Senate Vote Sets Stage for Party-Line Consideration of Federal Tax Reform

Last night (Oct. 19), the U.S. Senate approved a federal fiscal year 2018 budget resolution, a key procedural step in setting the stage for the Senate, which is narrowly controlled by Republicans, to pass a federal income tax reform bill along party lines.

The budget resolution passed by a 51-49 vote, with all Republicans except Sen. Rand Paul of Kentucky voting in favor and all Democrats opposing.

The U.S. House of Representatives, which is currently in recess until Oct. 23, has already passed a budget resolution of its own.  The Senate’s action, passed as an amendment to the earlier House-passed budge resolution (H.Con. Res. 71), continues momentum toward debate and passage of tax reform.

The final measure will provide instructions for fiscal year 2018 appropriations for education programs for education programs, as well as for tax reform and health care reform.  Moreover, the budget resolution will determine the scope of most legislative priorities for the current session of Congress.

A budget resolution is a nonbinding fiscal blueprint that Congress adopts by a simple majority vote, with no filibuster allowed.  When a budget resolution directs Congress to promulgate and implement its measures using so-called “reconciliation” rules, time for debate is specified and capped. Further, consent is not needed to proceed with a Senate vote. This means a tax reform measure subject to the reconciliation rules would need only a simple majority to pass in the Senate, but it would have to meet specific criteria to qualify to be considered under those reconciliation rules. (See background information below.)

The details of the actual tax reform bill are still being worked out.  Earlier this month, the White House and key congressional Republicans released a framework for a comprehensive federal income tax reform that, among other things, calls for both lowering tax rates and repealing various deductions and credits.  Among the proposals under consideration is the elimination of the state and local tax (a/k/a “SALT”) deduction taken by individuals who itemize their deductions.

This should be an issue of strong interest and concern to school leaders in states like Wisconsin that depend heavily on a mix of state income taxes and local property taxes to fund schools.  We’ll have more to write about this issue in the future.

So far, key Republican lawmakers from New York, California, Illinois and other high tax states (although not necessarily Wisconsin) are strongly resisting the proposal to eliminate the SALT deduction. This is important because their votes are critical to the bill’s passage. There are roughly 52 Republican House members from the “SALT-affected” states, and their unified opposition, coupled with Democratic opposition, would certainly kill the bill.

Republicans who support elimination of the SALT deduction are reminding detractors that the SALT deduction benefits “the wealthy” (since it is the largest deduction claimed by high-income households) and its elimination could raise as much as $1.3 trillion in revenue, which would be used to help offset the fiscal impact of reducing tax rates for individuals. Opponents of eliminating the SALT deduction have proposed alternatives, such as capping the deduction, transforming it into a credit or simply allowing it only for property taxes.

This is an issue to watch as the tax reform debate moves forward.

Background Information on Reconciliation and Its Importance to the Tax Reform Debate: Most bills in the Senate require a simple majority to pass (i.e., one half plus one of the members voting). However, in order to end debate on an issue to proceed with a vote, either unanimous consent or a three-fifths vote is required to end debate, thereby ending the tactics of a so-called filibuster. Under the Senate rules of procedure that normally apply, the bar is set higher to end debate than it is to pass an underlying measure. That is where budget reconciliation comes into play.

Budget reconciliation is used to make a budget resolution law.

Unlike an earlier budget resolution approved by the U.S. House, the Senate budget resolution is not revenue neutral, but would potentially allow tax reform to increase the federal deficit by $1.5 trillion. Thus, the House and Senate would have to reach agreement and pass a unified budget in order to allow them to proceed to the consideration of the actual tax bill.

To be subject to reconciliation rules, a bill must not increase the federal deficit beyond a specified “budget window” (i.e., a chosen period of time covering from five to 10 years.

The terms “revenue neutral” and “deficit neutral” jargon are often used interchangeably to describe compliance with this rule, even though those terms do not mean the same thing and do not appropriately describe such compliance.

A revenue neutral measure is one that leaves the total amount of tax revenue unchanged; provisions that cost money must be matched dollar-for-dollar by revenue raisers. One way that this can be done in the tax world is by simultaneously lowering rates and eliminating deductions. A deficit neutral measure is one that does not change the total mix of spending and revenue over a given period. There is no requirement that a reconciliation bill be revenue neutral in any way. Absolute deficit neutrality is not a requirement under reconciliation either. Reconciliation instead requires that a measure must not add to the federal deficit for more than the chosen period.