The prospect for meaningful tax reform legislation being enacted this year remains uncertain at best, and many would say it is even doubtful. The Republicans in Congress have still not achieved anything approaching a consensus among themselves as to the provisions that should be enacted. For most bills in the Senate, the rules of the Senate provide that 60 votes are required to bring cloture, or stop the debate on a bill and bring it to a vote. Even if all 52 Republican senators came to an agreement on tax reform, they would still need to attract eight votes from Democratic (or the two independent) Senators in order to bring the legislation to a vote.
This means that any tax reform will most likely have to be enacted through the budget reconciliation process. Under the process of budget reconciliation that is set forth in the Congressional Budget Act of 1974 (“Budget Act”), each year Congress is required to pass a concurrent budget resolution (by majority vote) by April 15, setting forth revenue, spending and deficit targets. It then must enact or change any laws necessary in order for revenue, spending and deficit expectations to match those of the concurrent budget resolution. Since such laws need to be enacted to meet the targets of the budget resolution, the Budget Act provides for a streamlined process that strictly limits the debate that can occur on legislation necessary under the budget resolution. Because debate is limited, a vote to stop debate is not required and such legislation can be passed by a majority vote. At this juncture Congress has not even passed its budget resolution which should have been passed by April 15.
Revenue measures enacted under the budget reconciliation process have important limitations that often mean permanent tax reform cannot be achieved through the reconciliation process. A provision that often comes into play is contained in Section 313 of the Budget Act (known as the “Byrd Amendment”) and prohibits the enactment of any legislation that will increase the deficit for any fiscal year beyond the “budget window.” The Budget Act requires the budget window to cover, at a minimum, the year for which the budget is being enacted, beginning on October 1 of that year, and the following four fiscal years.
For example, a bill enacted under the reconciliation process that reduces revenue more than it reduces spending can be on the books for the budget window only for that year, and then must sunset. A recent example is the temporary elimination of the estate tax and other tax cuts enacted during the administration of President Bush in 2001. The estate tax was gradually reduced in the years after 2001 and eliminated entirely for 2010. Because these provisions were enacted through budget reconciliation, they were required to expire at the end of the budget window, which in this case was 2010. There is no maximum period provided in the Budget Act for the budget window, but recently Congress has limited the budget window to 10 years. The Republicans in the current Congress have considered extending the budget window to 20 or even 30 years so tax reform measures enacted can remain in force longer.
Tax reform enacted through the budget reconciliation process can be permanent if it is neutral to the deficit or reduces the deficit. Legislation would be neutral to the deficit if it reduces revenue and spending by equivalent amounts and would reduce the deficit if it reduces spending more than revenue. Tax reform could even be revenue neutral and not require spending cuts if it has offsetting tax reductions and increases; however, tax reform is rarely revenue neutral. Absent any of these circumstances, any tax reform enacted would again be limited to not more than about 10 years. We will continue to apprise you of any significant developments in this area.