The government gets most of those funds from taxes. So when the Congressional Budget Office reported this month that the IRS took in less tax revenue than expected from Oct. 1 through April 30 — just under $300 billion less than in the first seven months of the previous fiscal year — it sent an ominous signal that the time could come even sooner when the United States can no longer borrow more money or fend off default. According to the CBO, this “X-date” may come as early as June.
The urgency was also stressed by Treasury Secretary Janet L. Yellen, who warned Congress twice in the past two weeks that this reckoning could come as soon as June 1.
A big chunk of that $300 billion shortfall, about $100 billion, comes from California, according to a Bipartisan Policy Center analysis first reported by the Wall Street Journal. Because of the major storms last year and early this year, the IRS gave almost all California residents an automatic extension on their tax returns, allowing them to file in October rather than April.
Of course, natural disasters have hit communities in many states. And as storms increase in frequency and intensity due to climate change, more taxpayers are given such extensions.
Although a small number of counties in other states were also affected, almost all Californians were granted extensions. Given California’s size and wealth, the Bipartisan Policy Center estimated that it accounts for 16 percent of all federal tax revenue — meaning the six-month extension has massive consequences: That $100 billion that Californians are paying later could keep the government running for almost six more days.
Alex Roytenberg, a certified public accountant with many California clients, says he has told them all to hold off on paying any taxes they owe until October so that they can keep earning interest on their money in the meantime.
“We have certain clients that have a couple million dollars’ worth of taxes that are due to the IRS or to California,” Roytenberg said.
While many Californians have paid their taxes, including those whose taxes are withheld from their paychecks by their employers, Roytenberg said his clients include self-employed earners who made more in 2022 than in 2021 — and prefer to pay the bulk of their higher expected tax bill later in the year.
To be sure, ups and downs in tax revenue are normal, experts say, and the reasons vary. In its May report, for example, the CBO noted that taxpayers owed less in taxes on capital gains this tax season than government forecasters had predicted.
Investors owe capital gains taxes when they sell an asset — such as a stock — and make money on the transaction. The healthy stock market in 2021 meant that many people made money on stock sales, and thus owed capital gains taxes the following spring. But the stock market did worse in 2022, so capital gains tax revenue is down.
Capital gains are “so unpredictable,” said Steve Wamhoff of the Institute on Taxation and Economic Policy. “When there’s any change in the market, that’s the thing that fluctuates most quickly and most dramatically. Wages and other things tend to be more stable than capital gains.”
What matters most is how much money the government collects in the long run through the tax policy it sets, Wamhoff said. But those fluctuations and other factors like delayed filing all matter for the underlying question: “When is the date when the financial cataclysm occurs?”
The tax shortfall isn’t the only change the government has to account for this year. Monetary policy also plays a role: The Federal Reserve is required to pay to Treasury its income from the interest earned on the bonds it holds on its balance sheet. Those holdings grew massively over the years as the Fed ramped up its bond buys, starting during the 2008 recession, to keep interest rates low — and Treasury benefited from that extra income.
However, the Fed’s series of rate hikes over the past year to fight inflation meant that the central bank had to pay billions more in interest to banks around the country. The May CBO report noted that the Fed had transferred $71 billion to Treasury from October 2021 to April 2022; this year, those remittances came to less than $1 billion. That difference could account for another four days of funding the government.
More broadly, though, experts note that changes in Fed remittances or tax receipts from year to year are fairly normal. In the end, no matter when the X-date comes, Congress has to address the debt ceiling crisis.
Because of vagaries like the California filing delay, “this early June period is looking like a very close call,” said Shai Akabas, who worked on the Bipartisan Policy Center’s analysis. “[But] exactly when it comes is less important than that we take action before the largest risks materialize.”