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Reconciliation: A ‘Faustian Bargain’ for Tax, Healthcare Reform

Posted on June 23, 2017 by Jonathan Curry

The much-anticipated Senate version of House-passed Affordable Care Act repeal legislation may ultimately omit some abortion-related provision, which commentators note may be due to a procedural rule called the “Byrd bath.” The rule is part of budget reconciliation — a process that Republican lawmakers are hoping will enable them to enact significant legislation in the form of ACA repeal and tax reform, despite not having a filibuster-proof majority.

And therein lie the pros and cons of reconciliation. It gives Republican policymakers freedom to operate without soliciting help from Democrats, but potentially forces them to scuttle policy provisions desired by their rank and file in the name of procedural rules. In an already fraught ACA repeal process, the loss of any favored provisions could mean failure for the bill. And in the case of tax reform, reconciliation imposes revenue restrictions that are forcing some in the GOP to consider only temporary tax cuts, short of the desired fundamental reform.

A look at reconciliation's historical uses and restrictions, as well as how policymakers might test the bounds of those restrictions, is worthwhile given the potentially momentous legislation hinging on the process.

The process was initially established to make it easier for Congress to pass a budget to reduce the deficit, particularly in the filibuster-prone Senate, but in 2001 the process was tweaked so that it could advance tax cuts under President George W. Bush. “Because of our repurposing of it, we have to deal with some funky rules; it’s a little bit of a Faustian bargain,” said Ray Beeman of EY at a June 14 tax reform panel in New York hosted by Tax Analysts and the American Bar Foundation. Beeman was legislative counsel for the Joint Committee on Taxation from 2001 to 2005.

The reconciliation process, which expedites the consideration of tax, spending, and debt limit legislation, was originally created by the Congressional Budget Act of 1974. The process allows lawmakers to fast-track legislation by requiring only a 51-vote majority to end a filibuster in the Senate instead of the usual 60-vote threshold; it limits debate; and it imposes restrictions on the scope of amendments.

Explaining the restrictions involved in the process for tax reform, Beeman said, “Every solution brings a new problem.” The same process that provides a means to fast-track legislation also includes guardrails designed to limit the scope of what can be included in a bill.

But just as Congress has the authority to create rules, it has the authority to change rules. And as Republicans have found themselves frustrated by the “funky rules” of reconciliation on healthcare and tax reform, some have begun advocating increasingly drastic and sometimes creative ways of dealing with these procedural restraints.

Byrd Rule

The major procedural obstacle in reconciliation for Republicans trying to advance legislation is the Senate’s Byrd rule, which prohibits the inclusion of extraneous provisions.

The rule was adopted by the Senate in 1985 after it became clear that Congress was using the process to circumvent the Senate’s filibuster and pass legislation unrelated to the federal budget. The rule prohibits the inclusion of provisions that are extraneous to the reconciliation instructions contained in the budget resolution concurrently adopted by the House and Senate, and a provision is deemed extraneous if it:

  1. does not produce a change in spending or revenues;
  2. produces a net change in spending or revenue that fails to meet the reconciliation instructions;
  3. is outside the jurisdiction of the committee that submitted the title or provision for inclusion;
  4. produces changes in outlays or revenues that are merely incidental to the non-budgetary components of the provision;
  5. increases deficits for a fiscal year beyond the budget window set by the budget resolution; and
  6. recommends changes to Social Security.

One concern for Republicans seeking to repeal and replace the ACA through the reconciliation process is that there are many major elements of the existing healthcare law that arguably can’t be repealed within the reconciliation framework, like the ACA’s insurance regulations.

The Senate parliamentarian, Elizabeth MacDonough, also reportedly told lawmakers that at least one provision of the House-passed American Health Care Act (H.R. 1628) likely wouldn’t pass Byrd rule muster. According to The Hill, the parliamentarian indicated that a provision in the AHCA to prohibit the use of individual healthcare tax credits for insurance plans that cover abortions would fail the “merely incidental” test. The Senate's Better Care Reconciliation Act, released late June 21, for now inlcudes abortion-related provisions.

Republicans have yet to settle on whether their tax reform bill should be revenue neutral or a deficit-increasing tax cut, but regardless of which choice they settle on, they will almost certainly be designing a tax plan with the Byrd rule’s deficit-increasing restraints in mind.

If the legislation increases deficits, under reconciliation it would have to be a temporary tax cut like the 2001 Bush tax cuts, which were passed through the same process. Those tax cuts were achieved by sunsetting the tax cutting provisions at the end of the budget window so that, on paper at least, the tax cuts didn’t increase deficits after 10 years.

Such a strategy may not work this time around, though. The Joint Committee on Taxation recently advised House Speaker Paul D. Ryan, R-Wis., that even a temporary, three-year corporate tax rate cut would lose revenue in later years outside the traditional 10-year budget window. Some have suggested extending that window, though the idea has yet to catch on with the leading tax policymakers in Congress, including Senate Finance Committee Chair Orrin G. Hatch, R-Utah. It is notable, though, that there is nothing in the Byrd rule criteria specifying a 10-year period.

Rulemakers, Rule-Changers

If a senator were to raise a point of order under the Byrd rule, interpreting and applying its tests  sometimes relies on subjective recommendations made by the Senate parliamentarian, with the final determination ultimately made by the Senate’s presiding officer — a role that traditionally would be occupied by Vice President Mike Pence. In Pence’s absence it would fall to Hatch as president pro tempore.

The budget process contains several tiers of rules, Beeman told Tax Analysts after the panel. Some of those rules are grounded in statute, beginning with the Congressional Budget Act of 1974, and those are “probably not changeable as a practical matter.” Then there are the rules adopted by each Congress that are more flexible and frequently change. There’s also a tier of rules that “leave a tremendous amount of discretion” for interpretation, Beeman said.

