Republican tax bill and wildfire aid could hasten the need to raise the debt limit
The next fight over the debt limit could take place earlier than anticipated.
The Republican tax bill could force Congress to act sooner to raise the nation’s $20.5-trillion borrowing ceiling because less money is expected to flow into the Treasury in coming weeks.
On top of that, the possibility of increased federal aid for victims of California wildfires and other disasters, as well as a budget deal that could boost military spending, would drain the Treasury’s coffers faster than expected.
All of those factors mean that lawmakers might have to accelerate their timetable to begin the contentious debt-limit debate. They have been operating under a still-vague deadline — known as the X date — of sometime in March or early April when the Treasury would run out of cash and risk a federal government default.
“I think this is the most uncertainty there’s ever been in projecting an X date given that there are so many policy levers in flux right now,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center, a think thank that has done extensive work on the debt limit.
He estimated Wednesday that the X date would still be in March, but now could be earlier in the month.
The debt limit — a statutory restriction on the federal government’s borrowing — has existed since 1939 and for decades was raised routinely with little controversy. But starting in the 1980s, both parties began using the need to raise the limit as political leverage.
In recent years, as government borrowing soared, some Republicans have sought to tie debt-limit increases to spending cuts. Democrats have argued that is inappropriate because the borrowing is simply for expenditures that Congress already has authorized.
A 2011 standoff over the debt limit, which was raised at the last minute, led Standard & Poor’s to downgrade the nation’s AAA credit rating for the first time. Two years later, another showdown, which also was resolved shortly before a possible default, caused investors to avoid buying some government bonds and led to higher government borrowing costs.
Congress’ Joint Economic Committee has estimated the tax bill would reduce federal revenue by $136 billion this year. Even when taking into account a possible economic boost from the tax cuts, the committee estimated that federal revenue would decline by $104 billion this year.
How much of that reduction will take place in the coming weeks is not known. As of Tuesday, the Treasury had $190 billion in cash.
The estimates of when the government would run out of enough money to pay all its bills in full is based on the existing federal budget. But lawmakers could pass a new budget that boosts defense spending, as Republicans are advocating. And the budget also could include $81 billion in disaster aid to deal with wildfires in California and other Western states, as well as damage from major hurricanes last fall.
Even just a few weeks of larger-than-anticipated federal spending could affect when the Treasury risks a default if the debt limit is not raised and borrowing can resume.
“While none of these in and of themselves is a game-changer it just creates a lot of uncertainty about exactly what those cash flows will be given that we’re only two months out” from the deadline, Akabas said.
The nation technically hit the debt limit on Dec. 8, but Treasury officials have been using what they call extraordinary measures to stave off default by temporarily creating more borrowing authority through the juggling of some government investments.
Treasury Secretary Steven T. Mnuchin wrote to lawmakers last month stressing that “honoring the full faith and credit of the United States is a critical commitment.”
“I encourage Congress to raise the debt limit at the first opportunity so that we can proceed with our joint priorities,” Mnuchin wrote.
Congressional leaders could try to include a debt limit increase in a government spending bill that must be passed by Jan. 19. Failure to pass the spending bill would lead to a partial federal government shutdown.
Mnuchin believes that the measures can fund the government at least until the end of January, a Treasury spokesperson said Wednesday. Treasury is constantly reviewing the data but is not in a position to give a more precise estimate at this point, the spokesperson said.
Declining to give a more detailed projection could add to the pressure for Congress to act. In the past, Treasury projections have lined up with those by the nonpartisan Congressional Budget Office and the Bipartisan Policy Center, but so far the department’s vague estimate is more conservative.
The Congressional Budget Office estimated on Nov. 30 that Treasury officials would exhaust their extraordinary measures and the federal government would run out of money to pay all the nation’s bills by late March or early April.
Early last month, the Bipartisan Policy Center projected that Treasury would hit that X date sometime in March. But that was before Congress passed the Republican tax bill, which the think tank warned could lower federal revenue as individuals and corporations reduced their withholdings in response to lower rates.
Another reduction in federal revenue could come because of the tax bill’s new $10,000 annual limit on the amount of state and local taxes that Americans can deduct.
Some homeowners in California and other high-tax states rushed to pay 2018 property tax bills before the end of last year so they could deduct them before the law’s changes kicked in. Those extra deductions could further reduce federal tax revenue as Americans file their tax returns in the coming weeks, Akabas said.
But there is some uncertainty with those deductions. The Internal Revenue Service said last week that some might not be allowed if the property taxes were paid before they were assessed by the local government.
People due tax refunds tend to file their returns early and a lot of those checks are sent in February, he said.
2:45 p.m.: This article was updated to include a new figure on how much cash the Treasury has.
This article originally was published at 2:05 p.m.
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