United States

FY18 budget may be key to passing tax reform

Jul 14, 2017
From the Tax Governance Institute

Is the Blueprint on a collision course with political reality?

By Jennifer Gray, Director, Federal Legislative & Regulatory Services, Washington National Tax, KPMG LLP

Read more Tracking Tax Reform blog posts

As the so-called Big Six work behind the scenes, trying to craft a tax bill that can pass both the House and Senate, it is the separate negotiations also going on in the Capitol over the FY18 budget that would be smart to focus on.

Here’s why: Republican lawmakers may need to pass a FY18 budget before they have a realistic shot at enacting tax reform. Alternatively, if the GOP can’t agree on the FY18 budget, it’s unlikely they’ll be able to get a tax reform bill across the finish line any time soon.

Short-cutting the process

Passing a FY18 budget could allow the Republicans to take a shortcut to tax reform. It is the same process used to pass the 2001 and 2003 Bush tax cuts and parts of the Affordable Care Act in 2010. It’s also the process that Senate Republicans have tried to use to pass a healthcare reform bill.

The process, known as “budget reconciliation,” would allow the passage of a possible tax reform bill with a simple 51-vote majority in the Senate. It would only require the support of 50 of the 52 Republican Senators, assuming Vice President Pence would cast the tie-breaking vote. (Watch five-minute video Senate Procedural Requirements Explained for a description of the complex Senate reconciliation process.)

But here’s where it gets complicated. The Senate can only use budget reconciliation to pass a tax bill if a budget resolution is passed first to authorize the use of a reconciliation bill. So if there’s no FY18 budget resolution, the GOP can’t use a simple majority to pass the tax reform reconciliation bill.

Nothing comes easy

With Republicans controlling both houses of Congress, passing an FY18 budget resolution with a simple majority to create a reconciliation vehicle for tax reform, would seem to be quite doable. However, budget negotiations among Republicans appear to be resulting in intra-party debate.

Some Republicans want big cuts to federal spending levels and entitlement programs; others oppose spending cuts for programs they support. Still others call for increases in Pentagon spending, and some want to use budget funds to address controversial issues such as the border wall.

As a result, there’s a chance that the budget negotiations will fail. (In fact, between 2007 and 2017, Congress has agreed on a budget only twice.) And if there’s no agreement on the budget, then the pure partisan path to tax reform isn’t an option.

Bottom line: Tax reform watchers should be focusing both on what’s happening on the tax reform negotiations front as well as the concurrent budget negotiations front to properly handicap the prospects of tax reform success.

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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.