Trickling Tax Revenue Complicates Debt Limit Talks
WASHINGTON — A vote by House Republicans last week to lift the nation’s debt limit in exchange for deep spending cuts was the first step in what is likely to be a protracted battle over raising or suspending the borrowing cap to avoid defaulting on United States debt.
But while Republicans and President Biden and his fellow Democrats are gearing up for a fight, a key question is beginning to sow unease in Washington and on Wall Street: How much time is there to strike a deal?
The United States technically hit its $31.4 trillion debt limit in January, forcing the Treasury Department to employ accounting maneuvers known as extraordinary measures to allow the government to keep paying its bills, including payments to bondholders who own government debt. Treasury Secretary Janet L. Yellen said at the time that her powers to delay a default — in which the United States fails to make its payments on time — could be exhausted by early June. She cautioned, however, that the estimate came with considerable uncertainty.
With June now just a few weeks away, uncertainty around the timing of when the United States will run out of cash — what’s known as the X-date — remains, and determining the true deadline could have huge consequences for the country.
Tax receipts will be key to the X-date.
Determining the X-date depends on a complex set of factors, but ultimately what matters most is how much money the government spends and how much it takes in through taxes and other revenue.
The Bipartisan Policy Center, which tracks federal revenues, projected in February that lawmakers would need to raise or suspend the debt limit sometime between summer and early fall to avoid a default. The specific date would largely depend on how quickly tax revenues are coming into the government’s coffers.
There are signs that 2022 tax receipts are trickling in too slowly for comfort. Economists at Wells Fargo wrote in a note to clients last week that because tax collections appear to be weaker than expected, there is a chance the X-date could be as soon as early June. However, they continue to believe early August is the most likely default deadline.
“A low but not insignificant probability of a U.S. default is still very concerning, and we would think the last thing Treasury officials want is an X-date that sneaks up on Congress,” they wrote.
Tax day payments are still arriving. Goldman Sachs economists projected last week that by the second week of June, the Treasury Department could have around $60 billion of cash remaining, which would allow the government to keep making its payments until late July.
Natural disasters could fuel a debt disaster.
There is a surprising factor that could cause the X-date to arrive sooner: the weather. Severe storms, flooding and mudslides in California, Alabama and Georgia this year prompted the Internal Revenue Service to push the April 18 filing deadlines in dozens of counties to October.
The I.R.S. said this year that, because of the storms, individuals and businesses in the affected areas could file their returns late. They were also given more time to make contributions to retirement and health savings accounts.
Farmers, who often file their tax returns by March 1, also have received a reprieve until Oct. 16, and estimated payments that normally would have been made in January were allowed to be pushed back to that date.
It is not clear how much tax revenue has been delayed by the storms, but the extensions have given the Treasury Department less wiggle room to keep paying the bills.
An update could come this week.
The Treasury Department is expected to send a letter to Congress in the coming days with a more precise estimate of when it could start running out of cash. It could also lay out new measures intended to stave off a default. This year, Ms. Yellen announced that she would redeem some existing investments and suspend new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund.
In a speech last week, Ms. Yellen warned that a default would have real consequences for the economy.
“Household payments on mortgages, auto loans and credit cards would rise,” Ms. Yellen said in remarks to the Sacramento Metropolitan Chamber of Commerce. “And American businesses would see credit markets deteriorate.”
She added, “On top of that, it is unlikely that the federal government would be able to issue payments to millions of Americans, including our military families and seniors who rely on Social Security.”
Here’s what the X-date means for negotiations.
As the X-date approaches, it will put more pressure on lawmakers to take action.
Analysts at Beacon Policy Advisors predicted that if a default could really happen as soon as June, that would increase the likelihood that Congress will pass a short-term suspension of the debt limit through October. If the X-date is expected to hit in July, that might compel lawmakers to file legislation by early May so they have sufficient time to deal with procedural obstacles in Congress.
Although markets have broadly remained calm about the prospect of a default, there are some signs that investors are becoming nervous.
They have sold government bonds that mature in three months — around the time policymakers have said the United States could run out of cash — and snapped up bonds with just one month until they are repaid.
The cost of insuring existing bond holdings against the possibility that the United States will default on its debts has also risen sharply. Still, analysts say the market reaction would need to be much more pronounced to force a fast deal.
“This has caused some heartburn among policymakers but not enough to move the negotiating needle in a meaningful way,” the Beacon analysts wrote. “There needs to be a bigger market response and a more definitive X-date to get negotiations going in full.”
That has yet to happen, however. While Mr. Biden has indicated he is open to talking with Speaker Kevin McCarthy about ways to get the nation’s fiscal situation on a better track, the two have yet to schedule a meeting after the House passage last week.
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