Special Washington Update: Budget Reconciliation 101 and the COVID Stimulus Bill

U.S. Office of Public Policy, 12 February 2021

In 1974, Congress created a special process called ”budget reconciliation” (often just referred to as “reconciliation”) to enable the House and Senate to approve major changes to federal tax and spending policies on an expedited basis. Under the reconciliation process, the House and Senate must first pass a budget resolution that provides broad parameters and directives on tax and spending policies. Both chambers then can pass a reconciliation bill that fleshes out the specific and significant policy details of those directives.

A reconciliation bill only needs a simple majority vote in both chambers to be approved. It therefore is an attractive option in the Senate, where filibuster rules effectively require 60 votes to pass most other legislation. In a Senate that is habitually tightly-controlled, the majority party has used reconciliation to pass bills that otherwise could not attract the 60 votes needed for passage. Most recently, Republicans in Congress used it in 2017 to pass the tax cut bill championed by President Trump. Democrats also used it in 2010 to pass major parts of the Affordable Care Act (“Obamacare”).

The budget reconciliation process has intricate rules that limit how it can be used. Most importantly, the provisions of a reconciliation bill must have a clear impact on government revenues or spending. It cannot be used to enact broader policy goals that aren’t directly related to the budget.

The Process – Step by Step

As noted, the House and Senate must first pass the same budget resolution (this can be for the upcoming fiscal year or for the current fiscal year if the prior Congress hasn’t passed a budget resolution). The budget resolution, which only needs a majority of votes to pass (51 in the Senate) and does not require the signature of the President, typically sets a broad direction for the government’s planned tax and spending policies for that specific fiscal year.

The House and Senate passed identical fiscal year 2021 budget resolutions during the week of February 1.

To allow the reconciliation process to commence, the budget resolution must provide instructions and directives on fiscal policy to guide the development of the subsequent reconciliation bill (most approved budgets in Congress have not carried reconciliation instructions and are just non-binding fiscal plans). If a budget carries reconciliation instructions, it would direct relevant congressional committees, working within their areas of jurisdiction, to develop specific policies that fit within the broad parameters and direction of the budget resolution. The budget resolution usually specifies a date by which this committee work should be completed. 

Twenty five committees in both chambers are now working to write legislation to comply with the recently-passed budget resolution’s directives. The work of the committees should be completed by February 16.

Once complete, the measures prepared and approved by the committees will be folded into one comprehensive bill – the reconciliation bill. The purpose of that bill is to “reconcile” and implement the general goals of the budget resolution with more specific tax and spending policies.

Once the committees have successfully combined their work into a single measure, the House and Senate will vote on the comprehensive reconciliation bill. In both the House and Senate, “privileged” rules ensure that the debate on the bill will be limited and not subject to lengthy delays. Amendments can be offered to add policy provisions to the reconciliation bill. Particularly in the Senate, lawmakers can make “points of order” that challenge whether provisions or amendments have a primary budget purpose and are therefore eligible to be included in the bill.

The House plans to vote on its reconciliation bill during the week of February 22. A Senate vote will come later – most likely in the first two weeks of March.

Democrats have a 50-50 majority in the Senate (wit Vice President Harris as the tie-breaking vote). We expect Vice President Harris to provide a decisive 51st vote to pass the reconciliation bill in the Senate. Assuming there will be no support from Republicans, Democrats will have to be fully unified to pass a reconciliation bill. The opposition of just one Democrat could sink the bill. As such, an individual Democratic Senator can exercise significant leverage in what is contained in the final reconciliation bill and can force provisions to be added or dropped.

We believe Senate Democrats will be unified on a final bill, There may be some drama around demands made by some Democrats on certain provisions, but we believe there will be unity on a final bill. No Democratic Senator will want to stand in the way of what will likely be President Biden’s first major legislative victory in office.

Following passage by both chambers, the bill will need the signature of President Biden to become law. If the two chambers pass different reconciliation bills, they will need to resolve their differences over the two bills and vote again on a final (and identical) bill.

What Can and Cannot be Included in Budget Reconciliation?

