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Frank Kelly Update: Tax and budget legislation | February 13, 2025

2/13/2025

Increased Republican infighting challenges timing and chances of tax and budget legislation getting done anytime soon.

Francis (Frank) J. Kelly

Founder & Managing Partner, Fulcrum Macro Advisors LLC and Senior Political Strategist for DWS

Three fundamental friction points
The Budget Committee draft resolution also increases the debt ceiling
How is the House Budget Committee draft broken out?
How does this work itself out?

Yesterday morning (2/12/2025), the House Budget Committee released its Budget Resolution, officially kicking off the tax and budget reconciliation process in the House of Representatives. Meanwhile, the Senate Budget Committee adopted their version, one very different in approach and content than the House version. With these new, significant moves by the House and Senate to try to advance President Trump's signature legislative agenda, we thought it timely to discuss what these latest developments likely mean and the potential timing for passage.

Three fundamental friction points

Overall, we would suggest that markets focus on the growing tensions among Congressional Republicans and within the Trump White House over the very basics of how to achieve their end goals. We see three fundamental friction points that Republican leadership seems unable to solve despite the release of the House resolution and repeated strategy meetings with President Trump over the last two months.

First, House Republicans are not unified on the overall size of the Reconciliation legislation. Specifically, a sizeable number of House Republicans (Freedom Caucus members) are saying today's budget reconciliation does not cut deep enough. They are demanding $2 trillion in cuts and are already complaining that yesterday’s Budget proposal seriously undercuts the $4.7 trillion needed to extend President Trump's 2017 Tax Cut and Jobs Act (TCJA).

Case in point: The Chair of the House Ways & Means Committee, Representative Jason Smith (R-MO), has made it clear that he is not happy with the smaller amount dictated in the Budget resolution to craft the tax cut portion of the bill. According to estimates by the Congressional Budget Office (CBO), extending the current tax bill will cost approximately $4.6 trillion. Chair Smith believes that the number needed is closer to $4.7 trillion and yesterday told reporters, "Let me just say that a ten-year extension of President Trump's expiring provisions is over $4.7 trillion…Anything less would be saying that President Trump is wrong on tax policy."

Additionally, the House Budget Committee resolution would require sizeable cuts to Medicaid, something moderate House Republicans are likely to oppose, and which will almost assuredly whip up a hornet's nest of public opposition to the bill. Factoring in the historically thin three-vote majority Republicans have in the House, Speaker of the House Michael Johnson (R-LA) has virtually no room to negotiate a compromise.
What to watch: The House Budget Committee is set to be marked up and voted on Thursday, February 13. We believe – barring a highly surprising last-minute compromise – there are not enough Republican votes within the committee to win approval. For the Budget Committee to fail at such an early stage would be a highly negative signal for any smoother sailing ahead and suggest an elongated timeframe for passage.
Secondly, House and Senate Republican leadership and the Trump Administration – despite more than two months of arguing with each other – are at increasingly inflexible odds over whether to move one or two separate Reconciliation bills this year. The Senate wants two separate reconciliation bills: one just for border security/defense/energy spending issues and one just for the tax bill. Conversely, the House is insistent on one giant reconciliation bill encompassing both tax cuts and the budget.

The House-Senate Republican stand-off worsened this past week when Senate Budget Committee Chair Lindsey Graham (R-SC) decided to move with the two Reconciliation bills approach – to which Speaker Johnson stated he would not allow it to be brought up for a vote in the House if and when it passes in the Senate. Graham managed the Budget Committee approval last night of a Reconciliation bill that only focuses on energy, border security, and defense policy. Graham and Senate Republican Leadership have given no timetable for when they might take up a second reconciliation focused on tax.
Last night (2/12/2025), Politico reported there is a disagreement within the Trump Administration itself over whether to go with one Reconciliation bill or two. On one side, according to the report, Vice President J.D. Vance, Office of Management and Budget Director Russ Vought, and White House Deputy Chief of Staff Stephen Miller are pushing for a two-bill approach. Treasury Secretary Scott Bessent is pushing for one. Congressional sources we spoke to last night are somewhat incredulous the White House has not come to a final decision on this basic framework and worry it portends further problems to getting a final bill done anytime soon.

Thirdly, The Budget Committee draft resolution also increases the debt ceiling to $4.5 trillion over the next four years – another potential stumbling block as a number of House Republican members either do not like such a long extension and have never voted for something like this before or simply want to do away with debt ceilings all together.

Meanwhile, the risk of a government shutdown increasingly looms as the Continuing Resolution (CR) currently funding the government expires on March 14. House leaders are already mulling pushing for another six-month CR which will likely be tough to get through as the various Republican factions will use it as a bargaining tool to get more of what they want in a future budget reconciliation bill – adding to the risk of a shutdown.

Looking more closely at the House Budget Committee draft release, it is important to note – to the point we made above – it only gives the House Ways & Means Committee $4.5 trillion for tax cuts, not the minimum of $4.7 trillion they have demanded. This means the Ways & Means Committee must now make some tough choices on what provisions can and cannot be included (and why we believe President Trump and some Congressional Republicans are supporting the elimination of the Carried interest provisions as well as some chatter about possible elimination of the tax exemption for municipal bonds in the new tax bill).

How is the House Budget Committee draft broken out?

The House Budget draft instructs the respective committees to work under the following caps and to report back their versions by March 27:

These committees can spend up to these numbers – an increase to the deficit:

$100 billion on spending by the Armed Services Committee
$90 billion on spending by the Homeland Security Committee
NOTE: There is an added $325 billion in defense and border security spending in these two numbers - $175 billion for stronger security on the southern border and $150 billion in defense spending
$110 billion on spending by the Judiciary Committee

The following committees must report back offsets (cuts to the deficit) by at least these numbers:

$230 billion for the Agriculture Committee
$330 billion for the Energy and Commerce Committee
$880 billion for the Energy and Commerce Committee (which would mean the committee would have to find significant cuts into Medicaid, which moderate Republicans will not be comfortable with)
$1 billion for the Financial Services Committee
$1 billion for the Natural Resources Committee
$10 billion for the Transportation and Infrastructure Committee

How does this work itself out?

With the White House as well as House and Senate Republican leaders lacking a clear, unified approach, we believe it is highly likely Congress will be forced to pass a six-month continuing resolution - with no support from Democrats who are furious over the President's DOGE program. Congressional sources we have spoken to are bracing for this fight to go on for the better part of the year, leaving markets guessing what tax policy looks like for a number of months ahead.

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Francis (Frank) J. Kelly

Frank is the Founder and Managing Partner of Fulcrum Macro Advisors LLC, a political risk advisory firm based in Washington, DC. He is the senior political strategist for DWS.

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Frank Kelly Update: Tax and budget legislation | February 13, 2025

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