Summary
- Congress reaches a deal on finishing out Fiscal Year 2026 appropriations, as the Administration releases proposed budget for Fiscal Year 2027 (without Green Book), and Congress set to consider reconciliation when it returns next week.
- New York State enacts second week-long budget extension as negotiations between Governor Hochul and the legislature continue over the budget, with tax increases amongst issues under consideration.
- Court dismisses Johnson Amendment lawsuit for lack of jurisdiction, following which Treasury states it will separately issue guidance on the issue.
- Department of Labor issues proposed regulations on fiduciary duties in selecting designated investment alternatives.
The showdown over DHS funding seems headed for a resolution. Republicans aim to finish it through a budget reconciliation bill that President Trump is asking Congress to send for signature by June 1. Last week, Speaker Johnson reversed course from the prior week and said the House would pass the Senate-passed bill, which would have funded DHS, except for ICE and CBP. Those two agencies would be funded through budget reconciliation. On April 2 at 7 a.m., the Senate, with just two Senators present, returned to the House the same DHS bill the Senate originally passed on March 27 at 3 a.m. The House had rejected that bill shortly before midnight of March 27 and returned it to the Senate as a two-month continuing resolution to fund all of DHS.
In the interim, despite the lapse of DHS appropriations, which has continued since February 14, President Trump issued a memorandum, titled “Liberating the Department of Homeland Security From the Democrat-Caused Shutdown,” to pay all DHS employees.
It remains unclear whether the House will return this week from its two-week spring recess in order to take up the Senate-passed bill or will instead wait until the conclusion of its recess on April 13. Especially given the executive action on paying DHS employees, the House may wait for initial Senate action on a reconciliation bill before taking up the DHS funding bill. Republicans are currently planning to use the reconciliation bill to fund ICE and CBP not just through the end of the current fiscal year, but through the end of 2028. Ways and Means Committee Chairman Smith (R-MO) has stated that if there is a reconciliation bill, tax provisions will be included.
On April 3, the White House released its proposed Fiscal Year 2027 Budget, which requests a $1.4 billion decrease in IRS funding compared to 2026 appropriations. As previously previewed by senior Treasury officials, the proposed budget does not contain a “Green Book” of legislative tax proposals.
New York State Enacts Second Week-Long Budget Extension as Negotiations Continue
On April 7, New York State enacted a second week-long budget extension as negotiations over the budget continue between Governor Hochul and the legislature. The statutory deadline for enacting the budget was March 31. New York State and New York City tax increases proposed by the State Assembly, State Senate and New York City Mayor Mamdani are amongst the most prominent issues on the table in the negotiations, along with environmental rules and car insurance. More details about Mayor Mamdani’s tax proposals and respective state and city authorities over New York City taxes are contained in this Sullivan & Cromwell publication.
District Court Dismisses Johnson Amendment Challenge
A federal court in Texas dismissed National Religious Broadcasters v. Bessent on March 31, 2026, for lack of jurisdiction. The plaintiff alleged the Johnson Amendment, which prohibits 501(c)(3) organizations from participating in political activities violated their freedom of speech, free exercise, due process and equal protection rights under the First and Fifth Amendments. The plaintiff and the government had submitted a joint motion to settle the case, narrowly interpreting the Johnson Amendment, providing in part:
When a house of worship in good faith speaks to its congregation, through its customary channels of communication on matters of faith in connection with religious services, concerning electoral politics viewed through the lens of religious faith, it neither ‘participate[s]’ nor ‘intervene[s]’ in a ‘political campaign,’ within the ordinary meaning of those words.
The Court concluded it could not reach the merits of the case, including considering the joint motion, because the requested relief would restrain the assessment or collection of federal taxes, which brings the case within the Tax Anti-Injunction Act and the federal-tax exemption in the Declaratory Judgment Act. National Religious Broadcasters plans to appeal the decision. For a more detailed review of the issues in National Religious Broadcasters v. Bessent, please see this earlier Sullivan & Cromwell publication.
In response the Treasury and the IRS announced that they still intend to issue new guidance on the Johnson Amendment’s prohibition on political activity, particularly with respect to houses of worship. Treasury Secretary Scott Bessent framed the coming guidance as part of the administration’s effort to protect religious liberty and align enforcement with First Amendment principles. Treasury Secretary Bessent stated “Religious liberty is foundational to our Constitution, and the freedom to practice one’s faith openly … Treasury and the IRS will provide additional clarity and guidance to houses of worship that reflect these ideals and uphold the First Amendment.”
Proposed Regulations on Fiduciary Duties in Selecting Designated Investment Alternatives
On March 30, 2026, the Department of Labor issued proposed regulations, “Fiduciary Duties in Selecting Designated Investment Alternatives,” that would establish a safe harbor for ERISA fiduciaries in their selection of designated investment alternatives for participant-directed individual account plans. The Proposed Rule is intended to provide retirement savers with greater access to alternative assets such as private market investments, digital assets, infrastructure and real estate, as directed by an Executive Order issued by President Trump in August 2025 (described in this S&C memo). The proposed regulations are further described in this S&C memo.