The Bumpy Road to Reconciliation

The Bumpy Road to Reconciliation

This week, a number of  House Committees completed their reconciliation “markups” – a series of proposed legislative changes that included permanently extending many of the 2017 Tax Cuts and Jobs Act (TCJA) tax cuts, adding a number of President Trump’s new proposed tax cuts, and making major policy changes to programs such as Medicaid, food stamps, and student loans. 

The net effect is to add $2.7 trillion to the debt or really $3.3 trillion once the cost of interest on the debt is included. 

The Committee for a Responsible Federal Budget projects that the costs of the plan are front-loaded while the majority of the savings come at the end of the ten year window. As a result, more than 70 percent of the debt increase occurs in the first five years! Specifically, many of the new tax cuts start immediately and expire in 2028, whereas the cost savings from Medicaid work requirements and food stamp cost sharing with states don’t begin until 2028. 

The largest piece of the budget plan moving in the House, and approved by the Ways and Means committee, are tax changes that, according to the Joint Committee on Taxation (JCT), will reduce revenue, and increase debt, by a net $3.8 trillion over the next ten years. 

The tax plan includes permanently extending many of the expiring TCJA personal (and selected corporate) income tax cuts and includes over $600 billion in new tax cuts that were promoted by President Trump on the campaign trail in 2024 – such as no tax on tips, no tax on overtime, an increased senior income tax standard deduction (in lieu of reducing taxes on Social Security), and no tax on car loans. All of these latter provisions have income limits and are set to expire after 2028 – part of the front-loaded cost. The (CFRB) estimates that if all the provisions in the bill are made permanent, the cost could increase to $5.3 trillion over ten years.

Meanwhile, many of the offsets to the tax cuts in the bill (tax increases or expenditure cuts) are points of conflict. One of the most contentious offsets is the state and local tax (SALT) deduction cap. The original TCJA capped the SALT deduction at $10,000 through the end of 2025. This was one of the major savings items in the 2017 legislation. The current proposal lifts the cap to  $30,000 for families making $400,000 or less for joint filers. SALT particularly affects families in states with very high property taxes because they are longer fully deductible from their income taxes. The SALT issue has not been fully resolved as the “SALT Caucus,” a group of members from states with high state and local taxes, wants a higher cap. The SALT Caucus has considerable leverage because if the House takes no action, the cap on SALT deductions expires at the end of the year, returning to full deductibility of state and local taxes. The very narrow Republican majority in the House increases the group’s leverage.

Other contentious tax offsets include ending clean energy tax and health-related tax credits. More than a dozen House Republicans are opposed to the repeal of the clean energy tax credits.

Meanwhile, the Energy and Commerce committee this week approved a plan with more than $900 billion in spending reductions, including $600 billion in Medicaid savings. There is ongoing debate about the size and scope of the Medicaid savings. The Freedom Caucus and other conservative members of the House want deeper cuts such as per capita caps and greater state cost sharing (see more here). Conservatives also want the Medicaid work requirement to start when the law becomes effective in 2026  – not delayed until 2028 as is in the current proposal.

The Agriculture committee achieved $230 billion in deficit reduction primarily through cuts to food stamps. The majority of the savings come from shifting additional costs to states. The legislation will require all states to pay at least 5 percent of the cost of food stamps starting in 2028, with states with high overpayment (error) rates paying a larger share – up to 25 percent. The proposal would cut the federal reimbursement for state administrative expenses from 50 percent to 25 percent. 

Doing the Math

The original House reconciliation instructions only allowed the House to take up legislation that would allow a ten-year cumulative deficit increase of  $2.8 trillion. This assumed roughly $2 trillion in deficit reduction and around $4.8 trillion in deficit increasing measures (mostly tax cuts).  Where do we stand now that all the committees have completed their markups? 

As noted in the table above, the total debt increase currently stands at $2.7 trillion, not including interest, which is just below the limit of $2.8 trillion. When interest is included, which is not considered for reconciliation compliance purposes, but has a major impact on the fiscal condition of the country, the total increases to $3.3 trillion. 

Budget Committee Speed Bump

The House Budget Committee met on Friday, May 16 to bring all the pieces together. In a surprise speed bump in the process, the Republican-majority Committee rejected the reconciliation package on a 21-16 vote, with five conservative “fiscal hawks” joining all the Democrats in voting no. Since there are no amendments allowed during the Budget Committee markup of the reconciliation package, it is simply an up or down vote on the entire bill. The dissenters indicated that they were willing to negotiate further and the bill will be now reconsidered at a committee meeting on Sunday evening. The legislation must pass the House Budget Committee so that when the bill moves to the Senate it will still comply with the rules for using the reconciliation process, avoid the filibuster, and allow the Senate to pass “The One, Big, Beautiful Bill” with a simple majority vote.

The issues on the table include shifting up the start date of the Medicaid work requirements, and potentially the state SNAP costs, to reduce the deficits in the early years of the bill by providing more significant spending cuts.  Once, or if, the bill passes the Budget Committee, more amendments may be offered to the bill in the House Rules Committee and then during the floor votes next week. The Rules Committee can make amendments to the bill, as long as they are consistent with the reconciliation instructions. 

As this process moves towards the finish line in the House, the leverage points for making changes to the package will be the ongoing Budget Committee negotiations, amendments in the  Rules Committee and on the House floor next week. Speaker Johnson has committed to completing the legislation before Memorial Day weekend. Next week will be a busy one in the House, and then attention shifts to the Senate which has set a much higher ceiling of $5.8 trillion in debt increases and where many of the most contentious parts of the House package – Medicaid cuts, food stamp cuts, the SALT deduction, clean energy tax credits, and more – will face considerable pushback.