Rising tax receipts are shrinking the federal deficit, and that will shape the budget debate when Congress returns from vacation next month. The big question for lawmakers: Should they renew, end or modify the tens of billions of dollars in “sequester” cuts in government spending that took effect earlier this year?
Tax revenue through June was up 14 percent from a year earlier, and that trend is expected to continue. New figures for July are due out next week, and for August on Sept. 12. That’s just three days after lawmakers return to face threats by some conservatives of a government shutdown on Oct. 1 or an economy-threatening default on the national debt weeks later.
With revenue rising, what’s the fight about?
Now that the government is taking in more money, Republicans in Congress are more opposed than ever to tax increases sought by President Barack Obama and his Democratic allies.
“This year the federal government will bring more revenue in than in any year in our history,” says House Speaker John Boehner of Ohio. “We have a spending problem in Washington. It has to be addressed.”
But Obama and the Democrats want to do away with some of the existing spending cuts, and they say they won’t accept significant further reductions — unless there’s also action to bring in still more revenue.
“Democrats know we must do more to reduce the deficit,” says Senate Majority Leader Harry Reid of Nevada. “We believe in a balanced approach that pairs spending cuts with having those that can afford it pay more.”
At the same time, some economists worry that currently rising revenue numbers will reduce the pressure to address the nation’s long-term debt problems.
“I don’t think political leaders feel that they have a gun to their head the way they did a couple years ago,” said William Gale, a former economic adviser to President George H.W. Bush and now co-director of the Tax Policy Center. “There’s a desire on some sides to declare ‘mission accomplished’ and ignore the long-term deficits and move on to other issues.”
Several factors are contributing to the increase in revenue. Congress increased income tax rates on high-income families in January. The Congressional Budget Office says some of those taxpayers probably cashed in investments ahead of the tax hike, boosting capital gains taxes. Congress also let a temporary payroll tax cut expire at the end of 2012, increasing Social Security taxes.
CBO also said a rise in personal income is adding to tax revenue, even though economic growth has been sluggish.
To see how important the economy is to federal tax receipts, look at what happened in 2009, after the nation plunged into the worst economic recession since the Great Depression. Income tax receipts dropped by 20 percent from the year before, and corporate tax receipts dropped by 55 percent. Social Security tax receipts dropped for the first time since 1946.
The budget deficit, which topped $1 trillion for four straight years, is projected to fall to $642 billion in the budget year that ends in September, according to the Congressional Budget Office. The spending cuts enacted over the past several years are combining with higher tax receipts to reduce government borrowing.
Under current law, the budget office projects that the federal deficit will shrink even further in the next several years before starting to grow again at the end of the decade. But with the national debt approaching $17 trillion, the long-term financial problems aren’t exactly solved, Gale said.
“It’s kind of like somebody carrying an extra 15 pounds around their waist,” he said. “Over the long term it kind of hurts your health, wears you out, reduces your mobility.”
Congress is headed toward two potential budget showdowns this fall, one when funding for the government runs out at the end of September and another when the U.S. reaches the limit of its borrowing authority later in the fall.
Republicans are demanding spending cuts in exchange for a debt limit increase, which will be needed to prevent an unprecedented default on U.S. obligations. But Obama says he won’t negotiate over raising the debt limit.
That debate could provide an opportunity to address the nation’s long-term finances. But there doesn’t seem to be much appetite in Washington for the kind of “grand bargain” deficit reduction package that Obama and Boehner tried to negotiate in 2011. That package would have cut spending and increased revenues, but Obama and Boehner were never able to agree on the details.
If not a grand bargain, a “somewhat” bargain evolved over the following 17 months.
Republicans willing to trigger a default on the government’s debt forced Democrats and Obama in August 2011 to agree to cutting government spending by $2.1 trillion over the following decade, including $1.2 trillion in the automatic spending cuts — taken equally from military and domestic programs — that began in earnest this March.
Democrats and some moderate Republicans now want to undo those automatic cuts. Most Republicans want to keep them but switch more of the reductions from defense to domestic programs.
Then this past January, two months after his re-election, Obama finally won a tax increase, nearly $620 billion over 10 years, most of it from people with annual incomes above $400,000.
With this year’s projected deficit less than half what it was from 2009 through 2011, economist Gale questions whether there’s an overwhelming will to do more on either the tax or spending side of the ledger.
“I think people are kind of like, well, it’s not as bad as it was in 2009, so there’s kind of a fatigue in dealing with debt stuff,” Gale said.
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