Why plunging tax receipts are raising fears about the debt ceiling

The federal government is pulling in less tax revenue than expected, prompting concerns the early numbers could leave far less time for Congress to strike a deal to avoid a default on the national debt.

Before tax figures started rolling in after last week’s filing deadline, Congress appeared to have until sometime in late July or August to pass legislation to raise or suspend the debt limit. But some experts have warned that a major shortfall in tax revenue means the U.S. government could run out of cash as early as June.

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“It’s a horserace between tax receipts and the House of Representatives and, ultimately, the Senate,” said George Hall, economics professor at Brandeis University, in a Tuesday interview.

The U.S. government has collected 35 percent less in tax revenue this year than at the same time in 2022, according to a recent analysis released by Moody’s Analytics economists Mark Zandi and Bernard Yaros. 

Zandi noted in an interview that it’s “not a surprise” the receipts are coming in at lower levels than last year — when the government saw a budget surplus of more than $300 billion in April 2022, according to estimates from the Congressional Budget Office (CBO). But he added receipts are “coming even weaker than” anticipated. 

“They’re going to come to a point in early June when they don’t have enough cash to pay everyone on time,” Zandi said. The Moody’s Analytics team previously estimated lawmakers had until sometime in mid-August to act on the debt ceiling.

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Goldman Sachs economists also noted in a report last week that while they still believe the U.S. won’t run out of cash until July, the “odds of an early June deadline have edged up” when looking at non-withheld income tax receipts.

The Treasury could see another boost in non-withheld tax payments around a mid-June deadline, according to experts, which could buy lawmakers more time. Even so, they won’t know until they receive further data from the Treasury in the coming days.

Why tax revenue is falling short

Experts have named a list of factors contributing to the April performance. 

Garrett Watson, a senior policy analyst and modeling manager at the Tax Foundation, pointed to a decline in capital gains realizations — profits made from financial investments — which are taxed by the federal government.

Watson said the nation saw “unusual strength” in investment profits as markets boomed back from the onset of COVID-19 and the aftereffects of inflation. That surge of tax revenue has reversed as markets have weakened.

Watson also pointed to a decline in corporate tax receipts, which is still only about 10 percent of overall tax revenue collection.

“It’s not a large source of revenue, but it does contribute to it,” Watson said.

Other experts have also questioned the impact of temporary tax relief provided to some disaster victims in places like California could have on receipts. But Watson doubted the impact the relief would have on the debt limit timeline.     

“It’s unlikely to make a difference between [an] early June and late August X-date — unless we really squeaked by,” he said. “And even in that scenario where, let’s say it’s a $50 billion difference that gets us to the June payments that saves us, that’s going to have its own major market impacts, I suspect.”

Financial markets are already rattled

House GOP leaders are looking to pass a sweeping package by the end of the week that seeks to raise the debt limit, paired with a list of partisan proposals to curb spending. However, the plan faces a rocky road to passage in the lower chamber and even greater chances of failure if it makes it to the Senate, where Democrats hold control of the body and have come out in opposition against the measure.

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House Republicans are adamant that the nation will not default this year. But Hall said the partisan impasse on the debt limit already could be affecting the Treasury market, noting “yields on one-month bills are plummeting because everybody’s investing in the ultra-short market.”

Hall said the difference between interest rates on 30-day and 90-day Treasury bills is usually “relatively small,” but the spread in between both “has widened dramatically in the last week or two.”

“What you see is that investors are reluctant to buy Treasury bills that are due in 90 days, and so the prices of those bills are going down, which means the interest rate on those is going up,” he said. “And the price of Treasury bills due in 30 days is going up, which means the interest rate, or the yield, is going down on those.”

“No one wants a Treasury bill that’s gonna come due in July or August. They want stuff that’s going to come due sooner,” he said, adding, “You already see the private sector participants are now taking this into account when making their investment decisions.”

Watson also argued “market reaction is the bigger issue,” including “where are the spreads looking [and] how are equity markets receiving this.”

“Depending on how that’s interpreted by markets, that could be an issue,” Watson said.