Happy Wednesday! Here’s what we’re watching while waiting for Thursday morning’s inflation report.
US Could Soon Hit $31.4 Trillion Debt Limit
The U.S. could hit its self-imposed $31.4 trillion debt limit in a matter of days or weeks, the Associated Press’s Josh Boak and Fatima Hussein report Wednesday, setting up what is could be a high-stakes clash between Republicans and Democrats later this year.
Any such crisis won’t hit immediately. Once the nation’s borrowing authority is reached, the Treasury Department will resort to what it calls “extraordinary measures” to continue meeting the federal government’s financial obligations, as it has done in the past. Those measures include delaying some payments, such as contributions to federal employees’ retirement plans, in order to provide some headroom to make other payments that are deemed essential, including those for Social Security and debt instruments. (The Treasury discusses its options in this 2021 document.)
Eventually, though, the Treasury will run out of options and be unable to meet all of its obligations. That threshold, the so-called “X-date,” could arrive sometime this summer, though much depends on spending levels and tax revenues over the next few months.
A looming confrontation: The far-right Republicans who held up Speaker Kevin McCarthy’s (R-CA) ascension to the top position in the House have vowed to use the need to raise the debt ceiling as leverage in their campaign to reduce federal spending. McCarthy has reportedly agreed to their demand that any increase in the debt ceiling be accompanied by a reduction in spending that sets a return to 2022 budget levels as a target.
Political insiders on both sides of the aisle say a drawn-out confrontation over the debt ceiling is a real possibility. Zach Moller, a budget expert at the centrist think tank Third Way, told The Hill that he is concerned that the clash would cause lawmakers to miss their deadline. “The House Republicans really seem to want to drag their feet on the debt limit,” he said. “I’m really worried that the unknown nature of the X-date, the default date, and how slow the House may move, we may find ourselves in a situation where we’re defaulting.”
Republican Brendan Buck, who advised former speaker John Boehner (R-OH) during the 2011 battle over the debt ceiling led by lawmakers affiliated with the tea party — a battle that resulted in a downgrade of the nation’s credit rating — said he thinks another showdown is likely. “I’m not saying it’s healthy to worry about the debt limit every day for the next nine months, but I am saying you probably should,” he tweeted.
How worried should we be? Analysts are divided over just how much of a threat the coming standoff over the debt ceiling represents. Libby Cantrill, head of public policy at bond giant PIMCO, told Politico’s Morning Money that her firm is not ringing the alarm bells just yet, since they still see a path to a debt limit increase that involves moderate Republicans and Democrats working together. “For the market’s purposes, as long as there is that release valve — a mechanism to force a clean debt ceiling increase — we are not exceedingly concerned about the chances of a default,” Cantrill said.
But Elliot Hentov, head of policy research at State Street Global Advisors, told Politico that the rise of the far right is increasing the risk of a crisis. While he doesn’t think the U.S. will miss a debt payment — a disastrous turn of events that would shake the world economy — he is worried that a confrontation could last for some time, pushing the Treasury Department to take unprecedented and perhaps legally questionable steps to keep making its payments.
“In all the previous debt ceiling episodes, I always felt like at the end of the day, I understood the need for the theatrics, but I could see a landing zone for how it gets resolved,” said Hentov. “Here, I don’t see that yet, and it makes me quite uncomfortable.”
Bank of America strategist Ralph Axel reportedly told clients he sees the potential for a technical default. “We think it is likely that by late summer or early fall, the federal government will temporarily be forced to default on a portion of its daily obligations for a time ranging between a couple of days to a few weeks,” he wrote, according to Bloomberg News. “If so, this would represent the first time in history that the US would default on any of its obligations due to the debt ceiling law.”
The bottom line: There could indeed be trouble ahead. “Debt limit negotiations are always protracted and almost always contentious, and the political trends seem to make it likely that they will exacerbate those tendencies and will create a volatile situation,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center, per the AP. Akabas added that we will have a better fix on the situation later this month, when the Congressional Budget Office updates its outlook for the budget, providing more data for when the X-date is expected to arrive.
Taxpayer Advocate Sees ‘Light at the End of the Tunnel’ for the IRS
Last year was full of misery for taxpayers and tax professionals dealing with the Internal Revenue Service, but this year should be somewhat better, according to an independent watchdog’s annual report to Congress.
“We have begun to see the light at the end of the tunnel,” National Taxpayer Advocate Erin M. Collins wrote in the preface to her latest report. “I am just not sure how much further we have to travel before we see sunlight.”
