Tax Day to provide clarity on timeline for debt ceiling showdown
Zachary Halaschak
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Tuesday’s deadline for most taxpayers to file their taxes will reveal how much revenue the government has to hold off a looming default.
After the deadline passes, it will be more clear how long the Treasury Department can keep using “extraordinary measures” to prevent the United States from defaulting on its obligations. The measures, which began after the U.S. hit its debt limit in January, essentially amount to shifting money around government accounts in order to pay incoming bills without issuing new debt.
The “X date,” which is the date when the U.S. would exhaust its extraordinary measures, has been forecast to be as soon as this summer or as late as the fall.
A strong tax haul by the IRS could push that date later into the year, giving lawmakers some latitude in negotiating a deal to raise or suspend the debt ceiling, while less revenue would mean the timeline gets even shorter and would mean that negotiations would have to come quicker.
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“So if we wind up with more revenue coming in, it may give Congress more breathing room to deal with the debt ceiling, but in essence, it’s more breathing room — it doesn’t ease the urgency of dealing with the debt ceiling issue,” Brian Marks, executive director of the University of New Haven’s Entrepreneurship and Innovation Program, told the Washington Examiner.
Republicans are hoping to use the looming date to extract concessions from the Biden administration. They hope to see spending cuts in light of soaring inflation and high deficits.
The so-called extraordinary measures have been used at least 16 times since first being deployed in 1985 and as recently as 2021, according to the Committee for a Responsible Federal Budget. The U.S. has never defaulted on its obligations in the history of these fiscal showdowns.
House Speaker Kevin McCarthy delivered an economic address on Monday at the New York Stock Exchange in which he insisted that spending cuts are necessary as part of debt ceiling negotiations with Democrats and the White House.
“Debt limit negotiations are an opportunity to examine our nation’s finances. Now, in the past 35 years, there have been eight major deficit reduction laws enacted by Congress,” McCarthy said. “Every single one of them was attached to legislation that raised the debt limit, and every one of them was bipartisan. Why? Because the problem gets solved only when both parties come together.”
Tax Day typically falls on April 15, but due to April 15 falling on a Saturday, the deadline was pushed back. Tax Day is also another opportunity to gauge the overall health of the U.S. economy over the past year or so. The haul offers a snapshot of how much people earned, given that higher collection rates typically mean more income.
“If we wind up collecting more than expected in general, when you take out the whole pyramid, it suggests that income levels have been higher than what was previously anticipated once all the numbers came in,” Marks said. “It could also suggest that there is a lot of income that is being generated outside the normal course of employment.”
Bank of America analysts Mark Cabana and Katie Craig said in a note to clients that they are still predicting the X date comes sometime in the middle of August. They added that they do see risks skewed toward earlier.
In terms of forecasting, Bank of America said that an increase in cash to the Treasury Department of more than $200 billion after Tax Day should be seen as a strong haul, while anything less than $150 billion would be weak, according to Bloomberg.
Economic worries have increased over the past year because of soaring inflation and the Federal Reserve’s barrage of interest rate increases.
Fed staff predicted a mild recession in a presentation to central bank officials at the Federal Open Market Committee’s March meeting, minutes from the meeting recently revealed. The huddle came just after the banking system was thrown into chaos with the collapse of Silicon Valley Bank, and staff noted that the fallout from the crisis raises the likelihood of an economic downturn.
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“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the Fed said in a readout of the meeting.
The missive was the first time central bank staff acknowledged that a recession is likely and that the Fed will likely be unable to pull off a “soft landing,” which is when inflation is driven down while the economy and labor market remain above water.