Reconciliation Bill Quickly Takes Shape in U.S. Senate

Here’s the latest from Washington, DC, this week from our partners at Paragon Government Relations:

Following House passage of the One Big Beautiful Bill Act (H.R. 1), Senate Republicans are rapidly assembling their own version of the budget reconciliation package. Earlier this week, key components of the Senate plan were released, including a draft from the Senate Finance Committee featuring significant changes to Medicaid policy and the federal tax code. The Senate Energy and Natural Resources Committee also recently unveiled its section of the bill, which includes a public lands provision that would direct the sale of certain federally managed lands.

Medicaid Provisions

While the House-passed reconciliation bill proposed substantial Medicaid reductions, the Senate Finance Committee draft generally keeps those provisions but also outlines even deeper cuts, particularly for states that expanded Medicaid under the Affordable Care Act (ACA).

As in the House-passed version, and beginning in 2027, the Senate measure would require “able-bodied” adults between the ages of 19 and 64 to meet work, education, or training requirements to maintain Medicaid eligibility. However, the Senate proposal narrows the caregiver exemption to those caring for children age 14 or younger, whereas the House legislation would exempt adults with any minor dependents. While both the House and Senate would provide a one-time, $100 million grant to support state implementation, the Senate draft would give the HHS Secretary the authority to grant a short-term implementation delay for states with good cause.

In a significant departure from H.R. 1, which caps Medicaid provider taxes at their current six percent limit, the Senate bill would gradually reduce that figure in ACA expansion states from six percent to 3.5 percent by 2031. Provider taxes are a key financing mechanism used by many states, including California, to draw down federal matching funds. Reducing the cap could limit the state’s ability to sustain funding for hospitals and safety-net providers, particularly those serving rural and medically underserved communities.

The Senate draft also would eliminate federal Medicaid funding for certain categories of non-citizens who are currently eligible for the program, including refugees and asylees, though states could choose to continue providing coverage using state-only funds for legally present children and pregnant individuals. It also would penalize states providing Emergency Medicaid Services for undocumented immigrants who would otherwise qualify for Medicaid expansion by capping the federal contribution at the traditional Medicaid match, even though states are mandated by federal law to provide these services. Additionally, the proposal would restrict the use of certain third-party contractors in verifying eligibility compliance, which could affect how states and counties manage Medicaid enrollment and redetermination processes.

Finally, the Senate measure would reduce existing State Directed Payments (SDPs) by 10 percent every year until they reduce to Medicare rates, or, in non-expansion states, to 110 percent of Medicare rates. This is a deviation from the House measure, which would grandfather in existing SDPs but hold future negotiated payment limits to the Medicare rate levels. States such as California use SDPs to direct Medicaid managed care plans to make additional payments to providers to pursue a state’s overall Medicaid program and quality goals and are currently allowed to match their payment limit with commercial insurance rates. The reduction proposed in the Senate measure could further erode profits for providers and disincentivize their treatment of Medicaid participants, though nursing home and intermediate care facilities would be exempt. 

Tax Provisions

Tax provisions in the Senate draft remain a point of active negotiation, with the state and local tax (SALT) deduction emerging as a key area of contention. While the House-passed bill would raise the SALT deduction cap to $40,000 for most taxpayers, the Senate version reverts to the current $10,000 cap. That position has drawn criticism from a bloc of House Republicans representing high-tax states, who argue that the cap disproportionately affects their constituents. Senate leaders have indicated this may be a temporary placeholder, but the issue remains unresolved heading into final negotiations.

Beyond SALT, the Senate Finance Committee draft includes a narrower expansion of the Child Tax Credit, increasing the maximum credit to $2,200 per child – less than the $2,500 level approved in the House version. The proposal also includes scaled-back deductions for tip and overtime income, capping allowable deductions at $25,000 and $12,500 respectively. In contrast to the House bill, the Senate draft takes a more measured approach to rolling back clean energy tax incentives.

Finally, it should be noted that the Senate draft does not propose any changes to the longstanding federal tax exemption for municipal bonds.

Public Lands Sale

The Senate Energy and Natural Resources Committee’s portion of the reconciliation package includes a public lands proposal aimed at facilitating housing and community development. Under the draft proposal, the Bureau of Land Management (BLM) and the U.S. Forest Service (USFS) would be directed to identify and sell between 0.5 and 0.75 percent of their total land holdings over a five-year period.

Eligible parcels could be nominated for sale by any interested party. However, the bill would give priority consideration to tracts nominated by states or units of local government, as well as parcels that are adjacent to existing developed areas, have access to infrastructure, are suitable for residential housing, help reduce checkerboard land patterns, or are considered isolated and inefficient to manage. It should be noted that certain lands would be excluded from eligibility, including those with special designations such as national parks, national monuments, wilderness areas, and national recreation areas. The bill also would prohibit the sale of parcels with valid existing rights, including mining claims, grazing permits, leases, and rights-of-way.

Lands sold under this authority would be required to be used for housing or associated community needs, as defined by the Secretary. The proposal also woul authorize the secretary to offer a right of first refusal to states or local governments for eligible parcels located within their jurisdictions.

According to CBO, the proposal is estimated to generate between $5 billion and $10 billion over the next decade. Of the proceeds, five percent would be directed to the local jurisdiction where the parcel is located, and five percent would be allocated to deferred maintenance of federal lands within the state. The remaining revenue would be deposited into the U.S. Treasury.

Outlook

Senate Republicans are aiming to begin floor consideration of the reconciliation package as early as June 26, with a potential final vote occurring over the weekend. However, several procedural and political factors could affect this timeline.

For starters, the Senate parliamentarian must review the full legislative text to determine whether each provision complies with the Byrd Rule, which governs what types of legislation may be included in a reconciliation bill. Provisions that do not have a direct budgetary impact or that are deemed “merely incidental” to budget changes are subject to removal.

In addition, ongoing negotiations within the Republican caucus may influence the final shape and timing of the bill. Concerns over the scale of Medicaid changes, the treatment of energy tax incentives, and unresolved tax provisions like SALT may require further amendments to secure consensus support.

Finally, it should be noted that the revised legislation would need to return to the House for another vote.