Questions are swirling about the effects of the recently passed tax law on the timing of the upcoming debt limit “X Date” – the date when the federal government will no longer be able to pay its bills in full and on time. With Congress also debating an omnibus appropriations package and contentious immigration issues that may require several more weeks to hash out, even a swing of days on the “X Date” timing could make a big difference.
First, a quick recap: The federal government reached the debt limit on December 8, 2017. In order to avoid a default, Treasury resorted to using its so-called “extraordinary measures” and cash-on-hand to continue meeting the government’s obligations. At the time, before passage of the tax law, BPC projected that the “X Date” would fall sometime in March 2018.
As the tax legislation details were being hammered out, however, we noted that major questions remained about the impact any enacted tax law would have on the debt limit timing. Now, as the new tax law is being implemented, many of those questions persist. The complex effects of the tax legislation are not yet fully known when it comes to day-to-day government deposits and withdrawals. As a result, uncertainty surrounding the debt limit “X Date” remains.
Even a swing of days on the “X Date” timing could make a big difference.
Specifically, in addition to the usual economic uncertainty and fluctuations of cash flows, there are several important variables for the current forecast of the “X Date”:
Lower withholding for individuals and corporations: Withholding amounts for individual and corporate income taxes are decreasing as a result of the tax law, lowering government revenues in 2018. The IRS has issued new withholding tables, which are being implemented starting this month. While some individuals could have adjusted their withholdings in January on their own, we anticipate that the impact will ramp up during February. The exact magnitude and how rapidly the adjustment occurs throughout the economy remains to be seen. Once fully phased in, the change to withholding is likely, on average, to lower revenues on the order of several billion dollars per week. This will have the effect of moving the “X Date” earlier than it otherwise would have been without the tax legislation.
Pre-Payment of 2018 Property Taxes: The tax deduction for state and local income, sales, and property taxes has been significantly curtailed by the passage of the tax law. As a result, some homeowners prepaid their property taxes before the end of 2017. These prepayments could lead to higher refunds being paid out over the current tax season for some taxpayers, as they were able to increase the size of their federal income tax deduction. All else equal, increased cash outflows to property owners also means an earlier “X Date.” While we may never know exactly how many households took advantage of this tax quirk and how much it cost the Treasury, the impact on “X Date” timing will be much smaller than the withholding factor above.
Disaster Spending and Appropriations: Beyond the tax law, the passage of another disaster relief package (for the numerous hurricanes, wildfires, and other disasters that plagued the U.S. last year) and/or increased discretionary spending could further affect BPC’s “X Date” forecast. The magnitude and timing of the additional appropriations would determine the impact, but at this late date, it is likely to be minimal. For example, even if Congress were to pass $50-$100 billion in additional budget authority for disaster relief next week, only a small portion would actually be spent in time to affect the “X Date.”
One factor we don’t expect to play a role in the debt limit conundrum is the tax law’s mandatory repatriation provision, which imposes a transition tax on foreign earnings as they are brought back to the U.S. Repatriation will certainly generate significant revenues over the next several years – see Apple’s $37 billion announcement – but not in advance of the projected “X Date.” According to guidance issued by the IRS, mandatory repatriation payments may be made in installments over an eight-year period. Even those companies that choose to pay the full obligation in the first year are unlikely to make payments in the next several weeks.
All the variables listed above move in the direction of raising federal deficits – and thus worsening Treasury’s cash flow situation – by either increasing government spending or reducing government revenues. Accounting for the effects of the tax law, CBO has revised its estimates to place the likely “X Date” in the first half of March, earlier than their previous projection of late March to early April. The debt limit crunch is upon Congress again, and the uncertainty of both the projections and the politics are not making things any easier, or clearer.
BPC will update its official projection of the “X Date,” including the effects of the tax law, in the coming weeks.
Additional debt limit resources can be found here.