Shrinking tax revenue complicates debt limit talks; Biden says ‘we’re not there yet’

Lower-than-expected tax revenue is adding pressure on President Biden and House Speaker Kevin McCarthy to hike the nation’s debt limit by a June 1 deadline or face default.  

The Treasury said tax receipts for the month of April were down 26% from last year, resulting in $225 billion less revenue. The news is another sign of urgency for Mr. Biden and Mr. McCarthy, who are engaged in a standoff on raising the borrowing limit. 

Mr. Biden said Saturday that it’s “hard to tell” how much progress the White House and congressional negotiators are making, but he will know more in the next two days.

“We’re moving along,” Mr. Biden told reporters. “We’ve not reached the crunch point yet. There’s real discussion about some changes we all could make. We’re not there yet.”

Asked how confident he is about a deal before June 1, the president replied, “Has to be.”

Some fiscal experts warn that if incoming tax revenue continues to be lower than expected, the date for the government defaulting on some of its obligations could be moved forward.

“We absolutely must raise the debt limit as soon as possible – without drama and without any threat of default,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

The Congressional Budget Office estimates that the Treasury will collect $4.8 trillion in total revenue this year, but that figure is dwarfed by the $6.3 trillion the federal government is expected to spend.

In order to make up the difference, the federal government borrows billions of dollars monthly to meet expenses and make interest payments on the national debt. In mid-January, the U.S. Treasury breached its $31.38 trillion borrowing cap and has been exercising “extraordinary measures” to ensure the government can keep paying its debts.

Treasury Secretary Janet Yellen has warned those tactics will only be available until June 1, at which point the U.S. would be forced to pick and choose which bills to pay if the debt limit is not raised.

House Republicans have long demanded spending cuts in exchange for raising the debt limit. Congressional leaders are engaged in talks with the White House on the topic, but a scheduled meeting with the president on Friday was postponed because their respective staffs had not made enough progress on preliminary issues. 

Administration officials have met twice with aides to House Speaker Kevin McCarthy since Tuesday to discuss a path forward. 

The CBO report confirming a default deadline in early June “is a timely reminder that as lawmakers work to raise the debt ceiling, they should also address the underlying problem of our rapidly growing national debt,” said Michael Peterson, CEO of the fiscal watchdog group Peter G. Peterson Foundation.
 
“There is no question that the debt ceiling must be raised, and the sooner the better because failing to do so would harm both our economic and fiscal standing,” Mr. Peterson said in a statement. “But with the debt itself reaching an all-time high, and interest costs exceeding $10 trillion over the next decade, it’s clear that America’s fiscal outlook is also a major threat to our economy and the next generation. Raising the ceiling while implementing fiscal reforms is not at all unusual — in fact, there are many examples over many years, especially in divided government.”

House Republicans are pushing for the debt-limit proposal they passed last month to serve as a blueprint for the talks. The bill proposed rescinding at least $90.5 billion in unspent coronavirus relief, expanding work requirements for welfare and capping federal spending.

They also want the final product to include an overhaul of the permitting process for energy projects.

“If you look at this package, it represents the most common sense, straightforward approach to addressing the spending problem that got us here as we confront the debt ceiling,” said House Majority Leader Steve Scalise, Louisiana Republican.

Mr. Biden has signaled that gutting provisions from his signature $739 billion climate and health care law is a non-starter. The debt limit proposal that House Republicans passed last month sought to claw back at least $200 billion from the bill’s green energy tax credits.

“They say they were spending too much giving tax breaks to people who are moving to renewable energy,” said Mr. Biden. “It has nothing to do with anything other than that oil companies don’t like it.”

Democrats want a debt ceiling that would last until at least after the 2024 election, to give Mr. Biden breathing room as he seeks reelection.

“It’s got to go out two years. We can’t be going through hostage-taking constantly,” said Sen. Gary C. Peters, Michigan Democrat. “The more time we have so we don’t have people acting irresponsibly and causing chaos in the markets and raising the costs for Americans. We should take that option.”

 A two-year deal is a tough sell for House Republicans, who would lose leverage to extract further spending cuts from Mr. Biden in next year’s budget process. Rep. Garret Graves, Louisiana Republican, said a yearlong extension is preferable with the right mix of spending cuts.

“If the White House could show that … they have an earnest intent to begin lowering the amount of spending to begin putting us on a sustainable financial trajectory, that we can do one year,” Mr. Graves said. “I think the speaker of the House would be more than happy to come back and have the same debate next year.”

Mr. Graves, an ally of Mr. McCarthy, said a two-year deal might be acceptable if Democrats are willing to cap future spending growth and agree to larger cuts.

Although the White House and House Republicans remain far apart, they are beginning to shape the outlines of a deal.

Rescinding unspent coronavirus relief is a likely area of compromise. House Republicans have long called for the move, and Democrats have indicated that they are open to the idea.

 “We should be talking about extending the debt ceiling until after the election, reclaiming unused Covid funds and discussions about discretionary spending without touching Social Security, Medicare, or defense,” Rep. Jared Moskowitz, Florida Democrat, said in a statement.

The U.S. Chamber of Commerce issued a memo on Friday pinpointing “three likely areas of agreement” that could accompany an increase in the debt limit.

First is the repeal of the unspent COVID funding, which would save $56 billion, said Neil Bradley, Chamber executive vice president and chief policy officer. The second is caps on discretionary spending, which were enacted in the debt-limit deal of 2011.

Mr. Bradley wrote that even if spending caps were in effect for only a year or two, “they would produce savings over the ten-year period as a result of resetting the baseline at a lower level of spending. We would not rule out savings over ten years of $750 billion to $1 trillion.”

The third area cited by the Chamber is permitting reform, which is included in the debt-limit bill passed by the House GOP on April 26.

As the White House and congressional Republicans discuss spending cuts, Democrats insist that the talks are separate from the debt ceiling. They say the debt limit should be increased regardless of any agreement.

Senate Majority Leader Charles E. Schumer, New York Democrat, said the staff from the White House and congressional leaders are laboring on a constructive way forward, “but that progress should not and cannot be tied to default.”

The Chamber of Commerce’s memo panned a potential move by the president to invoke the 14th Amendment and simply bypass Congress in issuing more debt. Mr. Bradley wrote that most proponents of the move “skip over a key phrase” in Section 4 of the 14th 
Amendment, which says the validity of the U.S. public debt is “authorized by law.”

“Under current law, debt issued by the government is only allowed up to the amount specified in the debt ceiling, currently $31.4 trillion,” Mr. Bradley wrote. “Issuing debt above that amount is not authorized by law. … If the Treasury Department attempted to borrow money above the statutory limit in order to pay obligations of the government, the validity of that debt would immediately be called into question and subject to litigation. This would only compound the negative economic consequences of reaching the X date.”