Debt and Reconciliation: A Washington Tale

In our prior update we briefly described the Federal budget process, specifically, a mechanism called Budget Reconciliation that makes passing complex budget bills easier in the Senate by allowing a simple majority vote rather than the normal 60 vote threshold to move legislation to the Floor. 

The original intent of creating the Budget Reconciliation process was to reduce federal deficits or increase surplus. Unfortunately, in this century most uses of reconciliation have become vehicles to enact spending increases and tax cuts that could not get enacted under regular order. In 2000, the federal debt was just under $6 trillion and equal to 54% of GDP; in 2024, the federal debt has risen to $36 trillion and equals 118% of GDP. Several reconciliation bills enacted during this period (2001, 2003, 2017 and 2021) increased the federal debt dramatically.  

We also highlighted that the House and Senate were moving in different directions but are required to enact identical budget resolutions to start the difficult process of drafting the statutory changes necessary to meet the tax and spending targets laid out in the resolution. 

What’s New This Week

Not much, but at the same time, maybe a lot. It appears the House and Senate continue to disagree on how to move forward on tax and spending. They cannot even agree on how to determine if cutting taxes impacts the federal debt.

Without diving too deep into the budget reconciliation process the above quandary boils down to whether they should use a “current law baseline” vs. a “current services baseline”.  It does not sound like much, but the difference is huge. 

The House prefers the current law baseline because they believe it appropriately recognizes what is in statute and has been the model used for the last 50 years. For example, if a tax cut is set to expire under current law, it would raise taxes on the individual or business losing the tax cut and raise revenue for the federal government, therefore reducing the deficit – all other things being equal. On the flip side, under this model, if the tax cuts are extended it would reduce federal revenue and directly impact the federal debt. Because of the debt impact the House wants to offset some of the debt increase by cutting spending.

Under the House Budget the federal debt is expected to increase by $4 trillion over the next 10 years when adjusting for the cost containment included. The federal debt would rise from an expected $36 trillion in 2025 to about $40 trillion in 2034, a 10% increase. 

The Senate plans on using the “current services baseline” which is premised on the theory that if tax cuts that are set to expire under current law (a lot of the TCJA 2017 tax cuts are scheduled to sunset), but are renewed, this will have no impact on the deficit because it is just an extension of current service/taxing levels. Under the Senate process, since there is no cost to renew tax cuts, they believe there is less reason to impose significant spending cuts to reduce pressure on the federal debt.

Under the Senate budget plan as drafted, the federal debt is expected to increase by $14 trillion over the next 10 years, more than 50% above current levels, rising from $36 trillion to over $50 trillion. The Senate also indicates that while they have much lower spending cut targets their goal is to achieve far greater spending cuts, but their budget assumes federal debt would grow as described above.

Another wrinkle as of today is that the Congressional Joint Committee on Taxation (JCT), released its official cost analysis of extending the expiring provisions of the TCJA of 2017, along with other expired business taxes and the cost has risen from $3.8 trillion to as much as $5.5 trillion when you include higher interest costs necessary to support the increasing deficits that will occur if they are extended. Because this estimate was released on April 3rd, neither the House nor Senate budget resolutions contemplated these higher costs. The JCT is a congressionally authorized entity that provides cost estimates for tax policy changes.   

Confusing? We agree.

This Does Not Sound Normal

The process is already confusing but even nonpartisan budget groups, and former Budget Chairs from both parties, are concerned about how the Senate budget resolution is highly unusual, has never been tried before, and is outside the norms of what the rules allow.

Items being highlighted that could run afoul of the process include how the Senate is providing spending and tax guidance that is different for each chamber. Under this twist, the Senate Budget Resolution proposed this week would require the House to achieve spending reductions approaching $2 trillion, but the Senate would have spending reduction targets of no less than several billion dollars over the next 10 years but acknowledges their goal is to make more spending cuts.  This maneuver is definitely unusual and outside the norms, but it will be up to others to determine if it meets the rules and laws governing budget reconciliation.

Another unusual move is the apparent bypassing of the Senate Parliamentarian to review if the things being considered outside the “norm” are allowable under Senate rules. Senate leadership has decided not to ask for guidance at all on some of the more controversial approaches they are utilizing in their latest proposal. Not seeking guidance from the parliamentarian up front, could spell disaster down the road if a ruling is required and it fails. Again, bypassing the parliamentarian is another highly unusual step in this process and being debated by some that the budget reconciliation process is being abused, if not broken, others say the law is clear and the Senate Budget resolution that may be voted on this week complies with the law and process that is required in the Senate. 

Where Does This Leave Us?

If the Senate passes their new Budget Resolution this week it will go to the House for their approval. Many House hardliners on the federal debt are being very vocal against the Senate’s approach but leadership in both chambers are saying passing the resolution, even if under unusual/outside of the normal practice and procedure simply gets the ball rolling so congress can begin writing the statutory changes under budget reconciliation. Both chambers will have to agree on the statutory changes before anything gets signed into law. 

The goal now is to stay alive to fight another day.