The House voted 216 to 214 to approve the Senate version of the budget resolution on April 10, crystalizing the framework Republicans hope to use to enact a massive tax package through the reconciliation process this year. The budget passed the Senate on a 51 to 48 vote on April 5, and it is now effective (it does not need to be signed by the president).
The budget resolution creates the framework for reconciliation, which is critical for avoiding filibusters and moving tax legislation in the Senate with simple majority votes. Its passage represents a major victory for Republicans and is a big step toward tax legislation, but key political and procedural hurdles remain.
The budget resolution effectively carves out $1.5 trillion for tax changes under a “current policy” baseline, potentially allowing Republicans to make expiring provisions in the Tax Cuts and Jobs Act permanent while still pursuing other key tax priorities. It requires little in the way of spending cuts, a sticking point for some conservative Republicans. Key questions remain over whether Republicans can simultaneously satisfy moderates and deficit hawks on spending, or whether Senate procedural points of order could pose a problem later.
Republicans suffered only two defections in the House vote, which was scuttled the night before due to resistance from Republican budget hawks. President Donald Trump and Republican congressional leaders leaned hard on members to support the budget to keep the process moving, with House Speaker Mike Johnson, R-La., offering a firm commitment to cut at least $1.5 trillion in spending. This could prove a point of contention for moderates, who fear it could force cuts to Medicaid or food assistance.
BDO Insight
Approval of the budget resolution does not resolve the spending fight among Republicans; it just punts it to the underlying bill itself. Given the narrow Republican majorities in both chambers, this may be the biggest hurdle to a final bill. The Republican House majority is currently 220 to 213 with two vacancies from Democratic seats. The Republican Senate majority is 53 to 47. Resolving the spending negotiations will be critical not only to the success of a bill but could also affect the scale of tax package. Failure to reach spending goals could diminish the appetite for tax cuts.
Tax Reconciliation Instructions
The budget resolution works by providing committees with reconciliation instructions. The final budget resolution instructs the Senate Finance Committee to draft legislation that increases the deficit by no more than $1.5 trillion. This cap essentially allows Senate tax writers to put together a tax package with a net revenue loss of up to $1.5 trillion.
The Senate Budget Committee chair would be given authority to score this $1.5 trillion cap using “more realistic assumptions regarding current tax policy,” including incorporating extensions of provisions of the TCJA “in the baseline.” This “current policy tax baseline” could provide for the extension of expiring provisions without any revenue impact, allowing Republicans to make the TCJA tax cuts permanent by bypassing a rule precluding deficit increases outside the 10-year budget window.
The final budget resolution maintains separate reconciliation instructions for House committees, but these may be largely irrelevant. The House instructions allow $4.5 trillion for tax cuts, but this figure must be reduced to the extent spending cuts fall short of $2 trillion. It can be increased to the extent spending cuts exceed $2 trillion. The $4.5 trillion figure was set assuming the use a more traditional “current law” baseline, whereby extensions of expiring provisions are considered a change in law and any revenue impact from that change must be scored.
BDO Insight
The Senate reconciliation instructions are crucial, whereas the House instructions are potentially superfluous. The House can waive any budget point of order for violating its own reconciliation instructions with a simple majority vote. Conversely, the Senate must comply with its own reconciliation rules or face points of order that require 60 votes to overcome. The parliamentarian has previously ruled that Senate points of order cannot be made for failures to comply with House instructions, only its own.
Current Policy Baseline
There is little precedent for using a current policy baseline to score reconciliation tax legislation. Republican Majority Leader John Thune, R-S.D., said in a statement that the Senate parliamentarian reviewed the budget and “deemed it appropriate,” but it is not clear how thoroughly all potential issues were vetted. There are many other open questions about how a current policy baseline could operate. It is not clear, for example, what the baseline will assume for bonus depreciation, which is drawing down gradually by year. It is also unclear whether a current policy baseline can incorporate the reinstatement of provisions that changed in prior years, such as the amortization of research expenses under Section 174 or the less favorable calculation of the limit on deducting interest under Section 163(j).
BDO Insight
Estimates for extending the TCJA tax cuts have varied depending on assumptions of what is included and when the cuts are scored. Republicans have cited a $3.8 trillion figure based on a score released last year by the Congressional Budget Office that excluded debt service and some business tax cuts. An updated estimate from the Joint Committee on Taxation requested by Democrats found that figure could be as high as $4.6 trillion under different assumptions. The Senate’s current policy baseline can erase the revenue impact of extensions included in the baseline, meaning that the $1.5 trillion allocation under a “current policy” baseline could be equivalent to a net tax cut as large as $5.5 or $6 trillion under the traditional “current law” baseline.
