Budget Reconciliation 101

Budget Reconciliation 101

What government finance officers need to know about this legislative tool

Budget reconciliation is a special legislative process established by the Congressional Budget Act of 1974, that allows Congress to expedite passage of certain fiscal legislation through the Senate with only a simple majority (51 votes), bypassing the 60-vote filibuster threshold.  

In other words, when Senate majorities have less than 60 people on their side of the aisle, the budget reconciliation process is a tool to move partisan policy priorities without the risk of them being blocked from receiving a final vote by the minority.   

Both major political parties have in recent years used the budget reconciliation process to enact policy priorities that do not have bipartisan support. Recent examples of budget reconciliation legislation include the:  

  • One Big Beautiful Bill Act (P.L. 119-21)
  • Inflation Reduction Act (P.L. 117-169)
  • American Rescue Plan Act (P.L. 117-2)
  • Tax Cuts and Jobs Act (P.L. 115-97) 

The Process

Step 1: Concurrent Budget Resolution* 

The process begins with a budget resolution that sets fiscal targets and includes reconciliation instructions directing specific congressional committees to produce legislative language aligned with those targets. Congressional committees are instructed to either raise revenue or spend federal funds. 

Step 2: Committee Work 

Committees draft sections or titles of the larger reconciliation bill based on the instructions outlined in the budget resolution. After each committee approves their title of the larger budget reconciliation bill, the Budget Committees package the titles together and send it to either the House or Senate floor.  

Step 3: Debate and Passage 

The entire House and Senate debate and vote on the full, packaged reconciliation bill. Budget reconciliation bills will almost certainly be approved by party-line votes since this process is usually used to enact the majority’s policy priorities that lack bipartisan support.  

Step 4: Conference Between Chambers 

The House and Senate must pass and approve identical bill texts before any legislation can be signed into law by the president. If the House and Senate produce differing bills, a conference committee will meet to resolve differences before sending it back to both chambers for final approval.  

Step 5: Final Approval 

After a budget bill clears Congress, it is signed into law by the president like any other piece of legislation.  

The Rules 
  • Congress may pass one budget resolution bill per year per fiscal category (i.e. spending, raising revenue, or addressing the federal deficit)
  • Provisions enacted by the budget reconciliation process MUST have a direct federal fiscal impact by either spending federal funds or raising federal revenue. This is known as the “Byrd Rule” that is enforced by the Senate Parliamentarian
  • Provisions are subject to the Senate’s “pay-as-you-go” (PAYGO) rule that prevents legislation from adding to the deficit in order to bypass the 60-vote filibuster rule, although this can be (and often is) waived
  • Reconciliation bills are still subject to the statutory PAYGO rule, which does not allow for net increases to the deficit over the period of a year, five-years or ten-years. Waiving the statutory PAYGO law for a budget reconciliation bill requires separate legislation that is subject to the Senate’s 60-vote filibuster rule 

 Why should government finance officers care? 

Because budget reconciliation bills are inherently related to revenue, or the debt limit, the tax code is frequently the subject of several key reconciliation proposals.  

Tax breaks cost the federal government, whereas tax increases generate  federal government revenue. The municipal bond tax-exemption is within the top 10 expenditures of the federal government, meaning it is often looked at and questioned when Congress is looking to raise revenues.  

IN OTHER WORDS THE TAX-EXEMPT STATUS OF MUNICIPAL BONDS COULD BE ELIMINATED BY A BUDGET RECONCILIATION BILL  

Congress has done this before. The tax-exempt status of advance refundings was eliminated through passage of the Tax Cuts and Jobs Act in 2017 - which of course, we want to see reinstated. Any moving legislative vehicle with a tax title, including a budget reconciliation bill, is an opportunity to reinstate tax-exempt advance refundings.  

What should government finance officers do? 

With one party controlling the White House and both chambers of Congress, GFOA’s Federal Liaison Center team is constantly monitoring the chances of a budget reconciliation bill to enact policy proposals that lack bipartisan support.  

If Congress were to pass a budget resolution with reconciliation instructions, there are a couple different responses GFOA members should take based on the situation at hand.  

Scenario 1  

Congress passes a budget resolution that instructs the tax-writing committees to generate revenue 

GFOA Response: advocate to preserve the tax-exempt status of municipal bonds 

Scenario 2  

Congress passes a budget resolution that provides the tax-writing committees with an allowance to spend federal funds  

GFOA Response: advocate to reinstate tax-exempt advance refundings  

What about when Congress is not considering a reconciliation bill? Is advocacy still worth it? 

Absolutely. When Congress is not considering a reconciliation bill, it is still always important to remind federal lawmakers and their staff about how critical the tax-exempt municipal bonds are to our ability to serve our communities when you have the chance.  

As bond issuers, state and local government finance officers are the best source of information on the realities of public finance and how federal policy decisions impact our abilities to efficiently provide critical services. 

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