Senate Republicans approved a budget resolution on April 5 that would carve out $1.5 trillion for tax changes using a “current policy” baseline, paving the way for the possibility of making the Tax Cuts and Jobs Act (TCJA) permanent while still fulfilling President Trump’s campaign tax promises.
The Senate budget resolution provides significantly more room for tax cuts than the House version, but key questions remain over whether it will garner enough support to pass in the House, or whether Senate procedural points of order could pose a problem later. The budget resolution will be critical to the success of tax reform, as it provides the framework needed to pass reconciliation bills in the Senate with simple majority votes, without the threat of filibuster.
The budget resolution would instruct Senate tax writers to advance tax legislation that increases the deficit by no more than $1.5 trillion. Importantly, it would give the Senate Budget Committee chair the authority to score tax changes using a “current policy” baseline, which assumes the extension of expiring tax provisions, rather than the traditional “current law” baseline, which assumes the policies will end when the law expires. Under a current policy baseline, extending the TCJA tax cuts is essentially “free” and could allow Republicans to make them permanent. Republicans may have to contend with a separate rule that requires every provision in a reconciliation bill to have a revenue impact that is more than “merely incidental,” perhaps forcing them to tweak each extension to manufacture a revenue impact.
Republican Majority Leader John Thune, R-S.D., said in a statement that the Senate parliamentarian reviewed the budget and “deemed it appropriate,” but there is little precedent for using a current policy baseline to score tax changes. When a reconciliation bill eventually comes to the floor, Senate Democrats will undoubtedly attempt to raise points of order to try to derail it.
The Senate budget now goes to the House for potential approval, where it is already running into resistance from Republican deficit hawks. House Republican leadership secured passage of the House version of the budget on Feb. 25 after inserting language that would reduce the cap on tax cuts unless mandatory spending cuts reached $2 trillion. The Senate budget resolution requires only $4 billion in net spending cuts, a nominal figure essentially giving Republicans authority to pursue open-ended spending cuts.
Several House Republicans have criticized the Senate version for failing to require larger spending cuts, and the current policy baseline has also come under fire. Senate Republican critics of the current policy baseline largely fell in line in the 51 to 48 Senate vote to pass the budget, with Sens. Susan Collins, R-Maine, and Rand Paul, R-Ky., the only Republicans voting against it.
Republican leaders are urging members to support the budget to keep the process moving and to save the fight over spending cuts for the actual reconciliation bill itself. House leadership is hoping for a vote the week of April 7 before Congress goes into a two-week recess. If there is insufficient support, it could delay the timeline for a tax bill. If the House makes changes to the budget, it will have to return to the Senate. Some House Republicans have alternatively demanded to see a draft reconciliation bill before they approve a budget. If the budget does pass, the House Ways and Means Committee is expected to announce a markup relatively quickly.
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The Senate budget would leave the spending disagreements unresolved but would lock in the parameters of the tax package. The Senate’s $1.5 trillion cap provides significantly more leeway than the $4.5 trillion House allocation because of the difference in baselines. Republicans have cited a $3.8 trillion figure for a straight extension of the TCJA, but an updated estimate from the Joint Committee on Taxation requested by Democrats found that figure could be as high as $4.6 trillion before debt service. The Senate’s current policy baseline would give them those tax cuts without any revenue impact, meaning 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. This could allow Republicans to extend the TCJA tax cuts more easily while enacting new tax cuts promised by President Trump and addressing important business provisions such as bonus depreciation and research expensing under Section 174. Tax cuts can add up quickly, however, and Republicans may still need to pare back their ambitions and consider revenue raisers. The outlines of a tax package will come together quickly once a budget is finalized, and taxpayers should begin assessing the impact of proposals and evaluating planning opportunities. For a discussion of some of the tax proposals under consideration, see our prior article: House Republicans Float List of Potential Tax Policies. More details on the budget resolution and the outlook are discussed below.
Reconciliation Instructions
The budget resolution works by providing committees with reconciliation instructions. The Senate resolution would instruct the Senate Finance Committee to draft legislation that increases the deficit by no more than $1.5 trillion. This cap would essentially allow 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.” A “current policy tax baseline” assumes the extension of any expiring tax cuts, meaning their actual extension in legislation has no revenue impact from a scoring perspective. This could allow Republicans to make the TCJA tax cuts permanent by bypassing a rule precluding deficit increases outside the 10-year budget window.
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Any changes to TCJA provisions outside of a straight extension would still be scored. For instance, increasing the cap on the state and local tax deduction rather than simply extending it would be scored as a revenue-losing tax cut. There are many other open questions about how a current policy baseline would 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).
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.
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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.
The Senate budget adds reconciliation instructions for its own committees without altering the original House reconciliation instructions. This creates a mismatch between the instructions for the House and Senate. The House budget carved out $4.5 trillion for tax cuts, but this figure would be reduced to the extent spending cuts fall short of $2 trillion. It could also be increased to the extent spending cuts exceed $2 trillion. The $4.5 trillion figure assumed a current law baseline, in which any change in law (including an extension of an expiring provision) must be scored.
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Minor mismatches between committee instructions are not unusual in a budget resolution because the House and Senate have different committees with different jurisdictions. But the discrepancy in top line numbers is very unusual. The Senate 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.
Timing and Outlook
House leadership wants the resolution passed the week of April 7 before Congress goes on a two-week recess beginning April 14. The budget resolution does not need to be signed by the president.
The narrow House majority could make passage difficult. The original House budget resolution was approved by a 217 to 215 vote on Feb. 25, with only one Republican defection. The Republican House majority has since grown to 220 to 213 (with two vacancies from Democratic seats), but the Senate resolution is proving even less popular with some House conservatives concerned about the deficit and the use of current policy scoring. House leadership will likely pitch the vote as necessary to keep the process moving, while promising members an opportunity to demand deeper spending cuts as the underlying bill moves forward. If further negotiations or adjustments to the budget are required, it could prolong the process and set the timetable back.
If the budget passes, the House Ways and Means Committee is expected to move quickly to mark up a first draft of a tax title. Republican taxwriters have been meeting quietly behind closed doors for weeks to sketch out a bill. Republican leaders are targeting July for final passage before the August recess, but the real deadline under the reconciliation rules will be Sept. 30, 2025.
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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 will be key for determining the timing, shape, and scale of the coming tax reform bill. The Senate version would provide 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. 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.