Budget Reconciliation: So Far, So Good!

May 16, 2025

The House of Representatives began its most challenging phase of the overall budget reconciliation process this week as various committees started considering changes in law to accomplish the “reconciliation” instructions contained in the House-passed version of the budget resolution. Public pension plans, which have been very concerned with the inclusion of highly problematic changes in law designed to raise needed revenues – such as the application of the Unrelated Business Income Tax (UBIT) to certain governmental plan earnings – were relieved to see that none have been included in the Ways and Means Committee’s proposal, which was finally approved in the early hours of May 14. So far, so good – but the process is not over yet!

Budget reconciliation is an expedited way for Congress to consider legislation that would implement policies embodied in a Congressional budget resolution, and permits Congress to make changes to spending, revenues and the federal debt limit. On April 10, following action in the Senate, the House adopted its final version of a concurrent budget resolution that required $2 trillion in gross deficit reductions and allowed a $2.8 trillion net deficit increase. This “sets the stage” for work on a future reconciliation bill to begin. This version of the resolution was first adopted by the Senate on April 5, which amended an earlier House budget resolution. The Senate’s April 5 amendment added reconciliation instructions for the Senate that require $4 billion in gross deficit reductions and allow a $5.8 trillion net deficit increase.

Why is budget reconciliation such a big deal? It is because the budget reconciliation process limits debate in the Senate, making it immune to a filibuster – which therefore allows it to pass with a simple majority vote (51 senators), rather than the usual 60. Thus, this process has been used by both Republicans and Democrats to pass any number of significant laws for which there was little to no bipartisan agreement, such as the 2017 Tax Cuts and Jobs Act (TCJA) and 2021’s American Rescue Plan Act (ARPA), responding to the COVID crisis, to name just two.

This year, the goal of Republicans is to use the budget reconciliation process to pass the so-called “Trump Agenda.” This would include:

cutting federal spending by at least $1.5 trillion;
extending and expanding the 2017 TCJA expiring provisions, eliminating taxes on tips and overtime pay, and addressing the taxation of Social Security benefits for retirees by giving a $4,000 tax deduction per eligible filer for Americans age 65 or older. It applies if their gross income is $75,000 or lower if single or $150,000 for married couples filing jointly, allowed for tax years 2025 through 2028 and available to both itemizers and non-itemizers;
increasing funding for border security, such as wall construction, surveillance technology, and personnel increases;
“unleashing” American energy production, including reduced regulations on fossil fuel industries, while also cutting or rolling back parts of Biden’s Inflation Reduction Act (IRA), particularly its infrastructure and climate-related provisions;
increasing defense spending by $113 billion for the upcoming fiscal year, bringing the total defense budget to $1 trillion—the highest in U.S. history; and
codifying or expanding Trump’s tariff policies.

For governmental plans, exempt from ERISA, perhaps the most consequential provisions could have involved changes to the tax code proposed by the Ways and Means Committee – presumably to help raise revenues. The provision that has been the focus of perhaps the greatest concern to public pensions is UBIT.

[By way of background, when the House of Representatives passed their version of the TCJA in 2017, it contained a provision which would have applied the Unrelated Business Income Tax, commonly referred to as UBIT, to certain investments of governmental plans. This unprecedented new tax would have reversed 40 years of Internal Revenue Service (IRS) policy on the non-applicability of UBIT to public pensions and imposed significant, complex compliance costs that could have adversely impacted public pensions’ portfolio construction and the diversification of public funds.

UBIT is a federal tax on unrelated business taxable income (UBTI) derived from either (1) an “unrelated trade or business” carried on, directly by the organization or by any partnership in which it is a partner; or (2) “debt-financed” property owned by the organization or any partnership in which it is a partner. UBIT does not apply to “passive” investment income such as interest, dividends, royalties, rents, and gains. The tax is equal to the income tax rates applicable to trusts or corporations (depending on the character of the underlying entity). The trust tax rate would therefore likely apply to a public pension plan’s earnings if they were subject to UBIT; that rate was 39.6 percent in 2017, and it was not subject to reduction elsewhere in the TCJA.

While UBIT applies to virtually all tax-exempt entities and their pension plans, including those of churches as well as colleges and universities (public as well as private) it has not been applied by the IRS to state and local government pension plans. Public pension plans are also generally seen as coming under Internal Revenue Code Section 115, which provides that gross income subject to tax does not include “income derived from… the exercise of any essential governmental function and accruing to a State or any political subdivision thereof.”

Finally, the U.S. Constitution contains a general prohibition on federal taxation of the states. Indeed, the legislative history of Section 115 notes that it was adopted, not because it was needed to establish that the revenues of states and municipalities should not be construed as taxable income, but instead “to foreclose all doubt” by expressly exempting such revenues.]

Fortunately, the Senate-passed version of the TCJA did not include a UBIT provision, and after a full-court press by public plans and their allies in opposition to the House amendment, it was not included in the final version of the law. But it was a close vote.