Budget reconciliation rules set strict limits on what types of provisions can be included and what cannot.

Generally speaking, these are the type of provisions that can be included in a reconciliation bill:

  • Government spending measures
  • Government tax policies
  • An extension of the debt ceiling

On the other hand, these types of provisions cannot be included:

  • Policy changes unrelated to tax and spending measures
  • Changes to Social Security
  • Provisions that add to the budget deficit beyond the timetable laid out in the bill unless they are offset by other measures 

Due to the strict nature of budget reconciliation rules, members will regularly raise procedural challenges that question the eligibility of certain provisions in the legislation during the floor debates, especially in the Senate.

During the Senate’s consideration of the bill, there will be particular focus on the Senate Parliamentarian, an official who will decide what provisions can and cannot be included in a budget reconciliation bill. While the Parliamentarian is a technical expert on Senate rules, the position is appointed by the Senate Majority Leader. Throughout the process of considering a reconciliation bill, the Parliamentarian will be questioned about the eligibility of certain provisions, and lawmakers may disagree with the Parliamentarian’s rulings. 

If the Parliamentarian rules against the eligibility of a provision or amendment, the Senate could vote to waive reconciliation rules to include that provision, but this would require the support of three-fifths of Senators. A more drastic step would be for the majority to overturn the Parliamentarian’s decision through a majority vote. While this would be controversial and set a new precedent, we can’t rule anything out from being included in a reconciliation bill despite the strict rules surrounding its use. Rules can be revised or eliminated during the debate.

Policy issues such as the minimum wage are generally considered to be ineligible for inclusion in a reconciliation bill. However, there may be ways to circumvent this. For example, a tax could be imposed on businesses that don’t pay the increased minimum wage to their employees, which would be eligible under reconciliation. We believe that congressional Democrats will be very creative in trying to find ways to include as many policy items in the Biden proposal as possible in this reconciliation bill.

How Often Can Budget Reconciliation be Used?

As noted, reconciliation legislation must be preceded by passage of a budget resolution, which is specific to a particular fiscal year (the same resolution must be passed in both the House and Senate). The budget resolution for each fiscal year allows for one subsequent reconciliation bill. Ideally, Congress would approve a budget resolution for each fiscal year but often times it does not. It did not pass a budget resolution for fiscal year 2021 until earlier his month. 

Congress can also look ahead and pass a budget resolution for fiscal year 2022. This can be done at any time now. For this calendar year, the passage of another budget resolution for a different fiscal year (2022 instead of 2021) provides Democrats with a second reconciliation bill option this year. 

And, this is what we expect congressional Democrats to do – try to enact two reconciliation bills this year. The first is the COVID stimulus bill to be finalized in March, while the second will be used to enact a tax and infrastructure bill in the summer.

Budget Reconciliation and Impact on the Federal Budget Deficit

The provisions of the reconciliation bill do not have to be deficit-neutral. The budget resolution recently passed by the House and Senate is designed to accommodate a $1.9 trillion spending plan with no plans to offset this spending. 

However, there are limitations in the process with respect to budget impact. First, the bill’s provisions cannot increase the budget deficit beyond the time window set in the budget resolution. The budget resolution often sets out a ten-year plan for the new tax and spending provisions. Beyond that ten-year period, these provisions would have to be paid for, phased out or maintained by a vote of Congress to continue in some form. In addition, amendments offered to a reconciliation bill generally must be deficit neutral.

The Bush tax cuts of 2001 expired at the end of 2010 in order to remain budget neutral outside the budget window. Tax changes impacting individuals contained in the 2017 Trump tax cut bill will expire at the end of 2025. Both of these tax bills were passed through the reconciliation process, which is why they both had expiring provisions outside of ten years.

Budget Reconciliation and the Debt Ceiling

A reconciliation bill can be used to pass an extension of the debt ceiling. Congressional debates over the extension of the debt ceiling during the last few decades have been very political and have often unsettled financial markets. The passage of the debt ceiling quietly and without fanfare therefore would be a positive development.

One of the two upcoming reconciliation bills will very likely extend the debt ceiling, currently due to expire in late July.