Focus on Washington: How Does Tax Law Get Made?

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With a new president and Congress both promoting changes to the tax code, now is an appropriate time to review how tax proposals become law. It is a process governed by the Constitution, statutes passed by Congress and procedural rules in both the House and the Senate. It is also important to distinguish tax legislation from separate but related issues of government shutdowns and the debt ceiling.

Who Writes Tax Legislation?

While presidents and candidates running for president may outline tax policies they would like to see enacted, tax legislation is the sole domain of Congress. The House and the Senate have tax-writing committees (the House Committee on Ways and Means and the Senate Finance Committee), each with a staff of non-partisan tax professionals who typically draft the legislation based on the policy objectives and proposals the committee members want to address. These committees are separate from the Budget Committees in the House and Senate that are responsible for the spending side of the ledger. Other bills may be introduced by representatives or senators, individually or as a group, and are typically referred to the appropriate committee for review before they come to the full House or Senate for a vote. Congressional Committees may hold hearings and modify the legislation before sending it to either the full House or Senate. Importantly, the Constitution provides that all bills related to raising revenue, such as taxes, must originate in the House.

What Happens in Congress?

Things are relatively straightforward in the House of Representatives. The Speaker of the House calls for debate, the members debate and can propose amendments to the bill and, ultimately, there is a yes/no vote. Passage requires a simple majority.

Things are more complicated in the Senate. Any senator can prevent a vote on a bill through a process called a filibuster, which is written into the Senate’s rules of procedure. Senators can and have used filibusters to delay or prevent votes on a variety of laws. It takes a vote of 60 senators to stop a filibuster. Currently, the Republicans hold 53 seats, which is not enough to prevent a filibuster. This leaves them two remaining paths to pass tax legislation. The first is to persuade enough Democratic or Independent senators to join them to defeat a filibuster, which typically requires compromise. The second path is to rely on the budget reconciliation process, which is not subject to filibuster.

How Does Budget Reconciliation Work?

Available since 1974, budget reconciliation has been used 23 times in the last 50 years to pass a federal budget. It was designed to expedite Senate consideration of certain bills and to align revenue and spending and address the debt ceiling. If invoked, no delays or filibusters are allowed and, with consent, no amendments are allowed. The budget reconciliation procedure can only be used once each fiscal year and can only address the limited topics of spending, revenue and the national debt. The “Byrd” rule, named for James Byrd, the sponsor of the amendment to the 1974 legislation, provides that a reconciliation bill cannot increase the national debt for more than ten years.

The budget reconciliation process begins with a concurrent budget resolution in each chamber directing the various departments of the federal government to revise spending in their jurisdictions to achieve a particular budget outcome. These are drafted by the Senate and House Budget Committees. When both the House and Senate approve using this expedited process (presidential approval is not needed at this stage), the taxation and spending limits are turned into specific legislation. This also must pass the House and the Senate through the expedited process, and the president must sign it. If the president vetoes the bill, it dies unless Congress overrides the veto, which requires a vote of a two-thirds majority in both houses of Congress, or 284 in the House and 67 in the Senate.

What Does This Mean in 2025?

The federal fiscal year runs from October 1 to September 30. There was no reconciliation bill in the final quarter of 2024 or the first quarter of 2025, so there could technically be two reconciliation bills before December 31, 2025 (one before September 30, one after October 1). The Senate has proposed a “two-bill” solution, in which there would be one bill now (before September 30) that addresses spending for immigration, defense and energy. Taxes and other spending priorities as well as raising the national debt ceiling would be pushed off until a second bill in October.

The House has preferred to pursue one bill addressing all these issues now. Their budget resolution has outlined departments that will need to cut their spending and others whose spending is allowed to rise within limits during the ten-year time horizon. The staff of the House Ways and Means Committee are currently writing the proposals to align revenue (or borrowing) to meet those spending objectives.

When Would Any Tax Law Changes Go into Effect?

Congress has the power to make any changes effective immediately or even retroactively to the beginning of this year. However, based on recent practices, such changes most likely would take effect for tax years beginning January 1, 2026.

What is the Role of the Debt Ceiling in This Process?

The United States currently spends more than it raises in revenue. The difference, or deficit spending, is borrowed by issuing bonds and notes. If a new budget increases the amount of borrowing, Congress must authorize “raising the debt ceiling,” which increases the amount that the Treasury Department is authorized to borrow to fund spending. If the debt ceiling is not raised, then the Treasury runs dry at some point (the timing depends on both the pace of spending and the receipt of tax revenue). This is like having a zero balance in the government’s checkbook. Without an infusion of cash from the sale of bonds or the receipt of taxes, the government cannot write any more checks. When planning a budget that increases the size of the national debt, it is necessary to raise the debt ceiling in the same bill or a separate bill.

What Causes a Government Shutdown?

If the government shuts down, it does not mean that the debt ceiling has been reached or that the government does not have money in its accounts. Rather, the government shuts down when Congress has not adopted legislation for the current fiscal period authorizing various departments to spend money. It is like having funds in your checking account but having no checks in your checkbook. This happens when a budget period runs out and a new budget has not yet gone into effect. This has happened several times in the last six months because no budget was adopted for the fiscal year beginning October 1, 2024. If no new budget bill is passed, the other remedy is for Congress to pass a continuing resolution, which authorizes the government to continue spending based on the prior year’s budget for a limited period of time. Congressional leaders often make this a relatively short period to force the issue on a budget bill. In March, Congress passed a continuing resolution to fund the government through the end of the current fiscal year (through September 30). This took bipartisan support from Democrats in the Senate to pass.