What Is Budget Reconciliation
& How Does It Affect States?
By Jamal (Jay) Nelson, CSG National Director of Federal Affairs
In early April, the Republican-led Congress passed a federal budget resolution that kickstarts the budget reconciliation process — a powerful legislative tool with significant implications for states. Now, the Republican majority can start crafting a package that includes extending the expiring portions of the 2017 Tax Cuts and Jobs Act (TCJA), defense spending, energy policy and border security investments, which are a major part of President Trump’s domestic policy priorities.
The Senate’s reconciliation instructions mandate only $4 billion in gross deficit reductions while permitting a $5.8 trillion net deficit increase, contrasting with the House’s requirement of $2 trillion in gross reductions and a $2.8 trillion net increase. These differing instructions will need to be reconciled in the final package.
What Is Budget Reconciliation?
Budget reconciliation is a fast-track process that allows Congress to make changes to spending, revenues and the federal debt limit. It was established under the Congressional Budget Act of 1974 and is unique because it limits debate in the Senate, making it immune to the filibuster. This means reconciliation bills can pass with a simple majority vote (51 senators), rather than the usual 60.
Reconciliation begins when Congress adopts a budget resolution that includes “reconciliation instructions.” These instructions direct specific congressional committees to develop legislation that meets fiscal targets — such as reducing the deficit or adjusting tax and spending levels.
The Congressional Budget Act limits the use of the reconciliation process. Reconciliation instructions can be given for three specific purposes:
- To make changes in the statutory debt limit.
- To make changes in revenues.
- To make changes in direct (mandatory) spending, or any combination of the three.
Discretionary spending subject to the regular appropriations process — such as annual funding for the federal agencies — cannot be included in the reconciliation process.
Another limitation on reconciliation is the Senate’s so-called Byrd Rule, named after former West Virginia Sen. Robert Byrd. This rule allows items that are deemed not to have a direct budgetary consequence, and therefore unnecessary to achieve the budgetary goals of the resolution, to be removed.
Congress first used the reconciliation process in 1980. Recent notable uses of the reconciliation process include the TCJA (2017), the American Rescue Plan Act (2021) and the Inflation Reduction Act (2022).
Why States Should Pay Attention
Although reconciliation is a federal process, the outcomes can significantly affect states. Here’s how:
Funding Changes to Federal Programs
Many reconciliation bills propose changes to mandatory spending programs like Medicaid, SNAP (food assistance) and Temporary Assistance for Needy Families (TANF). These programs are federally funded but administered by states — so any cuts or changes in eligibility directly impact state budgets and services.
Tax Policy Shifts
Reconciliation has been used in the past to pass major tax legislation, which can affect state revenues, especially in states that conform to federal tax codes. For instance, several lawmakers would like to see adjustments to the state and local tax deduction (SALT) cap. Additional new tax proposals under consideration include exempting tipped income from taxation and shielding Social Security benefits from taxes.
Health Care Policy
Reconciliation has been used in the past to enact sweeping changes to health care funding, an area where states rely on federal partnerships and dollars. In the House budget resolution, the House Energy and Commerce Committee is tasked with cutting $880 billion programs under its jurisdiction, including Medicaid, the joint federal-state safety net program for health care.
Debt Limit and Fiscal Constraints
Reconciliation offers a pathway for Congress to raise or suspend the debt limit. This action can indirectly affect the federal-state partnership and overall market stability. The final reconciliation bill could potentially increase the debt limit by as much as $5 trillion.
What Comes Next?
With the budget resolution adopted, congressional committees have begun drafting legislation to meet reconciliation instructions, with House committees scheduled to mark up their package the week of April 28. House Republicans are planning to get their version to the floor around the week of May 19, and GOP leaders want to send it to the president by July 4.
Depending on its content, this legislation could have significant implications for state governments. The Council of State Governments will continue to monitor the progress of this package through Congress.