The Budget Reconciliation Process: Where Are We and Where Are We Going?

By: John Harrison, Executive Director of The Alternative and Direct Investment Securities Association (ADISA)

By: John Harrison, Executive Director of The Alternative and Direct Investment Securities Association (ADISA)

I get asked a lot of questions about the US budgeting process and particularly how that might relate to taxation, mostly under concern for the tax code section involving 1031 like-kind exchanges. First, I’ll try to shed a little light on the budgeting process (little might be the key word), and then tie that in with the 1031 provision—and why that provision, in my view, will live long and prosper.

Like many things in organizations, including government, a process often goes along on its own until someone takes advantage. There was only a Budget Control Act (of 1921, the same year as the tax code establishing 1031s, by the way) which basically established the Office of Management and Budget and charged it with drafting a budget. Not much official “budget process” for the US government beyond that until funds appropriated by Congress were “impounded” by the Executive Branch (per Richard Nixon during his waning days before resignation). That set off a need for a more stringent process.

This reminds me of the odd clause in an organization’s bylaws that gets informally called the “old Joe Jones Rule” which might have been established to counteract some maneuver from old Joe Jones. Thus, we could call the budget process the old Richard Nixon Rule, but it’s officially named the Congressional Budget Act of 1974. That act outlines the current process including an expedited process called reconciliation whereby there’s a fast(er) track to reconciling a budget bill with existing law—which always needs to happen with such a bill, so why that name for the method?

Reconciliation, as you know already, is exempt from the filibuster requirement of a supermajority of 60 in the Senate, meaning a bill using reconciliation can slide through on a simple majority of 51 (or 50 plus the assenting vote of the vice president).

Cleverly though, reconciliation has limits around it: a max of three per year, one for spending, one for revenue, and one for debt limit (and on the debt limit, there’s a further Byrd Rule—you should remember old Robert Byrd of West Virginia, he was a classic—that restricts a bill from raising the deficit after 10 years or makes any change to Social Security). As you might guess, the administration of a three-part rule with sub-rules can get tricky, so the Senate parliamentarian gets to slice, dice, and make judgement on what can count in reconciliation (subject to a possible Senate vote to overrule the parliamentarian).

This brings us to the complex gamesmanship of today. And if you don’t appreciate gamesmanship and complexity, then politics will be depressing (note complexity, not complication; complication just means a lot of steps to solve, whereas complexity may have no real solution). Embrace the complexity and strive for complication, and you might survive (and always cherish complex democracy over “all the other forms that have been tried…”). What we have now left in reconciliation is a budget for FY2022, plus the ability to amend those with revisions (the revisions though have to come out of committee and possibly hundreds of amendments on the Senate floor, all by majority vote).

As of this writing, the Senate has passed the FY2022 budget outline and has begun to write a reconciliation bill, but an infrastructure piece has also been passed in the standard bipartisan manner, that is, not using reconciliation. That piece is the $1 trillion package called the INVEST in America Act, which is composed about half of what would traditionally be called infrastructure. Of course, the House would need to approve that bill to move it along and has cut its summer recess short to either consider that or the FY2022 budget resolution first. Look for continued jockeying on whether the House should pass or delay the bipartisan bill or try to move the bigger wish list bill ($3.5 trillion) through the reconciliation process.

As usual, the spending in the $1 trillion infrastructure bill which passed the Senate has some tax offsets to try to help pay for the spending (“pay-fors”). Those offsets do not include any change to the 1031 like-kind exchange provision of the tax code. The proposed budget resolution does have that and other major tax increases. I’ve previously written about what an insignificant pay-for any curtailment of the 1031 would be compared to its contribution to the economy (basically, a $2 billion pay-for that would cost $55 billion and endanger 500,000 jobs).

And, to drive the point home, the Senate approved via voice vote a non-binding budget amendment (from Sen. John Kennedy, Republican from Louisiana) to leave 1031s alone entirely. This though, because of where we are in the middle of the process, is an expression of sentiment since it does not yet have the force of law.

So what’s playing out now, and will likely play out through most of this autumn is the struggle in the House over which spending bill to be considered first, and then possibly send it back to the Senate with changes which could involve reconciliation. There is no doubt there will be further tax changes—read increases, but it is unlikely they would involve anything to do with 1031s; the math is not complicated enough to help the complexity.

John Harrison is a regular contributor to The DI Wire.

Since 2012, Harrison has been the executive director of ADISA, an organization that represents the non-traded alternative investment industry. He has been in association management for more than 25 years and has served in industry, education, and health associations in the U.S., Europe, and the Middle East. Harrison was a cum laude graduate in biology and psychology from the University of Georgia and earned an MBA and a doctorate in business administration from Georgia State University.

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The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.