House Republicans are advancing a new budget and tax framework known as Reconciliation 2.0, aiming to reshape federal revenue rules, curtail IRS enforcement, and tweak budgetary processes.
Built on the existing fiscal reconciliation process in the Senate, the proposed “Reconciliation 2.0” represents a strategic legislative approach that allows passage of budget and tax measures with a simple majority vote, bypassing the traditional 60-vote filibuster threshold. This mechanism targets both spending caps and revenue adjustments to achieve policy goals while addressing the complex interplay between tax relief, enforcement capabilities, and fiscal responsibility.
Following the successful passage of the “One Big Beautiful Bill Act” (H.R. 1) in July 2025, which increased deficits by $3.6 trillion over 10 years, House Speaker Mike Johnson has signaled plans for a second reconciliation package beginning in fall 2025. This next phase would focus on items that didn’t make it into the first bill due to procedural obstacles, with an emphasis on creating a net deficit-reducing package.
Key Tax Policy Proposals
The framework for Reconciliation 2.0 encompasses several targeted tax policy initiatives designed to provide relief while addressing compliance and enforcement concerns:
Temporary Extension of Individual Tax Cuts
Building on the permanent extension of key business provisions achieved in the first reconciliation bill, the second package would likely include temporary extensions of individual tax cuts from recent relief measures. These extensions would be offset by work requirements or income thresholds to ensure targeted relief reaches intended beneficiaries while maintaining fiscal discipline.
Strategic IRS Audit Funding Reductions
A central component involves reductions in IRS audit funding, particularly targeting examinations of high-income earners and large corporations. This aligns with the substantial cuts already proposed by House appropriators, who have advanced legislation cutting IRS funding from $12.3 billion in fiscal 2025 to $9.5 billion in fiscal 2026.
Retirement Account Rule Revisions
The package would include modifications to retirement account regulations, particularly changes to required minimum distributions that could provide additional flexibility for retirees while potentially generating revenue through accelerated tax collection on certain account types.
Small Business Expensing Acceleration
To stimulate investment and economic growth, the proposal includes acceleration of expensing provisions for small businesses, allowing immediate deduction of capital investments rather than depreciation over multiple years.
Effects on IRS Enforcement
The enforcement implications of Reconciliation 2.0 represent a significant shift in tax administration philosophy and capabilities:
Staffing Level Caps
Proposals to cap IRS staffing levels dedicated to audits and collections would formalize the 26% workforce reduction already achieved since January 2025. The IRS currently faces an indefinite hiring freeze, with plans to reduce the workforce to 77,728 employees in fiscal 2026 from 96,700 in the fiscal 2025 operating plan.
Automated Compliance Tool Limitations
The package would impose restrictions on automated data-matching tools used for compliance checks, potentially reducing the IRS’s ability to identify discrepancies and pursue enforcement actions efficiently. This represents a significant departure from the technology-enhanced enforcement approach previously emphasized.
Enhanced Oversight Requirements
Increased oversight and reporting requirements for IRS enforcement actions would create additional bureaucratic layers, potentially slowing the agency’s ability to pursue complex cases involving high-wealth individuals and large corporations. Current enforcement units have already experienced substantial cuts, with the Pass-Through Entities office losing 27% of staff and the Global High Wealth unit losing 38%.
Budgetary Implications
The fiscal dynamics of Reconciliation 2.0 present complex trade-offs between immediate relief and long-term revenue stability:
Revenue Loss Offset Requirements
Revenue losses from extended tax cuts would require identification of alternative revenue sources or spending reductions elsewhere in the federal budget. The Congressional Budget Office has identified numerous potential savings options across various policy areas, including Medicare, Medicaid, and energy-related tax breaks.
Deficit Projection Impacts
While spending caps could potentially reduce deficit projections if maintained, the overall package would need to achieve net deficit reduction to gain Senate approval. This constraint limits the scope of tax relief that can be provided without corresponding offsets.
Long-term Compliance Revenue Risks
The debate centers on whether enforcement cuts might undermine long-term tax compliance and revenue stability. Treasury analysis suggests that reduced audit rates for high-end taxpayers could decrease revenue by tens of billions annually while making the tax system less fair.
Implementation Challenges and Timeline
Procedural Constraints
The second reconciliation package must navigate Senate reconciliation rules that limit provisions to those with direct budgetary impact. The package would likely involve only four to five congressional committees compared to nearly a dozen in the first bill, focusing on areas with the greatest potential for deficit reduction.
Political Dynamics
With 2026 midterm elections approaching, Republicans face pressure to demonstrate additional policy achievements while managing potential Senate fatigue with another large reconciliation effort. Success depends on maintaining unity within the Republican caucus and securing presidential support.
Economic Impact Considerations
Independent analyses suggest that while tax cuts may provide short-term economic stimulus, the combination of reduced enforcement and increased deficits could have modest long-term growth effects, with GDP impacts potentially declining over time due to crowding-out effects from higher federal borrowing.
Stakeholder Perspectives and Market Response
Tax Professional Community
Tax practitioners face increased complexity from new provisions while dealing with reduced IRS staffing for guidance and dispute resolution. The burden of explaining complex new rules may shift significantly to private sector professionals as IRS customer service capacity declines.
Business Community Response
Small businesses generally support acceleration of expensing provisions, while larger corporations may benefit from reduced audit scrutiny. However, concerns remain about the long-term sustainability of the tax system and the potential for increased complexity in compliance requirements.
Fiscal Policy Experts
Budget analysts warn that the combination of tax cuts and enforcement reductions could exacerbate long-term fiscal imbalances, particularly given existing debt trajectories that show debt as a share of GDP climbing to 126% by 2034 under current policies.
As Reconciliation 2.0 moves through the legislative process, stakeholders continue weighing the trade-offs between short-term tax relief and the risks of weakened enforcement capabilities. The final package will depend on negotiations over budgetary offsets, IRS authority constraints, and adherence to the procedural rules governing the reconciliation process. Success will require careful balancing of competing priorities while maintaining the fiscal discipline necessary to secure passage in the Senate.