House budget accelerates tax policy negotiations

House Republicans’ Feb. 25 passage of a budget resolution, intended as a shell for their tax and fiscal policy ambitions, accelerated tax policy talks, aligning with an ambitious Memorial Day timetable put forward by House Speaker Mike Johnson, R-La.

Whether that momentum carries through hashing out the actual tax policy details — what rates, credits, deductions, and other benefits are kept or expanded, and which are ended or reined in — remains to be seen. The Senate appeared to be caught a bit flat-footed by the House budget resolution passage after Senate Republicans passed their own resolution intended to focus on border and national security, increased immigration enforcement and energy policy changes. That approach would leave tax policy for a second budget resolution.

House Republicans continue to insist a tax-only package, or tax-free package, would not earn enough votes in their chamber without being paired with significant other policy measures around healthcare, discretionary spending, and border security in “one, big, beautiful bill,” as President Donald Trump has referred to it.

“The Senate has had it for eight days. I wish they would go a little bit faster,” House Ways and Means Committee Chair Jason Smith, R-Mo., said in a March 5 public interview. “A skinny bill without tax will never pass the House of Representatives. The votes are not there. There are members of our conference who will not vote for a budget resolution without tax in it.”

Congressional Republicans have repeatedly signaled the difficulty in fitting all their tax priorities — and the president’s — into a final package. Advancing the budget resolution, which only sets topline parameters, meant agreeing to significant, politically difficult spending cuts that could be harder to achieve the closer they come to reality.

While it’s a straightforward reality, it’s worth highlighting that offsets in the form of tax hikes and spending cuts are typically less popular than tax cuts (or avoiding tax raises). That’s why personal income tax rates are due to go up at the end of this year: Republicans could not agree on fully offsetting the 2017 Tax Cuts and Jobs Act, so they instead made large swathes of it temporary to sidestep politically tricky choices. House Republicans still lost their majority, in part, over the cap on the state and local tax (SALT) deduction, one of the major budgetary offsets of that law.

After successfully advancing the budget shell needed to move tax and spending legislation along party lines in the Senate, Republicans face tough choices. One option senior Senate Republicans want to use to avoid political pitfalls while making the expiring TCJA cuts permanent is to change the baseline used to measure the budgetary impact of legislation from current law to current policy.

The shift would dramatically decrease what revenue increases or spending cuts Republicans need to find to accommodate an extraordinarily large tax agenda. That includes continuation of the TCJA, revivals of 100% bonus depreciation, Section 174 R&E expensing, and the more generous calculation of the 163(j) net interest deduction, and the significant tax promises made by President Donald Trump, including tax-free tips and overtime pay, a new deduction for auto loan interest, and a potential new tax break for Social Security recipients.

But while that would narrow debt increases within the narrow lens of the congressional budget process, debt would still increase. That could raise the cost of borrowing for the government, potentially causing significant knock-on effects on debt and equity markets, as well as personal borrowing costs and overall economic growth. Changing the baseline would also make it easier for Democrats to pass sweeping policy changes when they hold power, a fact that opponents of shifting the baseline have pointed out.

Still, there’s momentum behind changing the baseline from current law to current policy. Senior Senate Republicans, including Senate Finance Committee Chair Mike Crapo, R-Idaho, signed a Feb. 13 letter to Trump and House leadership in support of “permanence” for tax policy. The phrasing of the letter was intended as a tacit endorsement of changing the baseline, as the current law baseline necessitates either temporary changes or full offsets under the budget maneuver Republicans will use to avoid the normal 60-vote legislative threshold in the Senate.

But while there are significant voices supporting the change in the Senate — and Trump, plus key House Republicans Johnson and Smith, have signaled openness to the shift — it’s not clear every congressional Republican will go along. The Senate parliamentarian would also have to agree to the change or be overruled or fired and replaced, a messy process that would play out publicly and lead to further concerns over precedent-setting.

Smith warned that even if senators succeed in changing from a current law to a current policy baseline, House Republicans won’t vote for the tax and other policy changes without meaningful spending cuts.

“There’s members of my conference that believe what the Senate’s trying to with the current policy baseline is a budget gimmick so that they don’t have to do spending cuts,” said the Ways and Means Committee chair. “If the Senate can manage a policy baseline, that’s great, but you have to preserve spending cuts.” 

Key House and Senate members, as well as White House officials, began meeting on a path forward on Feb. 26. Ways and Means Republicans are set to begin a drafting with policy details the week of March 10, in keeping with their Memorial Day timeline. But a major unknown remains the extent to which Trump’s tariffs are intended to stay in place long term versus being used as a negotiating tactic, something the administration itself appears uncertain about.

For more details on the House-passed budget resolution, see our Feb. 27 Tax Legislative Update.

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