Lower Fed income taxes mean debt ceiling may be coming up faster

One item that's part of the debt ceiling situation in America is the fact that in a time of growing employment and higher wages, tax revenues are somehow falling short of the levels that we had in 2022.

This was reiterated in the Congressional Budget Office's report on the US budget situation in March 2023. Here are the numbers for the main revenue sources for Uncle Sam at the midway point of Federal Fiscal Year 2023.

That disparity in income taxes and payroll taxes (which generally pay for Social Security and Medicare) is weird, as both are largely based on wages, but there's clearly a disconnect between the two. The CBO says one of the reasons this is happening is because we are seeing a higher amount of tax refunds this year.

Individual income tax refunds rose by $68 billion (or 56 percent), thereby reducing net receipts. The precise timing of refund payments varies from year to year, but most will be paid in the period from February through April. The Internal Revenue Service reports that the number of refunds issued through the fourth week of March was 3 percent greater than in the same period in 2022.

But then you go to the IRS’s tax filing statistics, and it says the refund totals had switched by the end of March. The number of tax returns received and processed are less than they were at the same time last year, even though a higher percentage of the returns and pending refunds had been processed, the total amount of individual income tax refunds is down by $27 billion compared to last year.

So that’s not matching up, unless there’s a lag in reporting, which would allow for income tax receipts to "catch up” in April. Or is it possible that the differences lies between the 2021 and 2022 tax filing seasons vs the 2022 and 2023 Fiscal Years. I don't know why that would be so different, but maybe there are carryovers or a ton of late filings from 2021 that happened in the 2022 Fiscal Year due to stimmy checks, or something else I'm not seeing.

Maybe this helps explain it, as what the IRS calls a "tax refund" actually is a lack of tax credits, which the CBO calls "expenditures". And it's Joe Manchin's refusal to extend one of the best poverty-fighting measures out there seems to be a big reason behind that.

Outlays for certain refundable tax credits totaled $116 billion—a decrease of $86 billion, or 43 percent. That reduction occurred because the expanded child tax credit has expired. (In tax year 2021, eligibility for and the size of the child tax credit were expanded, and advance payments were made between July and December 2021.)

Oh, but "deficit reduction", right Joe?

A significant other reason revenues are falling behind in a time of still-growing employment and wages relates to the Federal Reserve’s increases in interest rates.

Remittances from the Federal Reserve decreased from $61 billion to less than $1 billion. Higher short-term interest rates raised the central bank’s interest expenses above its income, eliminating the profits of most Federal Reserve banks.

The FDIC's Deposit Insurance Fund also had net payments of $27.4 billion to help bail out depositors at some of the banks that failed in February and March, in a fund that usually makes money for the US Government. That money won't be paid back for several months or years, and will come from premiums paid by banks that survive.

Put the lower revenues and one-time higher expenses together, and there isn't enough cash coming in to pay for everything. This helps explain why we might hit the artificial debt ceiling sooner than originally thought, even when accounting for what was already likely to be a $1 trillion+ deficit for this year.

The U.S. government's deadline to raise the $31.4 trillion debt ceiling could be sooner than expected, raising the prospect of a short-term debt limit extension, analysts said on Tuesday.

Goldman Sachs analysts said weak tax collections so far in April indicate a higher probability that the so-called "X-date," when the government is no longer able to pay all its bills, would be reached in the first half of June. Analysts at Citi said they expected a short-term deal in June or July.

The Treasury Department has warned that the federal government could reach the moment when it will no longer be able to meet its financial obligations as early as June 5, while the nonpartisan Congressional Budget Office has forecast that moment would come sometime between July and September.

On the debt ceiling, I stand by stance that President Biden should simply say "We're paying the bills, as required under law", and continue business-as-usual unless the GOP gives a clean debt ceiling bill that takes it off the table, or until we have budget negotiations in August and September.

But the lack of revenues and higher interest payments on the debt is something that is causing more stress on the budget than we'd expect. The Fed's overshooting on interest rates is causing some of this, however, the lack of revenues seems to be something that should be watched, especially if the Fed's overshooting leads to a recession and job losses, and a bigger drop in revenues. And to see if this has an effect on the state side as our budget debates continue.