Therefore, NCTR and other public sector groups were delighted to find that upon careful review, the tax provisions of the Ways and Means Committee’s “Budget Reconciliation Legislative Recommendations Related to Tax” that were put before the Ways and Means Committee this week did not include UBIT provisions applicable to governmental plans, nor any other retirement-related provisions such as “Rothification” language requiring individuals’ contributions to their 401(k) plans to be made , in whole or in part, with after-tax dollars. (There has been some concern that such treatment, if included, would also likely be applied to public employees’ contributions to their defined benefit plans.)

Furthermore, when the Committee voted to approve a final package of amendments early the morning of May 14 by a 26-19 vote — with all Republicans voting for it and all Democrats voting against it — these worrisome provisions were not debated nor included.

Overall, the bill as reported would reduce federal revenues by more than $4.9 trillion over 10 years, according to an estimate of its impact prepared by the Joint Committee on Taxation. This reduction is to be offset by President Trump’s efforts to reduce the size of the federal government. Also, the final section of the bill would authorize a $4 trillion increase in the debt ceiling.

However, this does not mean that such problematic public pension provisions could not be included at some point in order to get a final budget reconciliation package through the House. This could be especially true should “dozens of Republicans from contested congressional districts” — who have “positioned themselves at the center of the negotiating table,” according to the Associated Press – are successful in protecting Medicaid from steep cuts that are being considered. Such cuts may be necessary in order for the House Energy and Commerce Committee to achieve changes in laws within its jurisdiction that reduce the deficit by not less than $880 billion for the period of fiscal years 2025 through 2034, as directed by the House-passed budget.

These GOP Members oppose any reduction in Medicaid coverage for vulnerable populations and are concerned that many rural hospitals will be jeopardized by the proposed drastic cuts. Other more centrist-leaning conservative Republicans are also worried about doing away with green energy tax breaks, arguing that businesses in their districts have already spent millions of dollars on renewable projects, and such steps would undercut economic development.

Finally, several GOP members are insistent that the “SALT” tax deduction, which allows taxpayers to write off a portion of their state and local taxes, needs to have the current cap of $10,000 removed. The language that the Ways and Means Committee has now approved does remove this cap but replaces it with a $30,000 SALT deduction cap for individuals making $400,000 or less. However, reportedly SALT Caucus members – who formally oppose any cap – have told House leadership they could nevertheless support a $62,000 cap for single filers and a $124,000 cap for joint filers, which would take effect in 2025, indexed for inflation. Therefore, the two sides are still far apart, and some New York Republicans have already said this $30,000 cap is a non-starter and would not have their support.

The bottom line? House Speaker Mike Johnson (R-LA) can only afford to lose three GOP votes on a party-line vote and still be able to get the budget reconciliation bill adopted, so every Republican vote matters.

Also, further complicating his efforts to keep all GOP members in line are the demands of the most conservative members of the House Freedom Caucus who want as much as $2 trillion in spending cuts – which will be hard to achieve without the drastic cuts in Medicaid that moderate Republicans oppose.

This raises yet another complicating factor, which is President Trump’s “signaling” to GOP leaders that he is open to raising taxes on the ultra-wealthy to offset the cost of his new policies eliminating taxes on tips, overtime pay and retirees’ social security, according to reporting by Fox News.

“A source familiar with the president’s thinking told Fox News Digital that to accomplish those goals, as well as preserving Medicaid for millions, Trump is considering a new top income tax bracket of 39.6 percent for single taxpayers making $2.5 million or more annually,” Fox says. (The TCJA lowered the tax rate for the top income bracket — currently $609,350 for single filers — to 37 percent, which is set to expire at the end of this year.) Such discussions are “threatening to foment a civil war among Republicans on Capitol Hill,” Fox reports – but no such amendment appeared from Republicans during the Ways and Means mark-up.

So, the final provisions of the overall budget reconciliation package are still being finalized and therefore somewhat unclear – and may require other sources of revenue to be able to satisfy all sides. Hence the concern that provisions related to retirement – and public pensions – are still possible, even if unlikely.

And then there is the Senate, where the GOP has a similarly thin margin and it is uncertain how the House bill, once finalized, will be received. As an indication of rough times to come, Senator Ron Johnson (R-WI) said after Wednesday’s action by the Ways and Means Committee that he thinks House Republicans’ reconciliation bill is “going down,” according to reporting by Politico.

“The ‘big, beautiful bill,’ I think that’s the Titanic,” he is reported to have said, Arguing it does not do enough to reduce spending, Johnson warned “I think that’s going down because I think I have enough colleagues in the Senate that this has resonated with, that say, ‘yeah, we have to return to a reasonable pre-pandemic spending.’”

As Politico notes, “Johnson’s comments indicate that even if the House is able to secure the votes to pass its ambitious legislative package this week, it will struggle to clear the Senate.”

In any case, House leadership still hopes to be able to take a completed budget reconciliation bill – consisting of all the committees’ reconciliation amendments packaged together by the House Budget Committee — to the House floor for a vote as soon as the week of May 19. The goal is to have a final deal with the Senate complete and presented to Trump to sign by July 4.

For more information on what the Ways and Means Committee was initially examining during its mark-up – and which was only slightly modified — the staff of the Joint Committee on Taxation (JCT) has provided a description of each provision, including present law, an explanation of the proposal, and the effective date.