Budget Reconciliation Explained

Background: The filibuster

Before you can understand budget reconciliation you have to understand the filibuster. The filibuster is a rule in the US Senate that, in its current usage, effectively requires 60 votes to pass legislation. The filibuster was not part of the US Constitution but has been in place since 1806, and its usage has expanded greatly since the 1970s. There is much talk of potentially modifying or eliminating the filibuster but for now it is the system the Senate operates under.

What is Budget Reconciliation?

Budget reconciliation is a process that allows specific budget-related legislation to bypass the filibuster so it can pass with just 51 votes in the Senate. 

How often can it be used?

Congress generally has one chance to use reconciliation per fiscal year (Oct 1 - Sep 30). In March of 2021 Congress used reconciliation to pass the American Rescue Plan as part of the 2021 fiscal year, which ended in September of 2021. 

In fiscal year 2021-22, so far the House of Representative passed a budget reconciliation bill (called Build Back Better) in November 2021. It includes tax credits and other legislation that will speed up a transition to affordable clean energy. The Senate has not yet passed its own version of the budget reconciliation bill, but has the opportunity to do so in 2022. 

What can be included in a budget reconciliation bill?

There are Senate procedural rules, called the Byrd Rule after Senator Byrd, about what can be included in a reconciliation bill. The Byrd Rule excludes “extraneous items” from reconciliation meaning anything that does not produce a change in outlays or revenue, or where outlays and revenues are merely incidental to the budget process. It also excludes changes to social security, and anything that would increase the deficit beyond 10 years. 

What is the budget resolution and how does it relate to budget reconciliation?

"In its annual budget resolution, Congress sets total spending, revenues, the surplus or deficit, and the public debt. The budget may also include reconciliation instructions. These instructions direct one or more committees to recommend changes to existing law to achieve specified changes in spending, revenues, deficits, and/or the debt limit."  (From Budget Reconciliation: The Basics)

So the resolution kicks off the reconciliation process. It sets the overall target for spending and revenue and provides instructions to committees to achieve those targets. These instructions and targets are not binding and committees can propose legislation that differs from the original resolution as long as they can get final approval in the final reconciliation vote. 

Who enforces the Byrd rule?

Any Senator may object to a piece of a reconciliation bill, and the Senate Parliamentarian makes a decision on whether that piece of the bill should be excluded according to the Byrd rule. In theory this ruling can be overridden by the Vice President, who presides over the Senate, but that has rarely happened. For instance, during debate on the American Rescue Plan the Senate Parliamentarian ruled that a proposed increase in the minimum wage was not allowed by the Byrd Rule, and that ruling was not overridden. Or in 2017, even the short title of the bill “Tax Cuts and Jobs Act of 2017" was ruled to be in violation of the Byrd Rule.

How would carbon fee and dividend fit with reconciliation?

It depends on the details but the short answer is that the key provisions of carbon fee and dividend could be part of a budget reconciliation process. They might not look exactly like the bill text of the Energy Innovation and Carbon Dividend Act but the carbon fee, the dividend, and the border adjustment could all be included.

• A carbon fee would clearly pass the Byrd Rule because it affects revenue in a non-incidental way. 
• Similarly a dividend could be included because it affects outlays in a non-incidental way. 
• A border carbon adjustment also affects revenue so it could be included. 

What about the 10 year limit on increasing the deficit? 

Many provisions passed through reconciliation expire after 10 years because they would increase the deficit beyond that threshold. A carbon fee, even if paired with a dividend, would not increase the deficit beyond 10 years. Therefore it could be a long term policy, if carefully written, even if other aspects of the reconciliation bill expired after 10 years. This would also be true of the border carbon adjustment as long as it was deemed to increase revenue, which is expected given the US imports more than it exports. 

What might need to be different if carbon fee and dividend were to move through reconciliation?

Some things that may be different if carbon fee and dividend were to be part of reconciliation:

• A Reconciliation package must either increase or decrease revenue or outlays, so a carbon fee and dividend would either need to be modified to create at least a nominal net effect on the budget, or could be part of a larger package that had other items with budgetary impacts.
• The EICDA creates a Carbon Dividend Trust Fund so that all net revenues from the carbon fee are returned as dividends. This may not be possible via reconciliation because it would require setting up a new program. As a result it may be difficult to tie dividends directly to the carbon fee revenue, which could make it easier for them to be modified independently in the future.
• Any regulatory provisions that were part of the EICDA would not be permissible under reconciliation. 

What other climate provisions could pass through reconciliation?

Numerous other climate-related policies could be part of reconciliation. Some examples:

• Spending or investments in research and development for things like clean energy, carbon capture and storage, etc.
• Tax incentives, rebates, or credits for things like clean energy or electric vehicles
• Targeted loan programs for clean energy businesses
• Spending on infrastructure like public transportation, electric vehicle charging stations, etc. 
• Changes to subsidies for fossil energy
• Changes to leasing programs on federal land
• Spending to support workers and communities transitioning from fossil fuel jobs (though not if it sets up a significant new program).

Basically anything that was based on federal spending or on increasing or decreasing taxes would be acceptable as part of reconciliation.

What types of climate provisions would be excluded from reconciliation?

In the end it is up to the Senate and the Parliamentarian exactly what policies can be part of reconciliation, but in general things that do not affect the budget or where the budgetary impacts are incidental are not allowed. Examples include:

• Updating the Clean Air Act to explicitly require GHG regulations
• Regulations banning new fossil fuel extraction or infrastructure
• Regulations banning the sale of GHG emitting vehicles.

What types of climate provisions might or might not be excluded?

Some policies can be implemented in different ways to make them more likely to be permissible under reconciliation. For example a Clean Electricity Standard, if implemented as a straight forward regulation would most likely not be permissible in reconciliation. But it may be more likely to pass the Byrd rule if it were implemented by requiring utilities to obtain zero emission energy credits from the government by either selling clean energy, or by purchasing them via an auction, or at a predetermined price. This would create some revenue for the government, but it would be up to the Senate Parliamentarian whether this would be considered more than incidental. In addition, the complexity of such a system would make it more vulnerable to Byrd Rule challenges to specific details of the proposal. 

Such logic could hypothetically be extended to other types of policies by using fees or other tax provisions in place of regulations. For example, a fee could be required from auto makers for each car sold based on its emissions. 

Resources: 

• A Carbon Tax in the Context of Budget Reconciliation.
• EESI's Understanding Budget Reconciliation
• Congressional Research Office: The Budget Reconciliation Process: Stages of Consideration

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