House-passed tax and spending bill faces Double-Edged Sword in the Senate

November 19, 2021

The House on November 19th voted 220-213 to advance to the Senate the tax and spending reconciliation bill where it will undergo an arduous vetting process. This is because the legislation is making its way through Congress under the protection of “budget reconciliation,” which can be a double-edged sword.

Simply put, using budget reconciliation means that the bill can pass both chambers of Congress with only Democrats supporting it. It also means that the legislation will likely not include all of their priorities.

The Sword’s “Good” Side:

Reconciliation is a legislative tool that allows legislation to pass the Senate with 51 votes instead of the usual 60 votes. Lowering the threshold to a simple majority in the upper chamber (House passage is normally a simple majority) means that the legislation cannot be filibustered, which makes it much easier to pass.

Both political parties have used this process when they have had at least 50 seats in the Senate and the person running the White House was in their party. With support from all 50 Senators and the Vice President (who is the President of the Senate and can break tie votes) they can pass legislation that is politically popular with their supporters.

Democrats are the majority party in both chamber of Congress. They also run the White House. They can use reconciliation to pass this legislation without any Republican support because of the lower voting threshold in the Senate. 

The Sword’s “Bad” Side:

Abiding by reconciliation rules is no cake walk. And sometimes politically popular provisions that are backed by the party in power can be struck from the bill because of them.

These rules have been described as arcane, exhaustive, and they sometimes don’t make sense. For example, when Republicans controlled Congress the title for the 2017 tax reform bill (which passed by reconciliation) had to be changed because it ran afoul of reconciliation rules.

The bill's title "The Tax Cut and Jobs Act" did not have an impact on the budget. It was officially changed to "An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018." Despite the change, most people still refer to the bill using its original title.

A ruling from the Senate Parliamentarian is what prompted the title change. And the Parliamentarian continues to have a major say in what provisions can be included in a reconciliation bill, and many times politically popular provisions are struck from the bill because this person doesn't think it fits within the confines of reconciliation rules.

The House Budget Committee provides guidance for how the Parliamentarian determines a provision to be worthy of reconciliation:

[Reconciliation] prohibits the inclusion of ‘extraneous’ measures in reconciliation, defining ‘extraneous’ as follows:

  • Measures with no budgetary effect (i.e., no change in outlays or revenues).
  • Measures that worsen the deficit when a committee has not achieved its reconciliation target.
  • Measures outside the jurisdiction of the committee that submitted the title or provision.
  • Measures that produce a budgetary effect that is merely incidental to the non-budgetary policy change.
  • Measures that increase deficits for any fiscal year outside the reconciliation window; and measures that recommend changes in Social.

The Parliamentarian has already blocked immigration reform from being included in the bill because it doesn't fit within these parameters. Several Democrats are frustrated by it being excluded from the legislation. 

It is worth noting that the Parliamentarian works for Congress. In 2001, Republicans controlled Congress and fired the Parliamentarian due to a disagreement over using reconciliation to pass the Bush tax cuts. Some Democrats have called to fire the current Parliamentarian due to excluding provisions from the bill that their constituents support.

The Senate is also expected to amend the House-passed bill. Those modifications must also be accepted by the Parliamentarian. Possible changes to the bill include:

  • Keep current SALT cap for incomes over $400,000 (The House approved increasing the SALT cap to $80,000 ($40,000 for married filing separately, estates and trusts) for tax years beginning after 2020 and beginning before 2031).
  • Deny Pass-thru deduction for incomes over $400,000 (The House bill does not change current law).
  • Repeal tax breaks in 2017 reform for incomes over $400,000 (The House bill does not address the overall tax reform bill).
  • Tax unrealized capital gains on billionaires (Few House Democrats support this provision. Speaker Nancy Pelosi (D-Calif.) reportedly called it a public relations stunt.)
  • End step-up in basis (Democrats in both chambers oppose this proposal).

Boomerang back to the House:

If the Senate amends the House-passed legislation as expected, the bill must return to the lower chamber and be approved. Both chambers must agree on the exact same bill for it to become law.

A final vote on the legislation is currently expected to occur in late December.

Tax provisions currently include the Bill:

The House-passed reconciliation bill includes the following tax provisions (not an extensive list):

  • Surcharges on High Income Taxpayers – A 5 percent surcharge would apply to modified adjusted gross income in excess of $10 million ($5 million for married filing separate and $200,000 for an estate or trust), plus an additional 3 percent surcharge on modified adjusted gross income in excess of $25 million ($12.5 million for married filing separate and $500,000 for an estate or trust).  Effective for tax years beginning after 2021.
  • Elimination of Active Owner Exception to NII (§1411) Tax for High Income Individuals – The exclusion would be phased out for married filing joint taxpayers with modified adjusted gross income between $500,000 and $600,000 (between $400,000 and $500,000 for single taxpayers and between $250,000 and $300,000 for married filing separate). Effective for tax years beginning after 2021.
  • Limitation on Excess Business Losses of Noncorporate Taxpayers (§461(l)) – existing limitation rules, scheduled to expire after 2025, would be made permanent. In addition, the bill would change the manner in which any excess business loss is carried over to a subsequent year; the excess business loss becomes a deduction subject to the following year’s limitation rather than becoming an NOL. Effective for tax years beginning after December 31, 2020.
  • Prohibit further contributions to IRAs in excess of $10 million, effective for taxable years beginning after 2028.
  • Prohibit the Roth conversion of IRAs and employer sponsored plans for married taxpayers with taxable income over $450,000 ($425,000 for heads of households and $400,000 for single and married taxpayers filing separate; all amounts to be indexed for inflation after 2028), effective after 2031.
  • Repeal the special 75% and 100% exclusion rates for section 1202 gains for taxpayers with adjusted gross income of $400,000 or more, effective for sales and exchanges after September 13, 2021.  An exception for binding contracts that exist as of that date would apply if the sale occurs by the end of 2021.
  • Include performance-based compensation, commissions, post-termination compensation, and beneficiary payments in the definition of employee remuneration for purposes of the section 162(m) $1 million deduction limitation, effective for taxable years beginning after 2021.
  • Modify inbound and outbound international taxation relating to interest deductions, GILTI, FDII, foreign tax credit rules, BEAT, and subpart F income.

Tax incentives include:

  • Research and experimental credits. -- The requirement that research and experimental expenditures be amortized would not apply to amounts paid or incurred in tax years beginning before 2026.
  • Employer provided child care – would be Increased to include 50% of qualified child care expenditure, subject to a $500,000 cap, for tax years beginning after 2021 and before 2026.

A short summary of the tax provisions included in the bill and their expected cost can be found here.

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