Budget Reconciliation Basics: What To Expect from Democrats' New Climate and Families Plan

On August 9, Senate Democrats released the first solid details of a long-planned, $3.5 trillion “budget reconciliation” push, which could allow Congress’ narrow Democratic majority to advance major domestic priorities without needing any Republican votes. This is a high-risk, high-reward strategy: even without needing to negotiate with Republicans, Democratic leaders must dodge procedural obstacles and dissent within their own ranks to deliver a package that could define the Biden presidency. Below, we examine the proposal, and what comes next in the complicated reconciliation process. 

For reference, here’s a Dear Colleague from Senate Majority Leader Chuck Schumer (D-NY), a one-pager explaining Democrats’ plans for reconciliation, and a longer summary from the Senate Budget Committee. Senate Democrats have given themselves until September 15 to assemble and advance a complete reconciliation proposal. 

What is budget reconciliation? Democrats control Congress – but barely. In the House, Democrats’ majority is the smallest in decades, but they can still pass major legislation on a simple majority vote. The Senate is a different story: Democrats hold the chamber by just one tiebreaker vote, and the Republican minority has a unique tool in the “filibuster,” which can block major legislation unless at least 10 Republican Senators also support a given bill. 

Congress created budget reconciliation in the 1970s as a way to pass fiscal measures that are immune to the Senate filibuster. The maneuver allows Congress to make major changes to federal spending and revenue with a simple majority vote on an accelerated schedule. However, reconciliation is not a blank check: Congress likely only has one more chance to attempt it this year, and there are strict, complex rules on what can be passed within.

Democrats have already successfully used budget reconciliation once in 2021, to pass the American Rescue Plan Act of 2021 which directed billions in coronavirus relief to states and individual Americans. In this new package, Democrats want to go even further to pass new policy changes that they say will address climate change, create new social programs like free preschool and a national paid family leave program, stimulate the job market, and improve living conditions for all. 

What is included in Democrats’ plan? Senate Democrats crafting this proposal generally included tax, budget, and spending provisions; and relies heavily on President Biden’s American Families Plan released in April 2021. Importantly, many of these plans are still a bit vague and need refinement in the coming weeks. Senate committees with jurisdiction over each issue will take the lead in turning the Senate’s summary into workable legislative language, then reconciliation’s harsh procedural rules may trim the plan even more.

Raise corporate and high-income taxes: The Biden Administration and Democrats promise to undo GOP-led corporate tax cuts passed in 2017, raising the corporate tax rate from 21% to around 28% to raise money for domestic programs. Similarly, Democrats want “tax fairness for high-income individuals,” which could follow President Biden’s recommendation of raising the highest taxation rates for the top 1% of earners as well as on capital gains for investors. Democrats argue the revenue from these higher corporate and wealth taxes would almost completely pay for the reconciliation proposal’s new spending elsewhere, including tax cuts to middle-class and lower-earning households.  

Senate Republicans and Democrats are already trading blows over the proposal’s corporate and wealth-related tax increases, with the GOP pushing moderate Democrats to turn against leadership and business groups working to raise public opposition. Democrats, hoping to hold onto members’ and public support, have promised that no tax increases will apply to families earning less than $400,000 total. Democrats also promise to pump up tax credits to lower-earning families, such as the Child Tax Credit (CTC) and Earned Income Tax Credit. For example, following the success of monthly Child Tax Credits (CTC) paid to families created in the American Rescue Plan earlier this year, Senate Finance Chairman Ron Wyden (D-OR) says he wants to continue these payments. However, Senate Republicans have already commissioned a report from the bipartisan Joint Committee on Taxation which argues that raising the corporate tax rate would indeed impact lower-earning households. Democrats may also confuse their messaging in their work to undo the 2017 tax law’s limit on federal deductions for state and local taxes (SALT), which is important to Democrats representing affluent, higher-taxing states like California and New York. 

On top of these overall increases, the reconciliation plan could also add new “polluter taxes” for businesses which will apply to methane releases. The methane tax could be based on the Methane Emissions Reduction Act of 2021 (MERA), S. 645, sponsored by Senators Sheldon Whitehouse (D-RI) and Elizabeth Warren (D-MA). This draft bill would tax fugitive methane emissions – i.e., leaks of the potent greenhouse gas at all stages of production – as assessed in satellite imagery for each production basin. Then all upstream and midstream companies in that basin would pay a tax equal to their total production or throughput, times the average basin-wide average rate of emissions, times $1,800 per ton or $40 per thousand cubic feet. Integrated companies with both upstream and midstream operations would pay the tax separately on both their production and throughput, even if they are paying tax on the same volume of gas twice). It would not apply to local distribution companies or downstream consumers. While this proposal has not been scored officially by the Joint Committee on Taxation yet, the MERA could potentially raise as much as $1 trillion.

