The House-Senate Tax Conference: A Byrd’s Eye View (with Ellen Aprill)

[This post is co-authored with Ellen Aprill, who holds the John E. Anderson chair in tax law at Loyola Law School, Los Angeles. Follow her on Twitter: @ellenaprill.]

Delegations from the House and Senate are meeting this week to work out differences between the tax bills passed by the two chambers. Their compromise, known as a conference report, will then go back to each chamber for final approval. Looming large over these negotiations is a Senate procedural requirement, the Byrd rule, that dictates which measures can pass the Senate by simple majority rather than requiring 60 votes to break a filibuster.

The Byrd rule applies in the Senate to all measures that are passed through the budget reconciliation process, including to the House-Senate conference report. It is the source of the requirement — familiar to many in the tax world — that a bill passed through reconciliation cannot add to the deficit outside the budget window (which in this case is 10 years). It is also the source of a little-understood requirement that every provision in a reconciliation bill must produce revenue effects that are more than “merely incidental” to the non-budgetary consequences. While the primary focus of news coverage and commentary on the Byrd rule in recent weeks has been on the deficit limitations, the Byrd rule’s “merely incidental” proviso is likely to play an increasingly important role as House and Senate negotiators hash out a conference report.

The intricacies of the Byrd rule may determine the fate of provisions affecting the political activities of charitable organizations, the tax treatment of confidential sexual harassment settlements like the ones used by Harvey Weinstein, and many more. And if the conference report runs afoul of the Byrd rule, that could delay passage of the final bill until early 2018. This week’s House-Senate conference is thus an opportune moment to examine the Byrd rule’s past, present, and future.

This post begins with a brief overview of the Byrd rule, focusing specifically on the requirement that a provision cannot be enacted via the budget reconciliation process if the revenue effects are “merely incidental” to the non-budgetary consequences. We then explain how the Senate parliamentarian — the nonpartisan official tasked with interpreting the Byrd rule and other procedural requirements — has applied the “merely incidental” proviso in the past. We go on to identify elements of the House and Senate tax plans that raise potential Byrd rule compliance questions, and we consider some of the strategic choices that lawmakers will face in the coming days and weeks. We end by reflecting on the role that the Byrd rule is likely to play in future legislative efforts.

Our analysis yields five key takeaways:

— A provision may violate the Byrd rule’s “merely incidental” limit even if it “scores” — i.e., even if the revenue estimators at the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) say that the provision will have a nonzero effect on revenue. Conversely, a provision may comply with the Byrd rule even if the CBO and the JCT say that it will have negligible revenue effects.

— Ultimately, the Senate parliamentarian must make a judgment call as to whether a provision’s revenue effects are merely incidental to its non-budgetary consequences. No mathematical formula can resolve that question. Moreover, there is no normatively neutral way to assess the magnitude of a provision’s non-budget impact; the parliamentarian must decide for herself what matters and how much.

— The parliamentarian is a protector of Senate supermajoritarianism while simultaneously serving at the majority’s whim. Her task is to ensure that the budget reconciliation process cannot be used by the majority to circumvent the filibuster for non-revenue measures. At the same time, the majority always has the option to sideline the parliamentarian, either by ignoring her recommendations or by firing her. The parliamentarian applies the Byrd rule’s requirements against the backdrop of institutional norms and political realities.

— The list of provisions removed from the current Senate tax bill on Byrd rule grounds thus far suggests that the current parliamentarian is applying the “merely incidental” limit quite robustly. Several provisions with revenue effects of more than (plus or minus) $100 million were dropped from the Senate tax bill apparently due to the “merely incidental” limit just hours before passage. By contrast, provisions with much smaller revenue effects and meaningful non-revenue consequences survived Byrd rule challenges in prior reconciliation efforts. There is no requirement that the list include the specific reasons for striking a provision under the Byrd rule.

— The Byrd rule gives Senate Democrats a potential source of leverage in the budget reconciliation process. Although Senate Republicans need only 50 votes (plus Vice President Mike Pence as a tiebreaker) in order to pass the conference report, they need 60 votes to waive the Byrd rule with respect to any given provision. But just as the parliamentarian’s position is precarious because she can be ignored or ousted by the majority, the minority’s leverage is limited because the majority has the power to eliminate the legislative filibuster, in which case it could pass legislation with 50 votes and the vice president as a tiebreaker even without resorting to reconciliation. So in one respect, the Byrd rule gives Senate Democrats a strong hand, but at the same time, Senate Republicans can take away the Democrats’ cards at any moment.

