Update 834 — Reconciliation and Beyond: Econ. Policy Agenda in Congress, Part 1
The legislative priorities and strategic approach regarding the nation’s major economic policy issues facing the 119th Congress, sworn in last Friday, and the debate around them, are coming into view. Over the next few weeks and months, the GOP majorities in both chambers will focus principally on completing the FY25 budget, addressing the debt limit, and designing one or maybe two reconciliation packages encompassing tax and other economic policy issues such as immigration and energy. Given the narrowness of the GOP majorities in the 119th, Democrats have critical leverage on selected issues despite the Republican trifecta.
On the financial policy front, the GOP in Congress also likely has its sights set on policy and spending constraints on the Consumer Financial Protection Bureau (CFPB), as well as on regulatory legitimization of the crypto industry. More on these to follow in part two of our look at the economic policy agenda of the 119th Congress in next Wednesday’s update.
Best,
Dana
The 119th Congress has been sworn in, had leadership elections, appointed its Committees, and begun legislative work. With a majority in both chambers and a Republican president set to be inaugurated in less than two weeks, Congressional Republicans seek to hit the ground running to enact a wide-ranging economic agenda over the next two years. Their immediate attention will focus on government funding this spring as well as a reconciliation package consisting of tax policy, the debt limit, and, perhaps tangentially, tariff policy. Republican wins on these items are not a certainty and there are internal GOP divisions and vulnerabilities Democrats can take advantage of to limit the damage of a second Trump administration.
Government Funding
Congress will be thrust back into a debate over government funding for the remainder of the 2025 fiscal year (FY25) this spring after agreeing to a second short-term extension (CR) before the holidays to fund the government until March 14 at FY24 levels.
The agreement, which kicked the can on appropriations until almost halfway through the fiscal year, came after Speaker of the House Mike Johnson struck a bipartisan deal with Democrats on government funding, disaster aid, and other priorities like health, only to see it derailed at the last-minute by President-elect Trump. Trump, whose hand was at least partially forced by billionaire advisor Elon Musk, insisted on a much smaller bill paired with action on the debt limit. Due to Republican opposition to raising the debt limit – namely from the House Freedom Caucus (HFC) – the final package ended up losing many of the components of the initial bipartisan agreement but did not include Trump’s demands to address the debt limit, highlighting the major divisions within the Republican party and the potential perils of Trump’s meddling in the legislative branch. Even with a deal much friendlier to Republicans than Johnson’s initial agreement, the short-term measure was opposed by 38 House Republicans and passage required Democratic support, setting up negotiations between now and mid-March.
Appropriations is one area where Democrats will have considerable leverage to oppose extreme Republican priorities in the 119th Congress. Right-wing Republicans are generally opposed to federal funding altogether, and their demands for partisan policy riders (AKA poison pills) and unrealistic funding levels only serve to further complicate negotiations on final funding bills. Funding measures will still need 60 votes to pass in the Senate despite Republican control of both legislative chambers and the presidency, meaning final appropriations bills for FY25 will necessitate bipartisan support – something Democrats should not and likely will not give away without significant concessions.
Reconciliation
Republicans will look to pass some of President-elect Trump’s biggest economic policy priorities using Reconciliation – a privileged legislative process that circumvents the 60-vote filibuster threshold in the Senate and allows partisan legislation to be enacted with a simple majority vote in both chambers. Legislation passed under reconciliation faces key constraints — it must relate to existing spending, revenues, or the federal debt limit, must be deficit-neutral over a ten-year budget window, and not create new policies or programs, among other restrictions. The majority does not have carte blanche to enact policy changes.
Below, we explore the state of play and road ahead for economic policy issues Republicans have been discussing in the context of reconciliation, including tax, the debt limit, immigration, tariffs, and energy.
Tax Policy
Trump and congressional Republicans last used reconciliation to pass the Tax Cuts and Jobs Act (TCJA) – a regressive package of tax breaks for wealthy individuals and corporations. While most of the corporate provisions of this package were made permanent, including a lowering of the corporate tax rate from 35 percent to 21 percent, individual provisions are scheduled to expire at the end of 2025 without congressional action. Thus, Congress will be focused on tax in the first half of its new term as Trump and congressional Republicans are looking to use the reconciliation process once again to extend the expiring tax provisions at a projected cost of $4.6 trillion over 10 years. Some of the tax items on the Republican agenda for reconciliation include:
- individual tax brackets and rates,
- 20 percent deduction for pass-through business income (199A),
- $20,000 standard deduction paired with limitations on itemized deductions,
- increased exemption amounts and phaseout thresholds for the Alternative Minimum Tax (AMT), and
- the doubled estate tax exemption threshold.