Yet another potential revenue raiser: a new fee on imports from countries that are not reducing their own carbon emissions. One model could be the FAIR Transition and Competition Act, which Sen. Chris Coons (D-DE) and Rep. Scott Peters (D-CA) debuted last month. This bill would be designed to assess fees equivalent to the costs that U.S. companies pay to comply with national pollution protections.

Some Democratic senators want to go even further with taxes and fees on the nation’s largest businesses: Sen. Warren and Sen. Angus King (I-ME) on August 9 floated a plan to add a 7% book profit tax on companies that report more than $100 million in profit. Sen. Warren and Sen. King estimate the tax would impact about 1,300 of the nation’s largest publicly traded companies. Similarly, Sen. Chris Van Hollen (D-MD) is leading a plan for more fees on fossil fuel companies responsible for more than .5% of global carbon dioxide and methane emissions between 2000 and 2019. Senator Van Hollen estimates that 25 to 30 large companies would be affected, with the largest companies, such as Exxon Mobil, BP, Shell, and Chevron paying $5 billion to $6 billion per year, according to his press release.

Labor provisions: Progressives including Senate Budget Committee Chairman Bernie Sanders (I-VT) have signaled plans to fold the Protecting the Right to Organize (PRO) Act of 2021 into reconciliation. The PRO Act, among other provisions, would expand workers’ collective bargaining rights; create new definitions of “joint employer” for labor law enforcement; and address misclassifications between employees and independent contractors. The House already passed the PRO Act earlier this year, and the Biden Administration supports it, but it cannot pass the Senate thanks to the filibuster and opposition from the GOP and moderate Democrats. 

The new reconciliation proposal mentions including “pro-worker incentives” and “labor enforcement and penalties,” without details. MBS has learned that these provisions could include portions, but not the entirety, of the PRO Act, particularly a tax sweetener to help pay union dues, and creating new fines against companies found interfering workers’ rights to organize under the National Labor Relations Act. 

These pro-labor provisions of the reconciliation plan will likely be controversial in the upcoming “Byrd Bath” process, and may not make it into a final package (see below for more). This is because Democrats are veering away from budget and fiscal matters with these provisions, and into unrelated policymaking. 

Immigration reform: Democrats promise to create in reconciliation a path to U.S. citizenship for select immigrants, including “Dreamers,” undocumented brought to the U.S. as children. Democrats want to offer similar solutions to those holding Temporary Protected Status (TPS) and farmworkers. These provisions could offer U.S. citizenship to millions of people. As with the labor provisions described above, the budget process is an awkward (if not unlawful) way to pass immigration reform, but President Biden and Democrats in Congress have rallied around the idea after bipartisan negotiations on the matter have stalled for decades. 

Climate provisions: Democrats vow aggressive action to meet President Biden’s goal for getting 100% of the U.S.’s electricity from “clean” sources by 2035. The reconciliation plan includes a Clean Electricity Payment Program, likely based on a plan from Sen. Tina Smith (D-MN) which offers escalating incentives to utilities who switch to cleaner sources of electricity, plus fees if they fail. Expect the reconciliation bill to also build on accomplishments in the recent bipartisan infrastructure bill, offering even more incentives for electric and other lower-emission vehicles, new “green” technologies like carbon capture, repurposing fossil fuel infrastructure toward cleaner fuels, and manufacturing of all these technologies in the United States. 

The reconciliation plan also creates a White House-approved Civilian Climate Corps (CCC), and sets even more spending on environmental remediation and environmental justice priorities. 

Create a new national paid family leave program: The U.S. is one of few developed nation in the world lacking a paid family and medical leave system; the current Family Medical Leave Act (FMLA) only provides for unpaid leave. Congress experimented with national paid leave during the COVID pandemic, creating pandemic-specific programs and protections. The new proposal will likely align with President Biden’s American Families Plan for 12 weeks of paid leave, for workers to bond with a new child, recover from illness or care for a family member, and deal with other life events like bereavement and military deployment. The program would offer workers up to $4,000 a month, with a minimum of two-thirds of average weekly wages replaced, rising to 80% for lower-earning workers. The program would phase in over a 10-year period. 

Paid family and medical leave also has a shaky future in reconciliation. While it arguably has strong roots in tax and spending policy, the proposal’s champions have struggled to add a Byrd Rule-compliant policy change to ensure workers who take their paid leave will have their job protected while they’re out. 

Universal Pre-K and child care support: Democrats promise a new Universal Pre-Kindergarten program for 3 and 4 year-olds, as well as “a new child care benefit” to offset that financial obligation for working families, both offset by higher taxes on the wealthy. President Biden’s American Families Plan proposed that families earning less than 1.5 times their state median income levels would not pay for child care and those earning above that threshold would pay no more than 7% of their income for child care. The Biden approach could cost about $775 billion over ten years. 

