidental" to the non- budgetary components of the provision
• increase the deficit for a fiscal year beyond the budget window covered by the reconciliation measure (the budget window is generally 10 years), or
• affect Social Security

Potential Implications

It clear that Republicans will use the budget reconciliation process in the next Congress and will have more than one opportunity to use it to accomplish their policy goals. It is likely that tax reform – particularly given the expiration of many TCJA tax provisions – will be the subject of an early budget reconciliation process. With the Congressional Budget Office (CBO) projecting deficit increases of up to $4.5 trillion-$5 trillion if TCJA tax provisions are extended, it is unclear how much deficit spending Republicans will tolerate, especially given the political leanings and razor-thin margins in the House. There may be efforts to rescind – or claw back – unobligated funding from the Democrats' recent reconciliation bills, such as the American Rescue Plan Act, Inflation Reduction Act or other prior acts that were unpopular with Republicans. Additionally, Republicans may try to use the process for a host of other policy priorities, notwithstanding the limitations of the process, including priorities such as immigration and border reform, defense spending, energy policy and trade reform.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.