The Byrd Rule in Brief

The Byrd rule is best understood as a limit on a limit on the Senate’s norm of unlimited debate. For most of the chamber’s history, senators have been able to extend debate on pending measures indefinitely — a practice known as the filibuster. Only for the last 100 years have the Senate rules provided for “cloture,” a maneuver that brings an end to debate through a supermajority vote (initially two-thirds, and now 60 votes). And until 1974, the rule that any measure could be filibustered applied to all legislation in the Senate, including budget bills.

The Congressional Budget Act of 1974 marked a change to the rule that only a supermajority could cut off debate in the Senate. With the goal of reining in the budgetary process, Congress implemented a new budget reconciliation procedure that allows revenue-related measures to pass the Senate without the possibility of a filibuster. The procedure begins with the House and Senate passing a budget resolution that gives “reconciliation instructions” to subject-matter committees; then the chambers consider one or more reconciliation bills that implement the concurrent resolution’s instructions; and then if the House and Senate bills differ, a committee of lawmakers works out a conference report that must be approved again by each chamber.

The availability of this new fast-track process threatened to undermine the Senate’s supermajoritarian norms by allowing a simple majority to enact measures via reconciliation that had little relation to the federal budget. To protect the reconciliation process from abuse, Democratic Senator Robert Byrd of West Virginia introduced the rule that now bears his name. Although it was initially a temporary measure, Congress made the Byrd rule permanent in 1990 and codified it at 2 U.S.C. § 644. In its present form, the Byrd rule applies to budget resolutions, reconciliation bills, and conference reports.

Whenever the Senate is considering any of these measures, any senator can raise a point of order asserting that the legislation includes a provision that is “extraneous.” Under the Byrd rule, a provision is extraneous if it:

(a) does not produce a change in outlays or revenues;
(b) produces an increase in outlays or decrease in revenues that does not follow the reconciliation instructions in the budget resolution;
(c) is not in the jurisdiction of the committee that reported the provision;
(d) produces changes in outlays or revenues that are merely incidental to the non-budgetary components of the provision;
(e) increases the deficit beyond the window specified in the budget resolution; or
(f) recommends changes to Social Security.

Once a provision has been challenged on the grounds that it is extraneous, the presiding officer of the Senate — who is either the vice president or a majority party member — must decide whether to sustain or overrule the point of order. Historically, the presiding officer almost always has followed the recommendations of the Senate parliamentarian, a nonpartisan official who serves as the official adviser to the Senate on the interpretation of the body’s rules and procedures. If the presiding officer sustains the point of order (i.e., agrees that the provision is extraneous), the provision is stricken from the legislation unless 60 senators vote to waive the Byrd rule or override the presiding officer. Likewise, if the presiding officer rejects the point of order, 60 senators can overcome that ruling to strike the provision.

While points of order are raised and decided in public view, much of the action related to the Byrd rule occurs behind closed doors. In a so-called “Byrd bath,” representatives from the majority and minority parties in the Senate (usually Budget and Finance Committee staffers, but occasionally others) will meet with the parliamentarian and debate which provisions violate the Byrd rule’s strictures. Sponsors generally remove such provisions before the bill goes to a final vote. As a result, the handful of cases in which the presiding officer has ruled on whether a provision violates the “merely incidental” limit represent just a small share of the total number of instances in which material has been stripped from legislation on those grounds.

“Merely Incidental to the Non-Budgetary Components”

The most common basis for Byrd rule challenges from the Senate floor is on grounds that a provision “does not produce a change in outlays or revenues.” This determination is generally straightforward. Consider, for example, a provision in the Senate tax bill to change the name of the “Low Income Housing Tax Credit” to the “Affordable Housing Tax Credit.” The parliamentarian advised senators that this provision would violate the Byrd rule, presumably on the grounds that it would not affect the budget in either direction. (Perhaps one could argue that since “Affordable” has one more letter than “Low Income,” the name change will increase ink costs, but in this as in other areas of law, de minimis non curat lex.)