James Wallner, former vice president of research at the Heritage Foundation, said the latter group of rules often applies to the “merely incidental” Byrd rule test, which he said can be tricky to apply. “If there is a budgetary impact, the question is, does that impact outweigh the policy considerations in the provision? And that is a purely subjective determination,” Wallner said. That test requires the Senate’s parliamentarian to weigh the budgetary impact of a provision as certified by the budget committee against the policy implications of the provision. “This is some very nebulous stuff” that entails determining legislative intent — “a whole host of thorny issues,” he said.

Wallner said that in those situations, when the rules are silent or ambiguous, the parliamentarian’s role is to advise Senate members and staff how the chamber resolved similar situations in the past. However, in the Byrd bath process, senators usually try to work out Byrd rule compliance issues in advance before bringing legislation to the Senate floor, having members from the majority and minority party present their arguments to the parliamentarian whether a provision passes muster with a particular Byrd rule test, who then advises members and staff of what recommendation she would make to the presiding officer if the issue arose on the Senate floor.

But because these are informal sessions and there are very few precedential instances when the Senate has actually adjudicated points of order related to the merely incidental test on the floor, any advice the parliamentarian gives would be “inherently subjective,” Wallner said.

“The only body that has the authority to ultimately make that determination is the full Senate. . . . A lot is [involved in] how clever can it be written and argued with the parliamentarian, and a lot is, what does the Senate want to do?” Wallner said.

It wouldn’t be unprecedented for lawmakers to fire a parliamentarian who issues recommendations that majority party lawmakers disagree with. In 2001 Senate Republican leaders dismissed Senate Parliamentarian Robert Dove after frustration mounted over his rulings on their budget-related legislative efforts, and another parliamentarian with views more favorable to their efforts took his place.

But as some leading Republicans, like Sen. Ted Cruz of Texas and Senate Budget Committee member Rand Paul of Kentucky, suggested to Politico in May, they wouldn’t need to go as far as firing the parliamentarian if they disagree with her over a ruling — they could simply ignore the parliamentarian’s advice and let the presiding officer of the Senate make the desired decision.

And even if a provision likely violates the Byrd rule, the rule only governs when a point of order objecting to the provision can be raised on the Senate floor, where overriding a point of order would require 60 votes. “Somebody has to actually invoke the Byrd rule on the Senate floor for something to actually fall out,” Beeman said. Even if a provision in a reconciliation bill clearly violates the Byrd rule, it could still remain in the bill if no senators object or if enough senators support including the provision, he said. But avoiding that 60-vote threshold is precisely why lawmakers are turning to the budget reconciliation process in the first place.

Pivot to Tax Reform?

Given the legislative progress thus far on ACA repeal, congressional Republicans appear to be sticking to their plan of using the fiscal 2017 budget resolution for healthcare legislation and the following year's version for tax reform. But if the Senate health bill fails to generate the support it needs among Republicans, several experts indicated that there’s no reason the chamber couldn’t do tax reform instead in fiscal 2017, even with all the procedural restrictions imposed by reconciliation.

There can be only one active budget resolution at any given time in Congress, according to Gordon Gray of the American Action Forum. Gray posited a situation in which Senate leaders decide they don’t have the votes to pass a healthcare bill and that tax reform has a better chance of success.

That scenario may be unlikely, but there’s a “greater-than-zero possibility that that could happen” if the healthcare reform effort stalls, according to Gray. Senate Finance Committee member Richard Burr, R-N.C., hinted at such a scenario in a June 1 radio interview, saying, “I don’t see a comprehensive healthcare plan this year.” Burr’s office did not respond to Tax Analysts' requests to elaborate.

Lawmakers won’t hit a point of no return on healthcare reform legislation unless it goes to conference. At that point, “there’s pretty tight rules about airdropping in completely new content,” Gray said, meaning that substituting a comprehensive tax reform bill in place of a healthcare bill would likely be off the table.

But until they get to that point, there’s no reason they couldn’t use the fiscal 2017 budget resolution instructions to do tax reform instead. Those instructions “are more or less what a revenue-neutral tax bill would probably look like,” Gray said, pointing out that the instructions only require that lawmakers produce $1 billion in deficit reduction — or nearly revenue-neutral reform — each through provisions within the jurisdictions of the Senate Finance and Health, Education, Labor, and Pensions committees.

Wallner agreed with Gray’s assessment. “Basically in reconciliation . . . the only thing that’s actually enforceable are the committees that are reconciled . . . and the dollar amount of savings, or the reconciliation instructions.” Those instructions can either raise or lose a certain amount of revenue, affect spending, or have a more general catchall that affects the debt so that it includes both revenue and spending. The fiscal 2017 budget resolution is the catchall variety, Wallner said. “Ultimately, what that means is you can do pretty much anything that has a budget impact,” he added.

Whether Republican leaders pursue this course of action has more to do with politics than procedure, and even if it is unlikely, it wouldn’t be unprecedented. After House Republicans initially failed to coalesce around a healthcare reform bill March 24, GOP leaders in Congress and the White House indicated they would instead move ahead with tax reform, before eventually pivoting back to healthcare. But switching legislative priorities again could be too big a pill to swallow, at least not before the Senate ACA repeal bill runs its course, pass or fail.

“I think it’s now hard for [Republicans] to steal it back since the House doubled down on health,” said Janice Mays, a former Democratic House Ways and Means Committee staffer. “I think the Senate has to pass something, even if it’s clear it’s not something that would pass the House” upon return to that chamber, she said, adding that the House would probably “blow up” if the Senate quit healthcare reform now. Wallner agreed that doubling back on healthcare reform would be a “tough thing to do” politically.

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