Congress tees up first reconciliation tax bill

Democrats made their opening move to advance President Joe Biden’s COVID-19 stimulus plan on Feb. 5, adopting a $1.9 trillion budget resolution that provides a framework for up to nearly $1 trillion in tax changes using reconciliation.

The reconciliation process will allow Democrats to pass a stimulus bill with a simple, 51-vote majority in the Senate, as opposed to the 60 votes typically needed to overcome a filibuster. Democrats are still negotiating with Republican moderates over a potential compromise that would avoid the need for reconciliation, but are moving forward with Biden’s $1.9 trillion plan in the meantime. The Biden plan currently proposes tax changes that would:

• Provide $1,400 stimulus checks for certain taxpayers and dependents
• Increase the child tax credit from $2,000 to $3,600 for children under the age of 6 and $3,000 for children under the age of 17
• Expand the Child and Dependent Care Tax Credit to provide up to $4,000 toward childcare for one child and $8,000 for two children
• Enhance the Earned Income Tax Credit and expand eligibility

Republican moderates have proposed a slimmer package with lower income limits on $1,000 checks and no other tax provisions. The House Ways and Means Committee is planning to unveil a tax title as early as this week, but the package is still very much in flux. The budget resolution allots roughly $941 billion to the Ways and Means Committee and $1.3 trillion to the Senate Finance Committee. Part of those caps will be used on non-tax items under their jurisdiction, but the committees may still have wiggle room to make other tax changes.

Some Democrats are pushing to roll back modifications to net operating loss (NOL) carrybacks enacted by the CARES Act and repeal the $10,000 cap on the state and local tax deduction. Proposals in Biden’s initial stimulus plan, such as extending and expanding mandatory sick pay and paid family leave, would likely not survive the reconciliation rules requiring all items to have a direct revenue impact.

Democrats are aiming to have a final bill enacted before March 15, when the current enhanced unemployment benefits expire. Regardless of whether Democrats ultimately agree to a compromise bill with Republicans or use the current reconciliation instructions, they have retained the ability to use budget reconciliation again this year. Although budget reconciliation may only be used on one tax bill per budget cycle, Congress never adopted a budget for fiscal year 2021. Democrats are using the budget for the current fiscal year on this reconciliation bill and may still use the procedure again when they create a budget resolution for fiscal year 2022.

Democrats are tentatively planning a larger and more long-term economic recovery and investment bill that would move through reconciliation later this year. It could be centered on infrastructure, climate change, health care or other major priorities. This bill could also carry a significant tax title, and may be the first place Democrats consider any tax increases.

Democrats are also focused on green incentives and onshoring provisions, and they will have to make decisions on expiring tax provisions. Many extender provisions are expiring at the end of this year, at the same time two major tax reform revenue raisers take effect. Beginning in 2022, the limit on interest deductions under Section 163(j) is scheduled to require amortization and depreciation to be added to adjustable taxable income, and research costs will be required to be amortized over five years.

The reconciliation process will allow for Democrats to pass legislation without any Republicans in the Senate, but it will not be easy. The Senate’s Byrd Rule requires the bill’s provisions to directly, not incidentally, affect spending or revenue. Reconciliation bills also cannot create any net revenue loss outside the 10-year budget window. In addition, reconciliation bills must go through the committee process, which could add further complications. Democrats and Republicans have reached an operating agreement that will allow discharge of committee markups subject to tie votes after four hours floor debate. However, committees could remain tied, potentially making committee action difficult and preventing amendments from passing at the committee level.

The Democrats’ slim majority also means they cannot afford to lose a single vote within their Senate conference. Moderate Democrats may wield significant influence and may hinder the party from enacting its more ambitious and transformational proposals.

Next steps

Democrats are aiming to hold a final vote on the stimulus package in early March. However, budget reconciliation is a long process fraught with challenges. While many core elements of the stimulus plan are expected to remain intact, others could evolve and new provisions may be added. Taxpayers should carefully monitor the developments but should not rely on any of the proposals until the legislation is enacted.

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