By contrast, the Byrd rule’s requirement that provisions must produce more than “merely incidental” budgetary effects is innately subjective. An annotated edition of the federal budget laws produced by the Senate Budget Committee in 1993 so concedes:

This subparagraph contributes much of the ambiguity created by [the Byrd rule]. Its language calls for the exercise of judgment. The Parliamentarian has not laid down any bright-line test to aid that judgment, and reserves the right to consider each individual case on its merits.
The drafters of this subparagraph wished to prohibit provisions in which policy changes plainly overwhelmed deficit changes. For example, a nationwide abortion prohibition might marginally reduce Government spending, but would constitute a much more significant policy change than budgetary action. The application of this subparagraph, however, has ranged wider than such plain cases.

The abortion example illustrates a point that the annotation goes on to state explicitly: “Budgetary effect, without more, does not insulate a provision from violating the [‘merely incidental’ condition].” At the same time, “[p]rovisions that have budgetary effects that the Congressional Budget Office cannot estimate do not necessarily violate” the Byrd rule. The “merely incidental” proviso does not come down to a single number.

1993 as a Turning Point

The 103rd Congress, from 1993 to 1994, was a turning point in the life of the Byrd rule. From the time of the Byrd rule’s introduction until 1993, the budget reconciliation process was primarily used to enact legislation with supermajority or bipartisan support. The Omnibus Budget Reconciliation Acts of 1986, 1987, and 1989 all garnered more than 60 votes. The Omnibus Budget Reconciliation Act of 1990 passed by a narrower margin — with 54 votes in favor — but those 54 yeas included 37 Democrats and 17 Republicans, with the leaders of both the majority and minority in support. (No budget reconciliation bills were passed in 1988, 1991, or 1992.)

This is not to say that Byrd rule issues were entirely absent from the budget reconciliation process in the late 1980s and early 1990s. For example, during consideration of the Omnibus Budget Reconciliation Act of 1990, Senator Howard Metzenbaum of Ohio raised a point of order to strike two provisions imposing criminal penalties for violations of workplace safety laws. Senator Metzenbaum did not object to the provisions on substantive grounds — in fact, he had supported them in the Labor Committee. In explaining his point of order, Senator Metzenbaum said:

We consulted with the Budget Committee experts before including the OSHA criminal penalty provisions in the reconciliation package. Based on the revenue estimate by the Congressional Budget Office, those experts indicated that the criminal penalty provisions were not extraneous under the Byrd rule. But I understand this may be a close question. I want to support the leaders in their effort to keep extraneous provisions out of this package; therefore I am willing to put the question to the Chair and to abide by the Chair’s ruling.

The chair (i.e., presiding officer), at the parliamentarian’s recommendation, sustained the point of order and struck the criminal penalty provisions from the final bill.

In 1993, however, both houses of Congress and the presidency were under the unified control of a single party for the first time since the introduction of the Byrd rule. Bill Clinton began his first term with a 259-to-176 Democratic majority in the House (counting independent Congressman Bernie Sanders of Vermont as a Democrat) and a 57–43 Democratic majority in the Senate. Thus, a united Republican minority could block legislation subject to the filibuster in the Senate but could not stop reconciliation bills. This new configuration came at a time of increasing ideological polarization between the parties.

At one point in the 103rd Congress, President Clinton and Senate Majority Leader George Mitchell considered using the budget reconciliation process to pass a sweeping health care reform package. Senator Byrd, protective of the institution’s supermajoritarian norms, apparently nixed that idea along with a handful of other Democrats who thought that using budget reconciliation for health care reform would be, in the words of North Dakota Democrat Kent Conrad, an “abuse of the process” that was “not what the Founding Fathers intended for this body.” Even so, the Omnibus Budget Reconciliation Act of 1993 was distinctively contentious and partisan, with a number of provisions that pushed the Byrd rule’s boundaries. The final package passed without a single Republican senator’s support, and with Vice President Al Gore casting the deciding vote.

