As city and county managers navigate an increasingly complex fiscal landscape, understanding the federal budget reconciliation process has become essential for effective local governance. The current reconciliation legislation moving through Congress will have significant implications for municipal finance, federal grant programs, and local government operations.

Budget reconciliation is a special legislative process that allows Congress to pass certain spending and tax measures with a simple majority in the Senate, bypassing the typical 60-vote threshold required to overcome a filibuster. This mechanism has been used periodically under different administrations to enact major fiscal policy changes affecting both revenue and mandatory spending programs.

The current reconciliation effort involves substantial changes to federal tax policy, spending programs, and regulatory frameworks that directly impact local governments. Understanding these changes is crucial for strategic planning and budget preparation.

Key Provisions Affecting Local Governments

Tax Policy Changes 

The House-passed reconciliation bill extends several tax provisions from the 2017 Tax Cuts and Jobs Act that were set to expire. While these changes primarily affect individual and business taxpayers, they have indirect implications for local governments through their impact on local economic activity and property values.

One significant development for local governments in the House version is the preservation of the tax exemption for municipal bonds, including private activity bonds. This protection maintains a critical financing tool that allows municipalities to access capital markets at favorable rates for infrastructure projects and public services.

The legislation also modifies the state and local tax (SALT) deduction, setting a $40,000 cap for couples earning up to $500,000, with the deduction phasing down to $10,000 for higher incomes. This change may affect taxpayer behavior and local economic conditions in high-tax jurisdictions.

Federal Grant Programs and Funding

Several federal programs that provide direct support to local governments face significant changes under the reconciliation framework:

• SNAP (Food Stamps) Modifications: The legislation introduces new state matching requirements, requiring states to pay 5% to 25% of SNAP costs. This shift of federal costs to states may create pressure on state budgets that could affect state aid to local governments. The Congressional Budget Office estimates these changes will reduce federal spending by $285.7 billion over 10 years, with approximately 3.2 million households losing benefits monthly.
• Medicaid Changes: Work requirements and enrollment modifications designed to save $716 billion could affect local hospitals and health systems that serve uninsured populations. The CBO estimates 8.6 million additional people may lose health insurance coverage, potentially increasing uncompensated care costs for local public hospitals.
• Immigration and Border Security: The legislation includes $363 billion in mandatory funding for defense, immigration enforcement, and border control. This includes $950 million for Department of Justice compensation to state and local governments for detaining migrants, though "sanctuary jurisdictions" would be ineligible for these funds.

Infrastructure and Transportation

The reconciliation bill includes several provisions affecting local infrastructure:

• Highway Trust Fund: A new fee structure imposes $250 per vehicle on electric vehicles and $100 per vehicle on hybrid vehicles, expected to generate $64.3 billion for highway funding.
• Clean Energy Programs: Most Inflation Reduction Act clean energy tax credits face elimination, with projects required to break ground within 60 days of enactment and complete by 2028 to maintain eligibility.

Housing and Community Development

The legislation includes targeted housing provisions:

• A 12.5% increase in state per capita allocation for the 9% Low-Income Housing Tax Credit (LIHTC) for 2026-2029.
• Requirements for 4% LIHTC projects to have at least 25% of costs financed by tax-exempt bonds.
• Creation of a second round of Opportunity Zones from 2027-2033, with refined eligibility criteria to better target economically distressed areas.
• Rescission of awards from the $4 billion Neighborhood Access and Equity Grant Program.

Technology and Regulation

A notable provision preempts state and local government regulation of artificial intelligence for 10 years. This federal override of local regulatory authority represents a significant constraint on municipal governance in an emerging technology sector.

Grant Opportunities

Despite broader federal spending reductions, several grant programs remain available to local governments:

Department of Homeland Security Programs:

• $324 million available through FEMA's Staffing for Adequate Fire and Emergency Response (SAFER) Grants.
• $32.4 million for Fire Prevention and Safety Grant Program.

Department of Justice Programs:

• $4 million for Safer Outcomes: Enhancing De-Escalation and Crisis Response Training.
• $13 million for Training and Services to End Abuse in Later Life Program.
• Multiple programs addressing sexual assault response and domestic violence prevention.

Specialized Programs:

• $625 million in supplemental Urban Areas Security Initiative funding for cities hosting the 2026 FIFA World Cup.
• $500 million for Department of Homeland Security grants to help law enforcement develop drone threat tracking capabilities.

Fiscal Impact and Planning Considerations

The reconciliation bill's overall fiscal impact remains under analysis. The Congressional Budget Office estimates the measure will decrease revenue by $3.775 trillion over a decade, with $335 billion in net spending cuts, resulting in a $3.1 trillion increase in debt between 2026 and 2034. Some budget watchdog groups project the actual impact could reach $5.1 trillion when accounting for interest costs and recent modifications.

For local government managers, this fiscal trajectory suggests several planning considerations:

• Federal Aid Uncertainty: The substantial federal deficit increase may lead to future pressure for spending reductions that could affect grant programs and federal aid to states and localities.
• Infrastructure Financing: While municipal bond tax exemptions remain protected, changes to federal infrastructure programs may require greater reliance on local funding mechanisms.
• Service Delivery: Reductions in federal safety net programs may increase demand for local social services, particularly in communities with significant low-income populations.

Looking Ahead

The reconciliation bill faces significant challenges in the Senate, where competing priorities between deficit reduction and program preservation will require careful negotiation. The timeline for completion remains ambitious, with congressional leadership committed to finishing before the August recess.

Local government managers should prepare for a dynamic environment where federal fiscal policy continues evolving. While some provisions offer opportunities for enhanced local capacity, others present challenges requiring proactive management and strategic adaptation.