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Key Takeaways 

  • Budget reconciliation is an expedited legislative process under which Congress can accomplish budgetary priorities through changes to revenues and spending.
  • A carbon tax instituted as a budgetary measure would allow Congress to raise a significant amount of revenue while incentivizing economy-wide reductions in greenhouse gas emissions. 
  • Most of the components of existing carbon tax proposals could likely be included in budget reconciliation through spending provisions and border adjustments. 

Overview

Budget reconciliation is a legislative procedure which allows certain legislation to avoid the filibuster in the U.S. Senate and thus only require 51 votes. With a high degree of polarization between the two political parties and a recent trend of Congress passing large legislative changes through reconciliation, this limited procedural mechanism may be used to advance climate policy this year. 

This paper explores how budget reconciliation could include a carbon tax to raise new revenue and reduce greenhouse gas emissions. Implementing a carbon tax by itself would raise various concerns, including its impact on economic growth; energy prices for low-income earners; the economic prospects of disadvantaged communities, including those reliant on fossil-fuel production; and the ability to achieve key climate policy goals. A comprehensive climate change strategy would involve not only a carbon tax but also complementary measures to make the overall policy environment more effective at reducing emissions, more equitable, and less costly. Here, we explore how budgetary measures could be combined to achieve outcomes under reconciliation that would be similar to a climate policy drafted under standard procedures.

What is budget reconciliation?

Created under the Congressional Budget Act of 1974, reconciliation allows Congress to make changes to tax provisions, federal spending, and deficits under special procedures. Congress is supposed to pass an annual budget resolution that sets broad fiscal parameters and may include instructions to other legislative committees to produce bills that meet particular budget targets in their areas of jurisdiction. If these reconciliation instructions are assigned to multiple committees, the House and Senate Budget Committees will then assemble the committees’ output in an omnibus measure. Reconciliation measures are not subject to a Senate filibuster, limit Senate debate to 20 hours, and require only a simple majority in the Senate and House of Representatives. 

What types of measures are permissible under reconciliation?

Budget reconciliation was designed to be used for changing mandatory (or direct) spending,  that is, spending according to rules laid out in statutes that carry over from year to year. The most prominent examples are entitlement programs (e.g., Medicare/Medicaid). In contrast to mandatory spending, discretionary spending is authorized by Congress through the appropriations committees and is used to fund spending on programs including defense, education, science, and environmental protection.  

The Byrd Rule allows senators to block extraneous provisions during budget reconciliation. The Byrd Rule disallows any changes to Social Security or increases in the annual federal deficit beyond the window of the budget resolution (which is typically 10 years). It also precludes provisions that do not change revenues or outlays, or provisions where any such changes are “merely incidental” to the provision’s nonbudgetary effects. However, provisions that have no budgetary effect may be permitted if they are determined to be necessary “terms and conditions” of other provisions within the bill that do have budgetary effects. The Senate parliamentarian advises whether or not a particular provision is in violation of the Byrd Rule. And while the Byrd Rule only applies in the Senate, it restricts final legislation and any measures that come out of a conference between the House and Senate. 

How can budget reconciliation been used to achieve nonbudgetary policy goals? 

Despite the limited purview of budget reconciliation, legislation to resolve the budget can have significant, and directed, impacts on specific sectors of the economy. 

In 2017, the Tax Cuts and Jobs Act (TCJA) was passed using budget reconciliation and made significant changes to corporate and personal tax rates. In addition to reducing tax rates on corporations and individuals, the TCJA raised new taxes on international transactions, created new tax credits for family leave, created tax preferences for investment in economically-distressed regions, and opened the Alaskan National Wildlife Refuge for oil and gas production. Each of those will affect the federal budget, but will also affect social welfare, investment patterns, and development of natural resources. 

For example, the statute directed the Department of the Interior to administer a competitive leasing program for producing oil in the Alaska National Wildlife Refuge. The Congressional Budget Office (CBO) estimated, in 2012, that production from leases in the refuge could generate $2 billion to $4 billion per year in federal revenue from leasing fees and revenue sharing. Under the TCJA, 50 percent of the royalties from oil produced under those leases is paid to the state of Alaska and the rest is paid to the Treasury. These payments to the federal government qualified the oil leasing provision as a budgetary measure, even if they were understood outside Congress as a policy measure for regional economic development that was included to win political support. 

In 2010, the reconciliation process was used to make revisions to the Affordable Care Act, affecting both spending and revenues. The Affordable Care Act itself, which made changes to private health care markets and introduced new regulations for health insurance, passed the Senate under standard procedures and would not have been in compliance with the Byrd Rule. The 2010 amendments passed through reconciliation provided implementation funding and matching federal funds to states for Medicaid, while increasing subsidies for low-income households, levying taxes on high-income households, and altering Medicare reimbursement rates.

The Taxpayer Relief Act of 1997 was passed using reconciliation and included a range of new tax credits. This included the Child tax Credit, which was created to provide financial relief to families with children, and the Hope and Lifetime Learning tax credits, which were created to subsidize educational expenses. Finally, among many changes it made to reduce the federal deficit, the Omnibus Budget Reconciliation Act of 1993 raised the rate of gasoline and diesel excise taxes, expanded the Earned Income Tax Credit, and raised the percentage of Social Security benefits taxable as income.

Full paper here.