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Tax cuts vs. green credits: the Republican fiscal balancing act of 2025

In Donald Trump’s inauguration speech, the U.S. President declared a “national energy emergency” promising to "end the Green New Deal and…revoke the electric vehicle mandate.” The media frenzy around this and the flurry of executive order that followed hides a much larger Congressional effort around Republicans taking back IRA provisions to extend and make permanent expiring Trump-era tax credits, all while agreeing on a palatable debt ceiling.

Republican Legislative Agenda

Republicans are gearing up for an ambitious legislative agenda in 2025, leveraging the ‘budget reconciliation process’ to deliver major wins for President Donald Trump. This strategy allows Republicans to bypass the need for Democratic support in the Senate.

The reconciliation process–a key tool for the majority party–enables the passage of certain budgetary measures with a simple majority vote in the Senate, circumventing the usual 60-vote threshold required to overcome a filibuster. However, this process comes with its own set of rules and limitations, most notably the "Byrd Rule," which mandates that all provisions in a reconciliation bill must be directly related to the federal budget.

At the heart of the GOP's legislative agenda is addressing the 2025-expiring provisions of the Tax Cuts and Jobs Act (TCJA) of 2017, a signature achievement of Trump's first term. Extension could cost between $4 trillion to $7 trillion over ten years. However, Republicans are keen to preserve these tax credits, viewing them as crucial for their prospects in the 2026 Congressional elections. 

To offset these costs, Republicans are eyeing the Inflation Reduction Act (IRA) as a potential source of revenue. Despite 18 House Republicans asking Speaker of the House Mike Johnson (R-La) not to repeal IRA tax credits, the party will undoubtedly seek to repeal or modify certain IRA clean energy tax credits, which could yield savings of $650 billion to $900 billion over a decade. This could include reducing bonus credit structures, limiting transferability of credits, and targeting electric vehicle credits. However, any changes would likely apply only prospectively, ensuring stability for ongoing clean energy projects.

Strategic Divide

While Republicans are united in their desire to use reconciliation, there's a notable split in strategy between House and Senate leadership.

Senate

Majority Leader John Thune (R-S.D.) advocates for a two-bill strategy. The first bill would focus on border security, defense, and energy policy, while the second would address tax reform, particularly extensions of the 2017 Tax Cuts and Jobs Act (TCJA).

House

Speaker Mike Johnson and Ways and Means Committee Chair Jason Smith (R-Mo) prefer a single, comprehensive bill that would include a debt limit increase tied to spending cuts. They argue that the slim Republican majority in the House (where they can only afford to lose two votes to maintain the 218-vote threshold) makes passing multiple bills challenging.

President-elect Trump has expressed a preference for "one big, beautiful bill" but remains open to the possibility of two separate measures.

Bottomline: Republican Unity is Crucial 

The GOP needs to maintain party unity to bypass the Democrats, who plan to use the debt limit debate as leverage to slow down the Republican tax agenda. With a razor-thin majority in the House, consensus is crucial.

The Reconciliation Process

The reconciliation process unfolds in several key steps:

  • Both chambers must adopt a budget resolution containing reconciliation instructions for relevant committees.
  • Authorizing committees then draft legislation based on these instructions.
  • The Budget Committee consolidates these recommendations into a single package.
  • The resulting bill is subject to expedited procedures in the Senate, including a "vote-a-rama" where unlimited amendments can be offered.

Potential Timeline

House Republicans are aiming for an aggressive timeline, with Speaker Johnson suggesting they could pass a bill out of the House as early as April 3rd, potentially reaching the President's desk by Memorial Day (May 26).

Dual Reconciliation Opportunity

Interestingly, Republicans may have the opportunity to pursue two separate reconciliation bills in 2025. This is possible because:

  • A budget resolution for fiscal year 2025 (starting October 1, 2024) has not yet been passed and can be approved by the new Congress in early 2025.

  • A second reconciliation bill could be based on the fiscal year 2026 budget resolution later in the year.

The reconciliation process offers Republicans a powerful tool to advance their agenda, but success will depend on their ability to navigate internal disagreements, manage the debt ceiling, and maintain party unity in the face of Democratic opposition.

As the 2025 debt ceiling deadline approaches, key questions remain about how much deficit Republicans can accept and what percentage of tax relief they can extend – it is this tension which makes the curtailment of IRA tax provisions trickier than expected.