David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. Joining me in the studio this week is Tax Notes Today reporter Jonathan Curry. Jonathan, thank you for being here.
Jonathan Curry: Glad to be back.
David Stewart: As U.S. lawmakers are starting work on tax reform, the term “reconciliation” keeps getting thrown around. What is reconciliation, and what are its limitations? Jonathan is here to help us sort it all out. Jonathan, what are lawmakers talking about when they refer to reconciliation?
Jonathan Curry: So this all starts in 1974, when Congress passed the Congressional Budget Act, and, among other things, that bill established what is known as the budget reconciliation process, to make it faster and easier to pass a bill dealing with the federal budget. Now, passing the budget is one of those basic duties Congress has to fulfill. And the ordinary process was becoming too cumbersome and too drawn out. And then, in the Senate there is always a threat of a filibuster that can bring things to a complete halt. Budget reconciliation was supposed to fix all that.
David Stewart: Okay, it's a budget measure. What does that have to do with tax reform?
Jonathan Curry: Well, as it turns out, everything. As we’re recording this October 25, the reconciliation process is chugging along with the House expected to vote tomorrow to approve a budget resolution that would set up a $1.5 trillion tax cut. And this has given Republicans the opportunity to pass a huge tax cut without needing any help from Democrats. And they're doing this by integrating it into the budget process.
David Stewart: Now is this the same method they used to try and pass healthcare earlier this year?
Jonathan Curry: Yes it is, and I think one big lesson to learn from the healthcare reform effort is that even with all its advantages, reconciliation still isn't a slam dunk. There are 52 Republicans in the Senate and, under reconciliation, they need to have at least 50 of them all on the same page, supporting the same bill. But while those 52 senators are all part of the same party, they all represent different parts of the country and some are more conservative than others. There's also a lot of conflicting priorities, even within the same party.
David Stewart: Could Republicans bring up their healthcare bill again under this process?
Jonathan Curry: They could, but they'd have to wait until after they finish with tax reform at this point, because you only get one crack at the reconciliation process per fiscal year. Now, if you remember earlier this summer, when the Obamacare repeal effort initially faltered, there was some talk of pivoting from healthcare reform to tax reform by using the 2017 budget reconciliation process. They could have done that, but the 2017 version of the process expired at the end of September, so at this point they've missed their chance. Now, they're moving on to tax reform using the 2018 budget reconciliation process. In theory, if the Republican leadership is really feeling jazzed up, they could try to combine healthcare reform and tax reform into one big reconciliation bill. But that would be a really massive and unwieldy bill, and I haven't heard anyone really advocating for that. Instead, Republicans will probably have to wait until after tax reform and instead use a fiscal year 2019 budget reconciliation process if they want to come back to healthcare reform.
David Stewart: Okay, let’s take a step back. How does reconciliation work?
Jonathan Curry: The reconciliation process begins with a budget resolution that's drawn up and agreed to by both the House and the Senate. And that contains what are called reconciliation instructions, which set fiscal targets for specific committees to try to meet. Now at this point, the reconciliation instructions are usually pretty broad. They'll say something like, “The Senate Finance Committee shall come up with changes in laws within its jurisdiction to increase the deficit by $1.5 trillion over 10 years.” And that's it. It doesn't explicitly say how they have to come up with that $1.5 trillion number. Also, the budget resolution itself is nonbinding. It isn't signed into law, meaning President Trump couldn't veto it if he doesn't like it. Instead, it just lays out the parameters of the fiscal goal, and then separate legislation is introduced to fulfill those instructions set out in the resolution. And although it's a process that is followed by both the House and the Senate, its use is primarily intended to make it easier to pass a reconciliation bill in the Senate.
David Stewart: Alright. What are the advantages of the reconciliation process?
Jonathan Curry: Well, there are a couple of advantages here. First, it limits the scope of the amendments that can be offered so they only relate to the bill being discussed. It also limits the amount of debate that can take place on a bill to only 20 hours. And finally, this is the biggest advantage, it provides a way around the filibuster, which, if you remember from that classic Mr. Smith Goes to Washington, it allows a Senator to bring the process to a standstill.
Now normally, if you want to end a filibuster, you need to get at least 60 Senators to vote to invoke cloture, and that would end debate. But if the bill being filibustered is a reconciliation bill, it only takes a simple majority vote to end debate rather than the three-fifths vote. And that means that if you're the majority party, you don't need to pick up any votes from the minority party. And that makes for a big political advantage.
David Stewart: It sounds like a pretty powerful mechanism if it allows you to just ignore the minority party in the Senate. What's the catch?
Jonathan Curry: Reconciliation turns out to be a bit of a Faustian bargain. You get this faster, streamlined process. But at the same time, terms and conditions apply. And the biggest of these conditions, the Byrd rule, has a potential to really make things complicated. In addition, you might think that not needing the minority party means the majority can just do whatever they want. But it turns out, it's not that easy when you have a razor-thin voting margin of error in the senate. And we've already seen that dynamic at play this year. Senate Republicans failed to pass ACA repeal and replace legislation because they lost just three Republican votes, even though that was something they'd all talked about repealing for years. Also, I think it's worth nothing that reconciliation doesn't necessarily have to be a partisan exercise. The Bush tax cuts in 2001 were passed via the reconciliation process, and that legislation had a couple Democrat senators vote for it.
David Stewart: Let's go back to that Byrd rule you mentioned. What is it, and why does it matter?