A couple of examples offer a taste of the Byrd rule debates during the 1993 budget fight. One involved a provision requiring childhood vaccine manufacturers who sold vaccines to the federal Centers for Disease Control to offer similar terms to states. During the debate over the Senate’s initial reconciliation bill, Republican Senator Bob Packwood of Oregon challenged that provision on Byrd rule grounds, and the presiding officer — apparently on the parliamentarian’s recommendation — agreed that it was extraneous. (The provision primarily affected state — not federal — budgets.) However, the Congressional Budget Office later said that allowing states to buy vaccines at the CDC price would have some effect on the price that the federal government paid, even though it could not quantify the effect. When a similar provision appeared in the conference report, Republican Senator John Danforth of Missouri challenged it, but this time, the presiding officer — apparently again on the parliamentarian’s recommendation — overruled the point of order and allowed the provision to remain in the final bill.

Another controversial provision in the 1993 bill imposed an assessment on cigarette manufacturers who imported more than 25% of the tobacco they used. The assessment was set at a rate that would make it unprofitable for manufacturers to trigger it, and it caused the United States to violate international trade laws (as the World Trade Organization would later rule). The Congressional Budget Office estimated that the assessment would raise only $6 million a year, and Republican Senator Hank Brown of Colorado raised a Byrd rule challenge. On the parliamentarian’s recommendation, however, the parliamentarian ruled that the provision’s budgetary effects were more than “merely incidental” to the non-budgetary consequences.

The Parliamentarian’s Power — and Vulnerability

Partisan fights over the Byrd rule have continued in the two dozen years since the Omnibus Budget Reconciliation Act of 1993. The stakes have increased as both parties have resorted to the budget reconciliation process in order to implement their policy agendas. Thus, while some Senate Democrats balked at using reconciliation to pass health care reform in 1993, a Republican-controlled Congress used reconciliation to pass welfare reform in 1996. (In that case, the final bill passed the Senate by a 78–21 margin, making the resort to reconciliation unnecessary as a maneuver to circumvent the filibuster.) Then in 2010, Senate Democrats used budget reconciliation to pass a final set of amendments to the Affordable Care Act. More recently, Senate Republicans have repeatedly (and unsuccessfully) tried to use budget reconciliation to undo the ACA.

In all of these efforts, the Senate parliamentarian has played the role of traffic cop, ensuring the budget reconciliation process cannot be used to bypass the normal route for non-budget legislation. (The parliamentarian plays less of a role in determining whether reconciliation bills hit their deficit targets — the Senate Budget Committee chair, aided by the CBO and JCT, calls those shots.) But while the current parliamentarian, Elizabeth MacDonough, has been called one of “the most powerful women in Washington” (or, more hyperbolically, “the most powerful person in America”) because of her role in reconciliation, that power is limited in two important ways.

First, while the presiding officer of the Senate traditionally heeds the parliamentarian’s advice, that tradition can be broken. In 1975, Vice President Nelson Rockefeller ignored parliamentarian Floyd Riddick’s advice regarding the proper procedure for changing the Senate’s filibuster rules. And in 1987, Vice President George H.W. Bush disregarded parliamentarian Alan Frumin’s advice regarding a quorum call in order to delay an energy conservation bill backed by the Democratic majority. In theory, any member of the majority serving as presiding officer could do the same thing. (When the vice president is away, the president pro tempore of the Senate usually designates a junior senator from his party to preside. Republican Senator Orrin Hatch of Utah is currently the president pro tempore.)

Second, the Senate parliamentarian lacks any tenure protection. She can be fired by the secretary of the Senate, who is herself chosen by the majority leader. One of MacDonough’s predecessors, Robert Dove, was ousted by the Republican majority in 2001 after a series of disputes regarding budget reconciliation.

Since taking over in 2012, MacDonough has issued a number of important determinations interpreting the Byrd rule. Near the end of President Obama’s second term, MacDonough said that the Byrd rule allowed Senate Republicans to defund Planned Parenthood through a budget reconciliation bill. And she said that while reconciliation could not be used to eliminate the ACA’s individual and employer mandates, Senate Republicans could use the budget process to reduce the penalties for violating those mandates to zero (which is much the same thing). This summer, however, MacDonough said that Senate Republicans could not use reconciliation to prohibit Planned Parenthood from receiving Medicaid funds for one year or to prevent ACA tax credits from being used to purchase health insurance that covers abortion. (See here for a summary of some of MacDonough’s other Byrd rule determinations during this summer’s health care debate.)

