This Year’s Tax Season Is Critical To The Debt Ceiling Debate. Here’s Why.

by | May 5, 2023 | Uncategorized

The amount of money collected in taxes this year will determine how long the federal government can continue making on-time, full payments on its obligations.

The Treasury Department will soon be aware of the amount of tax income it has received for 2022 and for the first projected payment of this year as tax season will be coming to an end for many filers on Tuesday.

The US reached its debt ceiling in January and can no longer borrow money to satisfy its obligations unless Congress raises or suspends it, so that money is essential right now. Treasury is preventing default, which would occur this summer or early fall, in the meantime by utilizing cash on hand and “extraordinary measures,” which, according to Treasury Secretary Janet Yellen, should last at least until early June.

The amount of taxes collected this year will also help House Republicans and the White House estimate how much time they have left to negotiate a resolution to the debt ceiling crisis. Although discussions are at a standstill, a shortfall might cause them to pick up speed.

Although it is difficult to predict tax collections, most experts agree that they are unlikely to exceed expectations in 2021, as they did during the previous filing season, helped by a robust stock market and faster economic growth.

Despite the large sum from capital gains taxes in 2021, Bernard Yaros, economist at Moody’s Analytics, said there is still a lot of uncertainty about how much tax revenue the Treasury will receive. That won’t be the case, given how poorly the financial markets performed in the previous year.

The Treasury Department and other analysts are anticipated to revise their predictions of when the government may begin to default on its commitments once the entire total is known, which won’t be for a few more weeks. Most of the current forecasts place the summer or the early fall.

Why It Maters To Lawmakers

Congress will be keeping a careful eye on this.

Negotiations will move extremely rapidly once we reach May, according to Shai Akabas, director of economic policy at the Bipartisan Policy Center. “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 enter May,” Akabas said. “In contrast, if they believe they have an extra month, two months, or more, they will likely fill that time, as we have seen them do repeatedly in the past.”

The plan, which House Speaker Kevin McCarthy expects House Republicans to approve in the coming weeks, would lift the debt ceiling through the end of the current fiscal year. Among other things, it would entail reducing domestic, non-defense

government expenditure to levels that would be in effect in 2022, adding or increasing job requirements for safety net programs, and canceling certain unused Covid-19 relief payments.

President Joe Biden would be willing to meet with California Republican Kevin McCarthy again if he can get the bill through the House, according to a senior White House official. The measure is not anticipated to clear the Democratic-controlled Senate.

It is unclear how much time they have. It’s doub????ul that the federal government will go into default until much later in the summer if the tax revenues collected this month are sufficient to continue paying bills into June. The second quarter anticipated tax payments, which are due on June 15, and the extraordinary measures that become available at the end of the month will provide Treasury with additional funding.

“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.

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About Daniel T.A. Cotts

Daniel is a skilled Tax Attorney who moved to Corpus Christi in 2019 to expand his practice and return to Texas. With over 26 years of experience in the legal profession, Daniel brings a wealth of knowledge of Taxation, IRS Dispute representation & resolution, Estate Planning, Accounting, and Business & Contract Law to South Texas.


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