Republicans struggle to align on tax legislative process

Republicans remain divided on the complex tax and economic package they hope to pass this year and are still wrangling over the scale, process and revenue scoring.

Senate Budget Committee Chair Lindsey Graham, R-S.C., announced on Feb. 5 that he planned to mark up a budget resolution this week with reconciliation instructions for a border bill. The move is an endorsement of a two-bill approach to reconciliation, in which the first bill would cover immigration enforcement, national security funding and energy policy changes, while tax changes would have to wait for a second bill.

Republicans have been grappling for weeks with whether to keep all their priorities in a single reconciliation bill or use two. Graham’s move aligns him with many other Republican senators and the House Freedom Caucus. However, House Republican leadership and President Donald Trump say they prefer one bill. Graham’s maneuver does not necessarily end the debate, as any budget resolution will have to be negotiated with the House and signed by the president.

The two-bill approach de-prioritizes a tax bill, as Republicans would focus first on debating non-tax issues as they work to enact the first reconciliation bill. Republicans could continue work in the background on a tax bill in parallel with a border bill, but it might be hard to build momentum and Republicans remain at odds over many key aspects of their tax agenda, including the extent to which continuing tax cuts can add to the deficit, a key early sticking point. The baseline for estimating revenue changes will also be a significant factor in the process.

House Republicans scrambled to land on the same page over the weekend of Feb. 8-9, but as of publication that appeared elusive, with spending and deficit numbers a major hold up.

Republicans have waited weeks for Trump to break gridlock over how to proceed on key legislative priorities, but the president has remained reluctant to do so, despite tacit endorsement of “one big, beautiful bill.” Trump was also reluctant to play tie-breaker on key legislative matters during his first term, which prolonged debate over key aspects of what became the Tax Cuts and Jobs Act (TCJA). 

“It’s just a lot of coordination that needs to happen and obviously at some point, a decision has to be made as to whether one bill or two bills or three bills [and] what will be in which bill,” said Senate Finance Committee Chair Mike Crapo, R-Idaho, in a Jan. 21 interview. 

Carried interest and sports franchises

Trump last week called for raising taxes on sports teams and ending the current treatment of carried interest payments. It is unclear specifically how Trump would like to increase taxes on sports franchises and how committed he is to the idea, which he has not mentioned before. Trump championed a TCJA change that increased the holding period from one to three years for long-term capital gain treatment on certain carried interests in partnerships and there are additional proposals that would more aggressively recharacterize all such income as ordinary.

White House Press Secretary Karoline Leavitt also reiterated Trump’s support to eliminate income taxes on tips, overtime pay and Social Security payments (which may not be procedurally feasible and could hasten insolvency for the program) to the state and local tax deduction cap and new tax breaks for products made in America.

Baseline issues

Crapo and Bessent both offered strong endorsements for changing the official scoring method for extending tax cuts to use a “current policy” baseline. Under such a baseline, tax cuts set to expire are assumed to continue so that an extension does not impact revenue. This could reduce the cost of extending expiring TCJA provisions from $4.5 trillion over 10 years to essentially zero but comes with complications in the reconciliation process. Reconciliation requires every provision to have a “significant revenue” effect and an extension of tax cuts alone under a current policy baseline would not. Crapo confirmed in an interview that they would have to make “some adjustments” to the provisions to use a current policy baseline. But the Finance chair said using a current policy baseline would potentially make it easier for Republicans to restore expensing of research costs under Section 174, reinstate 100% bonus depreciation and recurrent a more favorable limit on the interest deduction under Section 163(j).

Crapo also argued that using a current policy baseline might allow Republicans to make tax cuts permanent under the reconciliation rules, which preclude any increase in the deficit outside the 10-year budget window, although other policies under discussion could still make that difficult.

Using a current policy baseline has its share of detractors as well — notably many House Republicans who want to use the budgetary maneuver for its intended purpose of reducing deficits.

“It’s intellectually a fraud,” Rep. David Schweikert, R-Ariz., a senior Ways and Means Committee member, told reporters about Crapo’s current policy approach. “It is an intellectual fraud to say, ‘Let’s ignore the actual law and let’s just keep doing what we’re doing because it’s convenient.’”

Many House Republicans appear to be closer to Schweikert’s position than Crapo’s. The Republican Study Committee, the largest caucus with the House Republican Conference, released an official position statement that reconciliation legislation must reduce the federal deficit.

In a Feb. 5 interview, Bessent also rejected one proposal to reduce the deficit impact of extending tax cuts, expiring them in five years. During a Feb. 6 meeting, Trump reportedly continued to insist on permanence to House Republican leaders, though permanence would require the bill to be fully offset, meaning several potentially controversial revenue-raising and spending cut policies would have to be included.

Hundreds of cooks in the kitchen

Republicans in the House of Representatives attempted to narrow in on a clear direction for their chamber’s efforts during a retreat at Trump’s Doral property at the end of January but failed to achieve consensus on a path forward for the major tax-focused legislation they hope to pass this year.

The recent retreat, which featured remarks from Trump about tariffs paying for income tax cuts, highlighted how little progress on clear direction for the legislation has been made in the first month of Republican control of government. Instead, several differing voices that leaders will need to placate advanced their own ideas, while leadership struggled to get Trump to definitively weigh in on their side for a tactical path forward.

On Feb. 6, Trump again met with House Republicans, who want him to declare that taxes should be paired with the immigration and national security funding efforts due to historically narrow majority Republicans hold in the House. If Rep. Elise Stefanik, R-N.Y., is confirmed to be U.S. ambassador to the United Nations, the majority will likely become 217-215, meaning one dissenting Republican could sink any legislation over policy differences — at least until special elections can occur to fill her seat and the seats of two other Republicans who resigned.

Multiple caucuses within the House Republican Conference have released their own demands for a reconciliation package, highlighting the tricky job Johnson, House Ways and Means Committee Chair Jason Smith, R-Mo., and Republican vote-counters face in satisfying competing priorities and concerns within their own rank and file. Some of the items on these wish lists may face resistance from other Republicans, break the rules — the process that Republicans must use to pass tax and fiscal legislation along party lines — or be more directly undone by Trump executive orders.

The House Freedom Caucus, a group of approximately 40 House Republicans particularly prone to bucking leadership, continues to publicly push against Johnson’s preferred legislative tactic of lumping together taxes with immigration enforcement funding and other major legislative agenda items for vote-counting purposes. Instead, the caucus wants a reconciliation package focused on two-year debt ceiling increase, border and defense fundings, spending cuts and repeal of the remaining IRS funding from the Inflation Reduction Act, and several other non-tax related policy changes around immigration, student loans, and Medicaid and SNAP benefits, among other items.