To avoid a Senate filibuster, Republicans are using the reconciliation process to pass tax reform.  As part of their reconciliation instructions, Republicans allowed tax reform to increase the deficit by up to $1.5 trillion over the next ten years.  Even though tax reform can add to the deficit over the first ten years of the proposal, Republicans still need to come up with around $4 trillion in offsets to pay for their approximately $5.5 trillion tax cuts.

Much of the internal Republican debate is about how to pay for these offsets.  As the public learns that the Senate’s offsets (1) include a tax increase on households making less than $75,000 and (2) would lead to 13 million fewer Americans having health insurance, public opinion might encourage Republican Senators to oppose the proposal.  Already one Senator opposes the proposal, and Republicans might lose an additional vote if Democrats can win the special election in Alabama.

What happens if Republicans lose three Senate votes and cannot pass tax reform, but still want to pass something?  Republicans may (1) make a more modest proposal using the existing reconciliation instructions, (2) offset tax reform with reductions in entitlement spending, or (3) amend the reconciliation instructions.

Republicans could use the existing reconciliation instructions to pass a smaller tax-reform package.  The reconciliation instructions allow Republicans to add $1.5 trillion to the deficit.  Thus, they could pass more modest tax cuts that would not require as many politically unpopular offsets.

Alternatively, Republicans could use the existing reconciliation instructions to include reductions in entitlement spending as offsets for tax reform.   Although Republicans have framed the reconciliation instructions as a proposal for reforming the tax code, reconciliation instructions allow any changes in spending or revenue that are within a committee’s jurisdiction.  Because most entitlements are under the jurisdiction of the tax committees, reductions in entitlement spending could pay for tax reform.  Senate Republicans have already begun to use this strategy by including a repeal of the health insurance mandate.

However, Republicans could still pass all their tax cuts without worrying about the political ramifications of creating offsets by amending their reconciliation instructions.  The Congressional Budget and Impoundment Control Act of 1974 allows Congress to amend a resolution on the budget, which Congress uses for reconciliation instructions, any time before the end of the fiscal year (September 30, 2018).  Thus, Congress could amend its reconciliation instructions to provide for a $5.5 trillion increase in the deficit, which would allow all of the tax cuts in the Republican proposals without requiring any offsets.  If tax reform seemed dead, Republicans could even amend the reconciliation instructions to allow another shot at repealing the Affordable Care Act by including instructions for the healthcare committees.