Trump and Republicans have also proposed new cuts, with Trump pitching a number of ideas on the campaign trail to curry favor with the American electorate such as:
- enacting a 15 percent corporate tax rate for companies that make their products in America and 20 percent for all U.S. businesses.
- eliminating federal income taxes on tip wages, overtime wages, and Social Security benefits.
These additional cuts and the exclusion of some revenue-raising provisions of the TCJA that are scheduled to expire like the cap on the State and Local Tax (SALT) deduction could drive the cost of the tax portion of a reconciliation passage to as much as $10 trillion over 10 years when including extensions. Republicans have proposed offsetting the cost of the tax breaks for the wealthy with cuts to federal spending on crucial services or even tariffs (discussed in more detail below), meaning working Americans are likely to ultimately foot the bill for Trump’s next regressive package of tax cuts for the rich even if it is not deficit-financed.
There are still opportunities for Democrats to limit or resist GOP tax plans, as Republican fiscal hawks including members of the House Freedom Caucus (HFC) are likely to oppose the high cost of the package without the significant offsets mentioned above. These offsets may make the package less attractive for moderates who will face tough reelection contests in 2026, necessitating careful, potentially unrealistic balance between competing priorities of different congressional Republican factions.
Debt Limit
The debt limit was reinstated at the beginning of this year following the expiration of its suspension via the Fiscal Responsibility Act (FRA), passed in June 2023. Though the Treasury Department will use extraordinary measures to cover federal obligations while it is able, Congress is now tasked with either raising or suspending the debt limit before reserves are depleted, likely this summer (termed the X Date). Congress has never failed to address the debt limit before the X Date, but failing to act would cause the government to default on its obligations, stripping the gears off the U.S. macroeconomy and causing global economic uncertainty.
Though action had been widely expected to wait until later in 2025, Congress was thrust into a debate over the debt limit less than a month ago when President-elect Trump nixed the initial bipartisan agreement for an FY25 CR and demanded Congress address the issue before taking office later this month. As fiscally conservative Republicans generally oppose increasing or suspending the debt limit and minority parties rarely help the majority on the issue, Trump and the GOP were forced to settle for an internal agreement to raise the debt limit by $1.5 trillion as a part of reconciliation paired with $2.5 trillion in (mandatory) spending cuts.
It is currently unclear if this informal agreement will be the path Republicans choose to take in the 119th Congress, especially now that the President-elect has come out in support of using one bigger reconciliation measure as opposed to two smaller ones – an idea championed by Senate Majority Leader Thune that received pushback from House members. The debt limit has the potential to hinder efforts for a broader reconciliation package, especially given demands from GOP hardliners for significant spending cuts that will have to be negotiated in the context of a larger, very costly package.
Immigration
Congress failed to pass a bipartisan immigration bill last year but now turns to reconciliation to fulfill some of the bill’s border priorities with a focus on the President-elect’s plans to undertake a mass deportation of unauthorized immigrants. Ahead of his second term, the President-elect has said he would target as many as 20 million immigrants but some rhetoric has shifted to reveal he may focus on illegal immigrants with a criminal record.
The Republican-held Congress will soon be in a position to fast-track some of the tools Trump needs to enact these campaign promises – some of which he will be able to execute via executive order. As reconciliation provisions must be revenue or spending-related – therefore excluding policy changes – we can expect a surge in resources to the southern border including technology, personnel, and funding for the continuation of Trump’s border wall.
While a price tag is “no factor” according to the incoming President, the American Immigration Council estimates a one-time mass deportation operation of 11-13 million people could cost $315 billion – which they acknowledge is a conservative estimate. A longer-term deportation operation, the Council found, could cost as much as $967.9 trillion over a decade – roughly $88 billion per year.
Unauthorized immigrants are critical to the labor force, especially in the agriculture, construction, hospitality, and retailing sectors. Trump’s deportation plans could decrease overall employment by 1.1 to 6.7 percent depending on the severity of the policy’s implementation and would have an outsized effect in these sectors. While the surges in immigration seen during the Biden administration caused outrage and posed challenges to many American communities, the spike in immigration also benefited the labor supply and even helped ease wage and price pressure.
