The reported $200 billion war supplemental request by the Pentagon is facing many of the same questions in Congress that are posed of other legislation in the current slim-majority, fiscally constrained environment: whether it must be paid for; whether it can pass the 218-214 Republican-controlled House; if Republicans will need to use the budget reconciliation process given expected opposition from Democrats (and a 60-vote threshold in the 53-47 GOP-controlled Senate); and what else may be added. Some members want to use provisions targeting waste, fraud, and abuse in federal programs to pay for another reconciliation bill, while others are wary of that approach ahead of the midterm elections.

The Hill newspaper said in a March 20 story, "GOP grapples with $200B Iran funding request from Trump, Hegseth," that to use the reconciliation process, "Republicans must get near-unanimous support in a slim House GOP majority — a tall task for even the most populist GOP priorities — while contending with demands from their own members to offset the cost of such a funding boost with cuts elsewhere." Still, "Some Republicans are excited about the prospect of a Pentagon request serving as a catalyst that will push the party to pursue a second reconciliation bill that they can pack with other GOP priorities, as a follow-up to their spending and tax cut megabill last year."

In a March 20 Semafor story, "Collins wants bipartisan Iran spending bill," Senate Appropriations Chair Susan Collins (R-ME) said she would prefer the regular appropriations process to reconciliation for the war supplemental, and pondered whether intelligence community, farm aid, and Pell Grant funding will be in the package. In the report, Sen. Tim Sheehy (R-MT) said that with Democrats likely to oppose, "It's probably going to have to be a party-line reconciliation push, unfortunately."

Axios reported March 19 that "GOP leaders have struggled to build consensus around a 'reconciliation 2.0' package. But injecting a must-pass defense spending bill into the equation will give Speaker Mike Johnson the urgency he needs to bring it to the floor." The report said, "House Budget Chair Jodey Arrington (R-Texas), one of the most vocal backers of reconciliation 2.0, has floated using tariff revenue, cuts to government programs and changes to Affordable Care Act cost-sharing reduction payments as potential offsets."

Affordability — Global conflict is contributing to higher gas prices, which Democrats are seeking to highlight in the pre-election focus on affordability. On March 17, Senator Sheldon Whitehouse (D-RI) and other Democratic Senators (Baldwin, Blumenthal, Booker, Kaine, Markey, Merkley, Murphy, Reed, Sanders, Smith and Warren) introduced the Big Oil Windfall Profits Tax (S. 4111) to impose a windfall profits excise tax on crude oil and to rebate the tax collected back to individual taxpayers. Rep. Ro Khanna (D-CA) introduced the House version (H.R. 7960).

Additionally, on March 18, 120 House Democrats led by Reps. Mike Levin (D-CA) and Sean Casten (D-IL) introduced the Energy Bills Relief Act (H.R. 7977) to reinstate tax credits for home and system-wide energy improvements, such as the energy efficient home improvement credit, residential clean energy credit, energy efficient commercial buildings deduction, and new energy efficient home credit.

A March 19 Politico story, "New threats emerge for Trump's economy as war drags on," said that "recent reports suggest the president may have only a thin buffer to rely on if a prolonged conflict starts to weaken growth and spur inflation." The story cited higher inflation, hiring that has stagnated, falling wage growth, market-based interest rates climbing, and oil now topping $100 a barrel. The U.S. is now confronting "inherent fragilities," said Gregory Daco, EY-Parthenon's chief economist, in the story. The "typical buffers that would prevent any type of external shock — like an oil price shock — from disproportionately affecting the economy are smaller than usual."

Tax — Amid the continued talk of a second reconciliation bill, there is reporting that a lame-duck session bipartisan bill may still provide the strongest prospects for tax legislation. A March 18 Tax Notes story, "A Bipartisan Lame-Duck Package Has Best Tax Bill Odds This Year," said a bipartisan tax-extenders deal during the post-election period is the most likely scenario for a possible tax package in 2026, and the handful of provisions including extenders like the Work Opportunity Tax Credit (WOTC) may be enough to propel a tax extenders package in 2026. Like other bipartisan attempts in recent years, "A vehicle emerging after the midterms won't be immune from politics either, according to Lisa Wolski of EY, as the results of the election may sour the mood for one party working with the other." Wolski was also cited as saying a proposal for a tax bill with bipartisan extenders could be met with resistance from Democrats if it does not also deal with the expired enhanced ACA credits.

On March 17, Senator Ed Markey (D-MA) introduced the Equal Tax Act (S. 4122) to equalize treatment of capital gains and earned income. A press release said the bill would:

• Limit the lower preferential tax rate for long-term capital gains and dividends to incomes under $1 million
• End the stepped-up basis loophole and disrupt the "buy, borrow, die" strategy used by the wealthy to avoid taxation - by treating capital gains as realized at the time of gift or death, with exclusion allowances of up to $1 million in gains
• Enact a lifetime limit of $1 million on the use of like-kind exchanges for real estate
• Limit the pass-through deduction to incomes under $1 million
• Protect family farms and small businesses

Trade - Senator Whitehouse led a March 17 letter to United States Trade Representative Jamieson Greer urging the Trump administration to strengthen and better enforce environmental standards during the upcoming Joint Review of the U.S.-Mexico-Canada Agreement (USMCA).

Schedule — The Senate may be working this weekend to hold votes related to the SAVE Act voter ID bill, the continued shutdown of the Department of Homeland Security (DHS), and the nomination of Senator Markwayne Mullin (R-OK) to be DHS Secretary. Both chambers are in session next week before a planned two-week recess March 30-April 10. Senate Majority Leader John Thune (R-SD) has suggested the recess could be in peril if DHS funding is not restored.

IRS — Notice 2026-20 released on March 18 extends for an additional year temporary relief allowing eligible taxpayers to use certain alternative methods for making an adequate identification with respect to units of a digital asset held in the custody of a broker that are sold, disposed of, or transferred.

Revenue Procedure 2026-17 released March 18 provides guidance on the withdrawal of elections to be excepted real property, utility or farming trades or businesses under Section 163(j)(7) for purposes of the business interest limitation and to make a late election under Section 168(k)(7) to be exempt from bonus depreciation.

Today (March 20) is the Webcast, "EY Center for Tax Policy monthly update - March 2026." Register.