Jonathan Curry: The Byrd rule is a Senate-specific rule that was named after the late Democratic Senator Robert Byrd. It came about in 1985, about a decade after the reconciliation process was created. And that was because it was becoming clear that Congress was using reconciliation just to get around the Senate filibuster and pass legislation that wasn't actually related to the federal budget. So broadly speaking, the Byrd rule prohibits the inclusion of what's called extraneous provisions, and there are six tests for determining what is considered extraneous. Now, for our purposes, that's tax reform, the most consequential test is the one prohibiting legislation from increasing the deficit outside of the budget window, which, at this point, is 10 years.
David Stewart: Wait, if the current budget resolution calls for a $1.5 trillion deficit-increasing tax cut, how does that square with the Byrd rule?
Jonathan Curry: See, that's where reconciliation makes things complicated. It forces lawmakers to try to get creative to make their bill comply with these rules. And one of the ways they can try to get around this is to have some of their tax provisions sunset, or expire, after 10 years. And at least, on paper, that would make things go back to the way they are now. And that's what they did with the Bush tax cuts in 2001. But just a decade later, most of these tax cuts did end up becoming permanent with the passage of the American Taxpayer Relief Act of 2012. And after 10 years of lower taxes, the idea of letting taxes return back to their original level, especially so soon after the 2008 recession, was considered by many people to be a tax increase. So once you give people something, whether it's tax cuts or healthcare, it's proven that it's hard to take it back.
David Stewart: Should we expect to see more sunsetting tax cuts?
Jonathan Curry: Yeah, probably, but that strategy may not be as straightforward this time around. What happened is that earlier this year, the Joint Committee on Taxation told House Speaker Paul Ryan's office that sunsetting a corporate tax rate cut, even after just three years, would have a deficit-increasing ripple effect in later years outside of that budget window. So then they'll have to find an offset for that, and then on and on it goes. Basically, every solution brings a new problem. Now in theory, Republicans could decide that rather than using tax policy estimates from the Joint Committee on Taxation and the Congressional Budget Office — those are the traditional scorekeepers for both the House and the Senate — they could instead use tax estimates from the more friendly conservative sources that would conclude there would be much higher economic growth effects from those tax cuts. And that growth would be used to offset a lot of their revenue losses and could be a workaround to the Byrd rule’s limitation on long-term deficits. But doing that on legislation of this magnitude would be totally unprecedented, and that would be very controversial.
David Stewart: Are there any other limitations created by the Byrd rule?
Jonathan Curry: Yeah. There's also the merely incidental test and that prohibits the inclusion of provisions in the bill that produce revenue changes that are merely incidental to the nonbudgetary components of the provision. This test, in particular, is pretty subjective, and that comes into play more with the healthcare reform bills than it does with tax reform. But it has been interpreted by many political experts to mean that a lot of regulatory provisions can't be repealed through reconciliation. And according to some experts out there, a number of abortion-specific provisions in the healthcare reform bills also wouldn't pass muster under this rule.
David Stewart: Who actually decides what passes and fails the test?
Jonathan Curry: This all starts with the Senate parliamentarian, and she's sort of the in-house expert on Senate rules and procedures. She has sometimes been likened to a referee that declares when things are out of bounds, but the reality is that she's more like an advisor. Many Senate rules are self-imposed standing rules, and it's up to the members to decide how they're going to govern themselves. Now, ultimately, that decision over whether something is merely incidental falls to the vice president, who serves as president of the Senate, or it can fall to whoever is filling in that position as president pro tempore. Currently, that would be Senate Finance Committee Chair Orrin Hatch, and he is a Republican senator from Utah. It has also been openly suggested by some prominent Republicans that the Senate's presiding officer should basically ignore the parliamentarian's advice if it interferes with their plans for tax reform or repealing or replacing the Affordable Care Act.
David Stewart: If they can just overrule the parliamentarian, is there anything holding them back?
Jonathan Curry: Well officially, no, but the Senate takes pride in its longstanding rules, and, in general, it tends to be deferential to tradition. Anytime those rules are upended, it becomes major news. Also, while the idea of senators on the Senate floor raising points of order and shouting out objections sounds really dramatic, the reality is that most of these Byrd rule issues are dealt with ahead of time in — I'm not kidding here, this is the actual term — a Byrd Bath. And that's where lawmakers from both sides, along with their staff, get into a room and make their arguments for why provisions are or aren't at odds with the Byrd rule. And then the parliamentarian will issue her advice. Now, if senators know a particular provision won't fly under the Byrd rule, they usually just remove it ahead of time or try to alter it in a way to make it comply with the rule.
David Stewart: I think we're going to have to leave it there on that series of bad puns. Jonathan, where can listeners find you online to send you their own Byrd rule puns?
Jonathan Curry: Well, I'm not done yet. You can follow me on Twitter @jtcurry005. That's curry spelled like the spice, and that's where you're going to find all the hottest tax news.
David Stewart: Well, thank you for being here.
Jonathan Curry: My pleasure.
David Stewart: That's it for this week. Thank you for listening. You can find me on Twitter @TaxStew. That's S-T-E-W. If you have any comments or questions or would like to suggest a topic for a future episode, you can email us at podcast@taxanalysts.org. Be sure to subscribe to this podcast to make sure you get the next episode of Tax Notes Talk.
Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind, and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters, can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional.
All content in this broadcast is protected under U.S. and international laws. Copyright © 2017 Tax Analysts Inc. Unauthorized recording, downloading, copying, retransmitting, or distributing of any part of the podcast is strictly prohibited. All rights reserved