Tariffs
As Trump’s new term approaches, tariffs continue to be one of his central policy priorities. On the campaign trail, Trump proposed 10-20 percent tariffs on all imports entering the United States and a 60 percent duty on goods from China. Since election day, the President-elect has threatened a 25 percent tariff on goods from Mexico and Canada unless they take action to “control” the flow of illegal immigrants and drugs across their borders along with an extra 10 percent duty on Chinese imports over alleged negligence in the fentanyl supply chain.
What are the innovations for the 119th? While the authority to levy tariffs has shifted to the executive branch over the last century, reconciliation negotiations have sparked the possibility of Congress again legislating tariffs to establish them as a pay-for toward the bill’s costly provisions. This would mark a drastic shift in what is virtually an unchecked Presidential power – a move that neither Congress nor the President has expressed certainty on at this point. Although legislating tariffs is on the table, there are real concerns from both sides of the aisle with GOP lawmakers representing large agricultural constituencies who fear retaliatory tariffs on the sector.
Whether Congress legislates tariffs or the President-elect levies them with his own executive power, his campaign tariff proposals could increase revenue by $2.7 trillion over 10 years, according to the Committee for a Responsible Federal Budget (CRFB). However, this revenue would not be enough to offset the cost of a larger reconciliation package and economists widely agree such wide-sweeping tariffs would burden American consumers, especially lower-income families, as tariffs are generally accepted as a regressive tax. The Peterson Institute for International Economics predicted a 20 percent across-the-board tariff and a 60 percent tariff on Chinese goods would cost American households over $2,600 a year.
Energy
Though the situation is highly fluid, Trump and the congressional GOP are planning on implementing large portions of their energy agenda through reconciliation. What exactly that will look like beyond the broad strokes is still unclear. Trump is certain to push for boosting fossil fuels while curtailing clean energy, but the specific policies required to pull that off may be difficult to include in a reconciliation package.
The biggest roadblock to the GOP’s energy ambitions is the Byrd Rule, which states that any provision in reconciliation that does not impact the government’s fiscal situation – i.e. spending, revenue, and the debt limit – cannot be included. As a result, many in the GOP are admitting that permitting reform for energy projects – which has been a high priority for years – likely will not make it past parliamentarian muster. Other goals, such as ending IRA tax breaks and clawing back funding for Biden’s signature piece of legislation, will be difficult for both practical and political reasons, such as the fact that many GOP lawmakers do not want to lose funding that benefited their districts.
Road Ahead for Reconciliation
Even with a trifecta, narrow margins may spell difficulties for the Republicans, especially in the House (217-215 GOP majority temporarily due to departures). We have seen disagreements over which strategy to use for reconciliation:
- Two reconciliation bills: the first focused on immigration/border, energy, and possibly defense to offer President-elect Trump a quick victory upon taking office, and the second later in the year focused solely on tax
- One big reconciliation bill addressing tax, immigration/border, and energy
President Trump came out in favor of passing “one big, beautiful bill” this past weekend, a piece of legislation that some Republicans think would be too big to fail given all of the different priorities it would address.
Congress will first need to pass a concurrent budget resolution providing instructions to committees on how much they are allowed to spend or cut. Though this will provide little specific information about what will be included in the reconciliation package, it will give us a better sense of the overall size and scope. This resolution will likely need to be passed next month in order to stay on target for the GOP’s reconciliation timeline as Speaker of the House Mike Johnson has promised to pass the package and send it to the President for his signature by the end of April.
Conclusion
With a trifecta, the GOP now has the opportunity to push through many of its aforementioned priorities with sweeping and detrimental economic implications. Democrats may have limited ability to counter many of their policies, but narrow GOP majorities in the House and Senate and intra-party conflicts may serve as a barrier to President-elect Trump’s plans.
As Trump takes office in the coming weeks to enact his harmful and extreme agenda, Democrats in Congress must stand united in opposition to Republican attacks. Without this check, GOP policy will harm working Americans and the country as a whole by:
- slashing spending on crucial government services,
- giving away trillions of dollars to the wealthy and corporations,
- risking a default on federal obligations,
- deporting a crucial block of our workforce,
- increasing the cost of living through sweeping tariffs, and
- rolling back the biggest climate investment in our nation’s history.
This list, while limited in scope, paints a bleak picture of our economic future if Republicans follow through on their promises for policy in the 119th Congress.