MacDonough already appears to have shaped the Senate’s tax plan as well. Hours before the Senate passed its tax bill at the beginning of this month, Senator Finance chair Hatch stripped a number of provisions from the bill for purposes of “Byrd rule compliance,” according to a Finance Committee release. Hatch presumably acted after receiving advice from the parliamentarian that these provisions would violate the Byrd rule.

Those measures include (with JCT’s estimates of the 10-year revenue effects in parentheses):

— A provision that would have required foreign airlines to pay U.S. corporate income tax on a portion of their profits ($200 million revenue gain);

— A provision that would have allowed taxpayers to set up 529 college savings plans for children in utero ($100 million revenue loss);

— A provision that would have repealed the tax-exempt status of professional sports leagues, including the U.S. Tennis Association and the PGA Tour ($100 million revenue gain);

— A provision that would have exempted certain private foundations from a 200 percent excise tax on the value of for-profit companies that they wholly own — apparently intended to spare the foundation that holds the Newman’s Own company (revenue loss of less than $50 million, presumably because any foundation would choose to sell the company rather than pay the tax); and

— A provision that would have limited the ability of plaintiff-side lawyers to deduct expenses in pending contingency-fee cases ($50 million revenue gain).

One surprising thing about the provisions stripped from the Senate bill is that several of them “score” — i.e., the JCT can assign a dollar value to their revenue effects. Recall that the vaccine price provision in the Omnibus Budget Reconciliation Act of 1993 ultimately survived a Byrd rule challenge notwithstanding the fact that CBO could not quantify the revenue effects of the measure. Recall as well that the imported tobacco provision in 1993 legislation made it into the final bill even though the revenue effect ($6 million a year over 5 years) was smaller than several of the measures removed by Senator Hatch.

The list of provisions stripped from the Senate bill also illustrates the inherent subjectivity of the parliamentarian’s “merely incidental” determination. For instance, consider whether the provision to allow taxpayers to set up 529 savings plans for children in utero has significant non-budgetary consequences, such that the revenue effects can be characterized as “merely incidental.” Key to that determination is an assessment of the symbolic significance of a tax provision that places fetuses on the same plane as children who have emerged from the womb. Evidently the parliamentarian concluded that the provision was primarily intended to convey a message regarding the morality of abortion rather than to facilitate college savings by expecting parents. That seems to us to be the correct determination, but it requires an evaluation of motives as well as budget math.

The Days Ahead

If motives figure prominently in the parlimentarian’s decisions, as they must under the “merely incidental standard,” uncertainties continue to lie ahead, even, if as expected, a Byrd bath takes place in connection with the conference report. According to the Wall Street Journal, Democrats “are scouring the tax legislation for possible Byrd violations.” Provisions in the House bill that weren’t included in the Senate’s initial version can be challenged on Byrd rule grounds if they are incorporated into the conference report. New measures crafted by the conference committee can be challenged as well. And as the childhood vaccine episode from 1993 illustrates, senators can relitigate Byrd rule issues — especially in light of new information from the CBO and JCT — even if the parliamentarian has made a determination on a similar provision once before.

One provision that is sure to elicit a Byrd rule challenge if it is incorporated into the conference report is the House bill’s modification to the Johnson amendment. The Johnson amendment (yes, that’s Johnson as in LBJ) states that a nonprofit organization exempt from taxation under section 501(c)(3) cannot “participate in, or intervene in . . . , any political campaign on behalf of (or in opposition to) any candidate for public office.” The House bill would create a safe harbor for statements “made in the ordinary course of the organization’s regular and customary activities” that results in “not more than de minimis incremental expenses.” The safe harbor would apply from 2019 to 2023.

On the one hand, the House provision would have enormous consequences for churches and other charities. As one of us has written in the New York Times, “permitting charities to engage directly in electoral politics will reduce the respect they have long been afforded” and “will harm the sector.” It may also distort the political marketplace by allowing tax-deductible donations to go toward supporting candidates. And the motive for the provision clearly has little to do with revenue. Then-candidate Donald Trump made repeal of the Johnson amendment a major component of his appeal to religious conservatives during the 2016 campaign. House Republicans have introduced legislation called the “Free Speech Fairness Act” to roll back the Johnson amendment several times before, with nary a reference to the revenue effects.

