Why plunging tax receipts are raising fears about the debt ceiling

The federal government is pulling in less tax revenue than expected, and early figures have raised concerns that Congress may have much less time to strike a deal to avoid defaulting on its debt.

It appeared that Congress would have to wait until sometime in late July or August to pass legislation to raise or suspend the debt ceiling before the tax dollars started rolling in after last week’s filing deadline. Some experts warn that the US government could run out of cash as early as June due to a significant shortfall in tax revenues.

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“It’s a horse race between tax revenue and the House and ultimately the Senate,” said George Hall, an economics professor at Brandeis University, in an interview on Tuesday.

Tax revenue this year is 35% lower than the same period in 2022, according to the US government. Recent analysis Moody’s Analytics economists Marc Zandi and Bernard Jaros.

In an interview, Zandi said it was “not surprising” that revenues were lower than last year, when the government posted a budget surplus of more than $300 billion in April 2022. according to the estimate From the Congressional Budget Office (CBO). But he added that receipts were “even weaker than expected.”

“They will reach a point in early June when they won’t have enough cash to pay everyone on time,” Zandi said.Moody’s Analytics Team previously estimated Lawmakers had until mid-August to act on the debt ceiling.

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Goldman Sachs economists said in a report last week that they don’t believe the U.S. will run out of cash until July, but that unwithheld income tax receipts suggest an “early June deadline is possible.” There is a slight increase in gender,” he said.

Experts say the Treasury could see a further increase in non-withholding tax payments around the mid-June deadline, which could buy lawmakers more time. They won’t know until they receive additional data within days.

Reason for declining tax revenue

Experts give a list of factors that contribute to April’s performance.

Garrett Watson, Senior Policy Analyst and Modeling Manager at the Tax Foundation, points to a decline in capital gains realization (profit earned from financial investments) taxed by the federal government.

Watson said U.S. investment returns have shown “extraordinary strength” amid a boom in markets from the fallout from the COVID-19 outbreak and inflation. The surge in tax revenue reversed as the market weakened.

Watson also points to a decline in corporate tax revenue, which is still only about 10% of total tax revenue.

“It’s not a big source of income, but it contributes to it,” Watson said.

Other experts also question the impact on income of the temporary tax cuts offered to some disaster victims in places like California. I was skeptical about the effect it would have on the line.

“Likely to make a difference [an] X-dates in early June and late August—unless it’s really squeamish,’ he said. I think that in itself will have a big impact on the market.”

Financial Markets Already Rattling

House Republican leaders are looking to pass a sweeping package aimed at raising the debt ceiling by the weekend, combined with a list of partisan proposals to curb spending. But the plan faces an uphill road to passage in the House and is even more likely to fail if it ends up in the Senate, where Democrats are in control of Congress and are opposing the bill. Become.

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House Republicans have vowed that the country will not default on its debt this year. “Yields on one-month government bonds are plummeting as everyone invests in the ultra-short-term market,” he said.

Hall said the spread between 30-day and 90-day bonds is usually “relatively small”, but the gap between the two “has widened dramatically over the past week or two.”

“As investors are reluctant to buy bonds that are due in 90 days or less, the prices of these bonds are falling, which means interest rates are rising,” he said. I was. “And the fact that the prices of US Treasury bonds maturing in 30 days are rising means that their rates or yields are falling.”

“No one wants a Treasury bill that is due in July or August. We have already seen that they take this into account when doing so,” he added.

Watson also argued that “the market reaction is the bigger question” and included “where are the spreads?” [and] How is the stock market receiving this? ”

“It could be a problem depending on how it is interpreted by the market,” Watson said.