By Jonathan Tucker | Principal, Research & Development Tax Credits
While the passing of the House Budget Resolution on February 25, 2025 was the first step in opening the reconciliation process to effectuate tax reform, the Senate needs to pass the same identical Resolution to officially start the reconciliation process. Why is there still debate when one party controls both chambers of Congress?
Republicans in Congress want to extend the Tax Cuts & Jobs Act (TCJA) tax breaks that are set to expire at the end of 2025. However, there is disagreement over how to account for the cost of extending them. What is the disagreement? Whether to use what is called a Current Policy Baseline or a Current Law Baseline in the budget reconciliation process. This one change could change the future of tax policy in a big way.
KBKG Insight:
Choosing which baseline to use will fundamentally impact how the government taxes and spends. This change could worsen the deficit, spark opposition from some Republicans, and most certainly cause opposition from the people proposing this change when an opposing party may later use this change to advance their own agenda if they regain control of Congress.
What’s the Difference?
Current Law Baseline (the way it has historically been done) means Congress assumes tax laws will stay exactly as they are now if Congress takes no action. If certain tax cuts are set to expire (as are the tax cuts from the TCJA at the end of 2025), this approach assumes they will actually end. Keeping them would then count as a new tax cut, adding to the deficit.
Current Policy Baseline means that current tax policies will continue even if they are set to expire (this assumes the tax cuts from the TCJA are permanent). This means keeping the tax cuts from the TCJA would not be counted as a new cost, making it easier to pass without worrying about budget rules.
Many Republicans, predominately in the Senate, want to use the Current Policy Baseline because it avoids making the deficit look worse on paper (i.e. it assumes the extension of the tax cuts aren’t costs or “loss” of a revenue source). Using Current Law Baseline (again, how it historically has been done) would require lawmakers to show how much extending the tax cuts actually costs, which means to extend and/or add more tax cuts, there needs to be equal cuts in spending or raises in taxes elsewhere.
Why This is So Difficult: The Deficit Debate
Choosing to change which baseline to use would fundamentally change how the government views budgeting in terms of projected budget versus actual impact. This impacts how lawmakers find ways to pay for tax cuts. If Congress uses a Current Law Baseline (again, how it historically has been done), some Republicans, predominantly in the House (aka deficit hawks), will insist that spending cuts must balance out the cost. The House’s Budget Resolution passed on February 25, requires $2 trillion in spending cuts if the TCJA tax cuts are extended.
However, Senate Republicans want to keep the tax cuts in place, even if ignoring them causes a deficit issue. Senate Republican leaders argue that since the tax cuts already exist, albeit through 2025, keeping them should not count as a new expense, even though they are set to expire and were only budgeted based on their impact through 2025.
The House vs. Senate Battle
Since the House majority is slim, and there is varying interest within that slim majority, getting everyone to agree will not be easy. The House only passed its budget resolution by a slim margin (217-215), and any changes could cause that budget resolution to fall apart. The passing of this budget resolution implies the House wants the TCJA tax extensions only if they come with spending cuts, but the Senate does not want to make tax cuts dependent on other budget changes.
This means there’s disagreement between House Republicans, who want spending cuts to offset tax cuts, and Senate Republicans, who want to extend the tax cuts without worrying about the deficit. This disagreement could slow everything down.
What Happens Next?
- Senate discussions with the parliamentarian: The Senate’s rules expert (the parliamentarian) must decide if changing to a Current Policy Baseline is allowed. If approved, it will make it much easier for Republicans to pass tax cut extensions, assuming the House does not object to the details later when the “numbers” come out.
- House and Senate must agree on a budget: Both chambers need to pass the same budget plan before tax cuts can be extended. If the Senate changes the House’s plan to remove spending cuts, House Republicans might refuse to support it, blocking the process.
- Deficit concerns could stall progress: Even if the Senate gets its way, House deficit hawks might still refuse to extend tax cuts without spending reductions. Republican leaders will have to find a compromise that keeps both sides happy, or work with the Democrats.
Conclusion
This fight over how to measure the cost of tax cuts is not just about getting bills passed, it will fundamentally change budgeting and the future of tax policy. The House wants spending cuts to balance out tax extensions, while the Senate wants a simpler approach that makes the cuts permanent without looking at the cost. How this gets resolved will affect the country’s budget and could play a major role in the future regardless of who has control of Congress or the White House.
What is the timing? Well, the Speaker of the House says it will take five to six weeks to figure out the final plan. However, everyone should expect a long fight over taxes, spending, and the deficit in the coming weeks, potentially longer. The outcome will be crucial for the economy, Republican party unity, and the future ability to dictate taxing and spending to whoever has control of Congress or the White House.
About the Author
Jonathan Tucker | Principal – Research & Development Tax Credits
Jonathan Tucker is based in Atlanta, GA, and has over 20 years of experience providing federal business tax advisory services, primarily in R&D tax credits, to clients in various industries including technology, manufacturing, transportation, healthcare, retail and consumer products, hospitality, media and entertainment, financial, and other professional services industries. Read More