Health: Senate Budget Chairman Bernie Sanders (I-VT) wants to use reconciliation to expand Medicare to cover dental, vision and hearing care. Sanders also hopes to lower the eligibility age of Medicare from age 65. The reconciliation plan also includes preserving expanded health insurance exchange subsidies under the 2010 Affordable Care Act (ACA); closing the Medicaid “coverage gap” in states that haven’t expanded their programs under the ACA; and creating new subsidies for home health care services. 

Less clear are potential changes to drug policy: Senate Budget Chairman Sanders has discussed using reconciliation to drive down drug pricing by allowing Medicare to negotiate with pharmaceutical companies, with eleven Senators backing the idea in a new letter. The pharmaceutical industry has pushed back hard on the idea. 

Housing: Democrats promise “historic level of investments in public housing, green and sustainable housing, housing production and affordability.” Provisions promised include rental and down payment assistance for homeowners, new funding for public housing and home construction, consumer rebates to weatherize homes, and transit improvements. 

Education: Democrats say they want to increase the maximum Pell Grants for low-income students and make community college tuition-free for two years. Democrats have also promised new investments in minority-serving colleges, such as Historically Black Colleges and Universities (HBCUs). On the K-12 side, the plan includes investment in school infrastructure and climate readiness.

Now what? The Senate will soon send “reconciliation instructions” to committees: giving the policy goals outlined above to each of the Senate’s committees of jurisdiction over each covered issue area to write aligned legislative language by September 15. Once the Senate committees deliver their portions of a reconciliation proposal in mid-September, the Senate Budget Committee will stitch them together into a single package for Senate floor consideration. 

The Byrd Bath: Once the full reconciliation proposal hits the Senate floor in September, the nonpartisan Senate Parliamentarian will review it for compliance with the “Byrd Rule,” a complex set of rules and precedents designed to keep non-budget priorities out of reconciliation packages. Under the major components of the Byrd Rule, the Parliamentarian could disqualify proposals that:

  • Do not change spending or revenues, or have a “merely incidental” impact on spending or revenues
  • Fall outside of the jurisdiction of the committee that submitted the provision

  • Would increase the deficit beyond the ten-year “budget window” covered in reconciliation proposals.

Senate Democrats plan to push the Byrd Rule’s limits by including immigration reform; components of the pro-union PRO Act to strengthen union organizing protections; and potentially enacting drug pricing reform by allowing Medicare to negotiate with pharmaceutical companies. These provisions all appear to conflict with the Byrd’s rules requirements for focusing on spending and revenues. 

If the Parliamentarian finds any provisions that violate the Byrd Rule, she can unilaterally strike them from the bill. She already tossed a flagship Democratic priority earlier this year, when she dropped a White House-supported federal minimum wage increase from the American Rescue Plan Act. In that case, Democrats argued that a higher minimum wage would stimulate the economy and raise tax revenues, but the Parliamentarian found that this plan would have a “merely incidental” increase on federal revenues and violate the Byrd Rule. 

Why would Democrats attempt policies that clash with the Byrd Rule? Senate Democrats are well aware that some of their reconciliation proposals, such as immigration reform and the PRO Act, may not survive the “Byrd Bath.” They calculate, however, that there is little risk in floating these plans as long as the party holds together. The Parliamentarian’s job is much like a judge in a court: she bases her decisions on the written rules as well as precedent and her own judgement. A creative advocate may find a way to convince her to let at least a few of the more momentous proposals through, which would be a major victory for Democrats. Additionally, even if she tosses many provisions, Democrats can show their voters that they tried everything to deliver on their campaign promises. 

What if the Senate CAN’T pass reconciliation? Despite months of planning, this reconciliation push could indeed fail if even one Democrat breaks ranks. The Senate is divided 50-50, meaning all Democrats plus tiebreaker Vice President Kamala Harris must hold together to advance a reconciliation plan. House Democrats also have little room for error, controlling their chamber by just three votes. To prevent a last-minute failure, Democratic leaders must work hard to keep members on both the moderate and progressive wings of the party supportive. This wheeling and dealing could drive even more changes to the reconciliation proposal soon. 

What happens after Senate action? Once the Senate advances its reconciliation package, the House is expected to return to Washington on the week of August 23 to potentially kick off their own parallel reconciliation process with their committees writing legislative language, as well as to consider the Senate-passed bipartisan infrastructure bill (H.R. 3684). The House Budget Committee and other committees are already working with the Senate to ensure their proposals align and to prevent further slowdowns, but if any disagreement emerges between the two chambers, or within the Democratic ranks, the process could slow down and drag into later in the fall. 

How do I keep track? The MBS team of budget and appropriations experts are here to assist! For any questions, email Lucia Alonzo, Principal at the Michael Best Strategies office in Washington, DC.