Why this year’s tax season is critical to the debt ceiling debate

Apr 18, 2023, 6:30 AM | Updated: 8:43 am

a tax form, 1040, is often used to file taxes...

Tax day is April 18, 2023. (Photo credit: Getty Images.)

(Photo credit: Getty Images.)

(CNN) — Just how much longer the federal government can keep paying its bills on time and in full depends greatly on this year’s tax collections.

With tax season coming to a close for many filers on Tuesday, the Treasury Department will soon know the amount of tax revenue it has received for 2022 and for the first estimated payment of this year.

That cash is crucial now because the US hit its debt ceiling in January and can’t continue to borrow to meet its obligations unless Congress raises it. Meanwhile, Treasury is avoiding default, which would happen this summer or early fall, by using a combination of cash on hand and “extraordinary measures,” which should last at least until early June, Treasury Secretary Janet Yellen said in January.

This year’s tax haul will also give House Republicans and the White House a better sense of how much more time they have to negotiate a solution to the debt ceiling drama. Talks are at a standstill, but a shortfall could prompt an acceleration in discussions.

It’s hard to forecast tax collections, but most experts say it’s unlikely they’ll come in higher than expected like they did last filing season, buoyed by a strong stock market and faster economic growth in 2021.

“There’s just considerable uncertainty around how much tax revenue the Treasury will get,” said Bernard Yaros, economist at Moody’s Analytics, noting the hefty haul from levies on capital gains in 2021. “That’s not going to be the case given how poorly financial markets did last year.”

The full tally won’t be known for a few more weeks, at which time the Treasury Department and other observers are expected to update their estimates of when the government could start to default on its obligations. The current forecasts vary, with most pegging the summer or early fall.

Why it matters to lawmakers

Congress will be watching very closely.

“If cash flows are dramatically short of expectations and could result in the need to act in June, then things will start moving very quickly once we get into May,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center, of negotiations. “Whereas if they feel like they have an additional month or two or more, then they’ll likely take up that time, as we’ve seen them do time and again in the past.”

House Speaker Kevin McCarthy on Monday previewed a plan to raise the debt ceiling into next year, which he hopes House Republicans can pass in coming weeks. It would also entail cutting domestic, non-defense federal spending to 2022 levels, imposing or tightening work requirements on safety net programs and rescinding certain unused Covid-19 relief funding, among other provisions.

The measure is not expected to pass the Democratic-controlled Senate, but if McCarthy can get it through the House, President Joe Biden would be open to meeting with the California Republican again, a senior White House official said.

Just how much time they have remains to be seen. If the tax revenues coming in this month are enough to sustain bill payments into June, then it’s unlikely the federal government will default until much later in the summer. Treasury will get another injection of funds from second quarter estimated tax payments, which are due June 15, and from extraordinary measures that become available at the end of the month.

“What we’re looking more for is, do we get enough revenue by Tax Day to allow the secretary to say with confidence that the federal government will not default on its debt before June 15?” said Rohit Kumar, co-leader, Washington National Tax Services at PwC, and former deputy chief of staff for Senate Republican Leader Mitch McConnell.

Related: IRS warns of tax scams as filing deadline rapidly approaches

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Why this year’s tax season is critical to the debt ceiling debate