On the other hand, the House provision would indeed have a revenue effect. JCT estimates that this change will lose revenues of $2.1 billion over the five years for which it will be in effect under the House bill, as donors who otherwise might have made nondeductible contributions to social welfare and political organizations instead make deductible gifts to 501(c)(3)s. That dollar amount may be enough to shield it from the Byrd rule. There are few if any instances in which the parliamentarian has determined that a provision with revenue effects exceeding $2 billion flunks the Byrd rule on “merely incidental” grounds. But to repeat: the Byrd rule comes down to more than a single number.

Another provision that could raise Byrd rule issues is one that denies a deduction for confidential settlements of sexual harassment and sexual abuse claims. That provision, initially proposed by Republican Congressman Ken Buck of Colorado in response to revelations that Hollywood producer Harvey Weinstein had used confidentiality clauses to cover up decades of sexual misconduct, made it into the Senate bill but not the House version. The Joint Committee on Taxation says that the provision will generate a revenue gain of less than $50 million over the next decade.

The provision would seem to be vulnerable to a Byrd rule challenge on the grounds that the minimal revenue effects are merely incidental to the non-budgetary consequences. The evident purpose of the provision is to discourage confidentiality clauses, not to generate revenue. It is not clear why this provision would pass Byrd rule muster when others with larger revenue effects, such as the repeal of the tax exemption for professional sports leagues, did not.

At the same time, Senate Democrats face a difficult tradeoff in deciding whether or not to challenge the confidential settlement provision on Byrd rule grounds. On the one hand, any Byrd rule violation in the conference report could postpone the passage of the GOP plan. Striking just one provision from the Senate version would mean that the House and Senate bills do not match. Sending the legislation back to conference might delay final passage until early 2018, after lawmakers return from an abbreviated holiday recess.

On the other hand, Senate Democrats do not want to be seen as defenders of secret sexual harassment settlements, especially after one of their own — Al Franken of Minnesota — reluctantly resigned amidst sexual misconduct allegations. And if the confidential settlement provision were to become the subject of a Byrd rule waiver vote, Senate Democrats might not want to go on record against the measure. At the very least, they would have to weigh the benefits of a short-term delay against the longer-term political consequences of their position.

Moreover, Senate Democrats — like the parliamentarian — are in a position of vulnerability when it comes to the Byrd rule. Extraneous material in a conference report can empower the minority by giving it a bargaining chip in a process in which it is mostly relegated to the sidelines. But the majority still holds two trump cards. First, as noted above, the majority controls the presiding officer’s chair, and if the presiding officer says that something isn’t a Byrd rule violation, it takes 60 votes to override that decision (60 votes that the Democratic minority does not have). And second, Senate Republicans could exercise the so-called nuclear option and eliminate the filibuster altogether. The survival of the Senate’s supermajoritarian norms ultimately depends on the good graces of a simple majority.

We would be surprised if the fight over the Republican tax plan is what pushes the Senate to its breaking point. In April, 61 senators — including 29 Republicans — signed a letter calling on the majority and minority leaders to retain the filibuster for legislation. And so far, calls from Republican Senators Ted Cruz of Texas and Rand Paul of Kentucky to override the parliamentarian’s Byrd rule determinations have attracted little support from others in the majority caucus.

And yet if the history of the Byrd rule teaches us one thing, it is that the norms of the Senate change over time. From today’s vantage point, it is hard to imagine any senator following in Howard Metzenbaum’s tracks and raising a point of order against legislation he helped to write because he was worried about the presence of extraneous material. It is hard to imagine members of the majority pushing back against their own party’s attempt to use budget reconciliation to enact legislation that advanced their party’s non-budgetary priorities. And it is hard to imagine budget reconciliation bills passing with the overwhelming bipartisan majorities that several such bills commanded in the years immediately after the Byrd rule’s introduction.

In sum, the history of the Byrd rule teaches us much about the way that the Senate’s procedural requirements will shape the final stage of the tax legislative process. But it does not teach us everything. The Byrd rule certainly imposes constraints on the Senate majority, but the majority can unwind those constraints in a number of ways. The various actors — the majority and the minority, individual senators, and the parliamentarian — are players in a procedural chess game. But unlike any other chess game, one side retains the ability to rewrite — or disregard — virtually all the rules.