Republicans took a major step toward tax reform on Feb. 25, with the House narrowly passing a budget resolution that would carve out $4.5 trillion for tax changes. Key hurdles remain in the process, however, as the House and Senate must now reconcile their budgets before Republicans can begin the difficult task of writing a reconciliation bill.
Key insights:
- Budget resolution contains $4.5 trillion in tax changes
- Necessary spending cuts will be politically difficult
- Final resolution must includes both chambers
The Senate last week passed a much narrower budget resolution that would largely target border security and defense, while saving tax legislation for a second reconciliation bill. The House resolution would keep Republican priorities together in a single reconciliation bill.
President Donald Trump endorsed the House approach last week, but it was unclear whether House Republicans had enough support for their budget to overcome their razor-thin majority. House Republican leadership initially appeared to give up on the planned vote late on Feb. 25, only to reverse course and bring members back to the floor. The budget resolution then passed on a narrow 217 to 215 vote with only a single Republican joining all Democrats present in opposition (one Democrat was absent).
Trump’s support of the House budget and the favorable House vote will put immediate pressure on Senate Republicans to adopt the House approach. But the Senate cannot simply pass the House resolution as written because it does not include reconciliation instructions for Senate committees. A final resolution will still need to be passed again by both chambers, and the Senate could push for changes. Trump said after the vote that each chamber “has things that I like.” The budget resolution does not need to be signed by the president.
The budget resolution will be critical for enacting tax reform, as it will carry the reconciliation instructions that allow Republicans to pass a tax bill in the Senate with a simple majority vote. The specific rules included in the budget will set the parameters that control the timing, scale and substance of any reconciliation tax bill.
Grant Thornton Insight:
House passage of the budget is not just an important procedural step; it also represents a demonstration of the nearly unanimous House Republican support that will be needed to pass a reconciliation bill. It also offers evidence of Trump’s ability to influence members. At the same time, the nearly abandoned vote shows how tenuous support is, and the votes will only get harder from here. Republicans will face real challenges managing the opposing interests of members, balancing competing priorities, and passing a tax bill under the major constraints imposed by the House budget. Taxpayers should begin assessing potential tax legislative outcomes under the House budget resolution and what they mean for tax planning.
Budget implications for tax
The House budget resolution provides reconciliation instructions allowing tax legislation to increase the deficit by up to $4.5 trillion over 10 years. This cap could change depending on the actual amount of spending cuts achieved by the bill. The budget resolution requires mandatory spending cuts of at least $1.5 trillion, but the $4.5 trillion tax cap would be reduced to the extent spending cuts fall short of $2 trillion. The cap could be increased by the amount of any mandatory spending cuts exceeding $2 trillion.
Grant Thornton Insight:
Spending cuts will be critical for the success of the tax legislation but could be politically difficult. Republican moderates are already objecting to proposed cuts to Medicaid and food assistance, while deficit hawks are calling for even deeper cuts. Trump has complicated the picture by pledging not to “touch Medicaid” besides “fraud,” but $1.5 to $2 trillion in savings may be impossible without more substantial cuts. Trump has touted tariff revenue and DOGE savings as potential offsets, but neither of those will officially count for reconciliation scoring purposes. If Republicans fail to make politically difficult mandatory spending cuts in the bill itself, it could further shrink or even scuttle the tax package. Spending cuts in excess of $2 trillion could be used to increase the cap and “pay for” tax cuts.
The $4.5 trillion cap is smaller than what tax writers wanted and could force very difficult choices. The Congressional Budget Office has previously scored an extension of the Tax Cuts and Jobs Act (TCJA) cuts at approximately $4 trillion over 10 years before debt service, which could increase the cost to $4.5 trillion. This figure includes reinstating 100% bonus depreciation but does not account for any relief for research amortization under Section 174 or the limit on the interest deduction under Section 163(j). Fulfilling Trump campaign tax promises and providing relief from the cap on the state and local tax (SALT) deduction would add to the cost. Republicans have several options for managing the costs of a tax package:
- Shorter extensions: Republicans could save money by extending the TCJA tax cuts for a shorter period. The original sunsets were largely set for eight years to prevent spillover effects from reducing revenue outside the 10-year budget window. A similar eight-year extension would give them extra wiggle room, and an even shorter extension could provide more revenue for other tax cuts.
- Revenue raisers: Republicans could also consider tax increase as revenue offsets, and have discussed many options, including limiting the SALT deduction for businesses, changing the treatment of carried interest, repealing energy incentives, and targeting tax-exempts.
- Abandoning priorities: Republicans could be forced to choose between competing priorities, allowing some tax cuts to expire or failing to fulfill tax cut promises. This could include allowing GILTI and FDII rates to increase as scheduled or declining to reinstate research expensing.
Grant Thornton Insight:
House Ways and Means Chair Jason Smith, R-Mo., said before the vote that the $4.5 trillion cap would likely only allow for only an eight- or nine-year extension of the TCJA tax cuts. He also expressed a commitment to deliver on Trump promises to remove tax on tips and overtime and provide tax relief for seniors. It is worth noting that the Congressional Budget Office scores for extending tax cuts could increase when updated, providing even more of a revenue squeeze for lawmakers.
The House resolution preserves a “current law” baseline, meaning that tax cuts set to expire are assumed to expire and revenue is reduced by extending them. Key Senate Republicans are pushing to use a “current policy” baseline, which assumes the extension of expiring provisions. Because tax cut extensions are already built into this baseline, it essentially makes them “free” from a scoring perspective.
Grant Thornton Insight:
It is difficult to make the TCJA tax cuts permanent under a current law baseline because reconciliation rules bar any deficit increase outside the 10-year budget window. Supporters of a current policy baseline will continue to push for its inclusion in any final budget resolution, as it has the potential to allow for permanent tax cuts. Smith said before the vote that he has advocated for it, but acknowledged some opposition in the House, particularly among deficit hawks. There are also questions about whether the Senate parliamentarian would accept it.
The House resolution is based on the government fiscal year ending on Sept. 30, 2025, which would become the deadline for enacting a reconciliation bill. The resolution also includes an increase in the debt limit, which could create pressure to act even more quickly. If Republicans intend to address the debt limit through this reconciliation bill, they may need to act as early as June to avoid a default. Lawmakers could also separately address the debt limit with bipartisan legislation, but Democrats may demand policy concessions.
Next steps
House passage is a significant achievement, but Republicans still face major challenges in finishing the budget resolution and writing a reconciliation bill. While the outlook remains fluid, it is clear based on the current draft budget that Republicans will face political and procedural limitations that could force difficult choices. Taxpayers should not assume every one of their tax priorities will be addressed and should consider the impact on planning. There may be opportunities to mitigate the impact of current unfavorable rules, like the limit on interest deductions under Section 163(j) and the drawdown of bonus depreciation. There also may be arbitrage opportunities if GILTI and FDII rates increase.
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