Any changes to TCJA provisions outside of a straight extension would presumably still be scored. For instance, increasing the cap on the state and local tax deduction rather than simply extending it would likely be scored as a revenue-losing tax cut. Conversely, extending most of the individual rate cuts while allowing the top income bracket to revert to a higher rate could presumably be scored as a revenue increase.
There is a separate reconciliation rule that requires every provision in a reconciliation bill to have a revenue impact that is more than “merely incidental.” Since straight extensions of the TCJA would be scored as revenue-neutral under a current policy baseline, Republicans may be forced to tweak the provisions to produce a score and circumvent this restriction.
BDO Insight
It’s not clear how the Senate parliamentarian might enforce this rule. There is very little precedent for applying it to tax legislation because tax changes typically have an inherent revenue impact. Examples of policy changes that were disallowed under this rule include a proposed increase in the minimum wage, tort liability reform, and efforts to extend Section 529 plans to include home schooling.
Implications for Tax Policy
The Senate reconciliation instructions will give tax writers significant flexibility to make TCJA tax cuts permanent while addressing many other tax issues. The chances have improved for reinstating bonus depreciation, research expensing under Section 174, and the more favorable calculation of limit on the interest deduction under Section 163(j). The breadth of Republican ambitions, however, could still force tough decisions over tax priorities. Republicans will have to balance expensive campaign tax promises against priorities like business tax relief and increasing the cap on state and local tax deductions. Tax increases could be needed if Republicans want to make permanent any tax cuts that aren’t considered extensions under the current policy baseline. For a discussion of some of the tax proposals under consideration, see our insight House Republicans Float List of Potential Tax Policies.
BDO Insight
Tariff revenue and Department of Government Efficiency cuts will not be officially scored within the reconciliation process, but Republicans may argue that they provide equivalent deficit relief. Tariff revenue, however, is contingent on rapidly shifting executive action (for the latest on tariffs, see our recent insight). Republican budget hawks for now appear more interested in revenue raising tax increases, and some have criticized the use of a current policy baseline. Republicans have openly discussed various tax increases, including allowing the tax cuts to expire for taxpayers with over $1 million in income, repealing energy credit incentives, limiting the business deduction for state taxes, increasing the endowment tax, and changing the tax treatment of carried interest.
Timing and Outlook
Congress left for a two-week recess shortly after the House vote and is returning the week of April 28. Republican tax writers have been meeting quietly behind closed doors for weeks to sketch out a tax bill and could begin marking up tax legislation immediately after the break. Republican leaders are targeting July for final passage before the August recess, but the real deadline under the reconciliation rules is the end of the current government fiscal year on Sept. 30, 2025.
BDO Insight
The debt limit could also put pressure on Republicans to act quickly. The Congressional Budget Office has predicted that an increase in the limit will be needed to avoid a default by August or September (with May or June a possibility if tax receipts crash). Republicans are currently planning to increase the debt limit as part of the reconciliation bill. They could always shift strategy to address the debt limit outside of reconciliation, but this might require offering policy concessions to Democrats to secure their votes.
Next Steps
The budget resolution is key for determining the timing, shape, and scale of the coming tax reform bill. The agreement on a budget is major step forward for Republicans, but important challenges remain. The final budget offers significant flexibility for Republicans, improving the outlook for full TCJA extensions and favorable business provisions, while alleviating some of the need for tax increases. Money will not be unlimited, however, and taxpayers are unlikely to get everything on their wish list. Targeted revenue raisers will still likely be under consideration, and some of the rate changes scheduled for GILTI, FDII, and BEAT may be difficult to prevent. Taxpayers should follow developments closely and assess the impact on planning. Despite the uncertainty, there are tax planning opportunities businesses and investors should be evaluating, including implementation of Pillar Two abroad, interest capitalization strategies to address Section 163(j), and even rate arbitrage opportunities.
How BDO Can Help
BDO’s National Tax Office is closely monitoring the tax legislative landscape and evaluating the implications for businesses and investors. Reach out to a BDO tax professional for a discussion of how the pending tax legislation could specifically affect your business, and any planning options you should be exploring.