Lower Tax Receipts Could Double U.S. Budget Deficit

Individual income tax receipts are running far below expectations this year, threatening to punch a $50-billion-plus hole in the current federal budget and undercut efforts to pay for the 10-year, $1.35-trillion tax cut.

Daily Treasury Department reports show that receipts through Wednesday, the latest date available, were $102.2 billion lower than at the same time last fiscal year, with less than half the difference traceable to the tax cut.

The size of the shortfall has even some Republican budget experts worried. “We knew there was going to be some reduction because of the tax cuts,” said G. William Hoagland, GOP staff director of the Senate Budget Committee. “What’s surprising is the order of magnitude of the reduction not accounted for by the cut.”

Hoagland said that the slippage is likely to double this year’s budget deficit, which the Congressional Budget Office recently estimated would run $46 billion, a sharp reversal from the huge surpluses of the late 1990s and early this decade.

“It makes me nervous,” he said.

White House and Treasury officials refused to comment publicly on the tax downdraft but asserted privately there is still time for the trend to reverse itself. Individual income tax receipts, which account for half of Washington’s annual revenues, swing wildly in April as taxpayers wait until the last minute to pay, the U.S. Postal Service takes time to deliver the checks to the Internal Revenue Service and the IRS makes mistakes tallying up the money.

However, with only four business days left in the month and with evidence that well over two-thirds of the year’s individual tax receipts are already in, budget veterans and independent analysts said the odds are high the government will come up substantially short.

And, these officials said, the apparent source of the shortfall suggests that the problem won’t be transitory but rather could involve a return to the budgetary nightmares that plagued Washington for most of the two decades before the late 1990s.

“During the late ‘90s, there was a series of favorable federal income tax surprises that pushed up revenues,” said John Youngdahl, an economist with the New York-based investment bank Goldman Sachs. “What we’re seeing is that these are now reversing.”

The recent shortfalls “are likely to be harbingers of revenue problems that will be with us for some time to come,” Youngdahl said.

The chief source of the 1990s surprises was a boom in the capital-gains taxes that people paid on their stock market winnings, as well as similar bursts in tax payments on stock option gains and wage bonuses. Although it will be months before the details are known, analysts said it appears that most of the current falloff in revenues is concentrated in precisely these areas.

Federal budget officials had always assumed that tax revenues from capital gains, options and the like would slip in the wake of the stock market drop that began in the spring of 2000. But there are signs in the recent Treasury reports that they substantially underestimated the extent of the fall.

While the reports through Wednesday show that individual income tax revenues overall were down 11% from the same period a year ago, they show that the portion of receipts that typically include capital gains--that taxpayers handle when they settle up with the government on April 15 rather than having withheld from their paychecks during the year--had plunged a whopping 64%.

Analysts and budget experts said that the recent revenue falloff is particularly disturbing because it has occurred during a period when the stock market, though still far from its early 2000 highs, had partially recovered, and when the economy, though technically in recession, had continued to perform better than many expected.

They said that the shortfall could mean Washington will no longer be able to count on the kind of revenue burst from capital gains and related sources it enjoyed during the late 1990s unless the historic stock market boom of that time repeats itself--a scenario few expect. That would make it very difficult for the government to recover from the deficit it is expected to post this fiscal year, something that Bush administration officials had said could be easily accomplished.

“If these trends continue, it’s bad news for the budget, and not just for this year,” said Rep. John M. Spratt Jr. of South Carolina, the ranking Democrat on the House Budget Committee. “It indicates that the deficit could be a much deeper, more intractable problem than we’d thought.”

The political consequences could be almost as dire.

President Bush came to office promising that a surplus-drenched Washington had enough money to stash away Social Security and Medicare savings for the impending baby boom retirement, spend more on such programs as education and cut taxes by $1.35 trillion.

Although the stock market plunge, a recession and the Sept. 11 terrorist attacks drastically changed national circumstances, White House budget officials have insisted the combination would have only a transitory effect on the federal budget--pushing it back into deficits, but only by comparatively small sums and only for three years.

Budget officials estimated that the combination of setbacks, plus the tax cut, would trim individual income tax receipts by only $45 billion this year, from $995 billion in fiscal 2001 to $950 billion this fiscal year.

But individual tax receipts are arriving at a pace that suggests that, when fully collected, they will be about $50 billion short of the administration’s goal. In addition, some other tax revenues are also running behind, according to budget experts.

As a result, they said, the deficit for the curent fiscal year, which began Oct. 1, is likely to double to $100 billion or more. By contrast, Washington managed a surplus of $127 billion in the last fiscal year.

In addition, administration forecasts of returning to a surplus by fiscal 2004 are likely to prove overly optimistic. The new tax receipt numbers “raise some concern about the president’s commitment to get back to balance by 2004,” said Hoagland, the Senate Republican staffer.

Many budget analysts predicted that once the economy recovered, Washington would return to something like the heady tax revenue days of the late 1990s. But with the government set to issue new growth numbers later today that show the economy expanding at a better-than-3% annual rate during the first three months of the year, and still no improvement in the tax revenue picture, hopes for a quick turnaround in the budget situation are fading.

The revenue shortfall will put added pressure on Congress to pare spending and could fuel demands to slow or reverse portions of the Bush tax cut. The president’s proposal was premised on the notion that Washington would collect $5.6 trillion in surpluses over 10 years, an outcome that now seems highly unlikely.