Collins’s report says the IRS has made substantial progress in reducing its huge backlog of unprocessed returns and correspondence, cutting the number of such items requiring manual processing from more than 22 million as of the end of 2021 to about 15 million as of last month. For individual tax returns on paper, the backlog was cut from 4.7 million to 1 million. “Because the majority of individual taxpayers receive refunds, the reduction in unprocessed paper tax returns was a significant accomplishment,” the report says.
Still, the watchdog says that millions of tax filers have been waiting for an unacceptably long period of at least 8.5 months to get their refunds and the agency’s continuing backlog means that the 2023 filing season will inevitably be rife with challenges and frustrations.
Service improvements ahead? Telephone customer service remains a major problem for the IRS, with just 13% of 173 million calls last year answered by a live agent and hold times averaging 29 minutes. The report points to the agency’s recent hiring of 4,000 new customer service representatives and its goal of adding 700 more employees to provide in-person help as reasons for optimism. Treasury Secretary Janet Yellen said last fall that the agency will answer more than five times as many calls in the coming filing season and that wait times would be cut to less than 15 minutes.
Collins also cites the $80 billion in additional funding provided to the agency by Democrats as part of last year’s Inflation Reduction Act as positive development. The new money includes $3.2 billion allotted for service improvements and $4.8 billion for systems upgrades. “This legislation provides the IRS a critical opportunity to significantly improve its delivery of taxpayer services,” the report says, adding that “increased funding alone will not guarantee improvement.”
GOP vs IRS: The report comes as Republicans, newly in control of the House or Representatives, have put the IRS squarely in their sights. House Republicans have already passed a bill to repeal most of the $80 billion in additional funding over 10 years provided to the agency by Democrats last year. They will also be voting on a plan to abolish the tax agency and replace the federal income tax with a national consumption tax. That bill, called the Fair Tax Act, was introduced Wednesday by Rep. Buddy Carter (R-GA). House Speaker Kevin McCarthy (R-CA) reportedly agreed to bring the bill up for a floor vote as part of the deal to get conservatives holdouts to back his bid for the speakership.
While neither piece of legislation is likely to become law given Democratic control of the Senate and White House, they provide a clear indication of the scrutiny the IRS faces.
What’s next: Collins lays out dozens of recommendations for improvements. She calls for the agency to create online accounts for taxpayers similar to those of private financial firms, which could facilitate communications and correspondence. She also urges the agency to hire more human resources employees to manage its expanded recruitment, hiring and training efforts.
The report also calls for the widely used Earned Income Tax Credit to be restructured to both make it simpler for taxpayers and to reduce improper payments.
The IRS is expected to submit a modernization plan within weeks detailing how it proposes to spend the new funding it is set to receive.
Quote of the Day
“All the signs are pointing to a higher, not a lower, probability of a soft landing. It may still not be more than 50-50. But 50-50 is looking better than it was a few months ago.”
− Princeton University economist Alan Blinder, who previously served as vice chair of the Federal Reserve, in an Associated Press article detailing growing optimism that the U.S. can avoid a recession.
Number of the Day: 16 Million
As the open enrollment period for Affordable Care Act coverage draws to a close on Sunday, nearly 16 million Americans have enrolled in plans since November 1 — an increase of 13% compared with last year, the Department of Health and Human Services said Wednesday. The number of people picking plans includes 3.1 million who are new to the marketplaces and 12.8 million who had coverage last year.
This year marks the 10th open enrollment season since the Obama health law took effect.
- Nation Closing In on $31.4T Borrowing Limit – The Hill
- IRS Advocate Reports Big Drop in Backlog as GOP Votes to Cut Funds – Washington Post
- I.R.S. Backlogs Continue as Republicans Mount Offensive – New York Times
- Group of Moderate Democrats Lobbying Against Defense Spending Cuts – The Hill
- What’s in Biden’s New Student Loan Repayment Plan? Here’s What We Know. – Washington Post
- McConnell Most Unpopular Senator in New Survey – The Hill
- Fed’s No-Rate-Cut Mantra Rejected by Markets Seeing Recession – Bloomberg
- Coronavirus ‘Chimera’ Made in Lab Shows What Makes Omicron Seemingly Less Deadly – Washington Post
- Pentagon Drops Covid-19 Vaccine Mandate for Troops – Politico
- Obamacare Is Everywhere in the Unlikeliest of Places: Miami – New York Times
- How Newsom Proposes to Handle a Budget Deficit – Politico
Views and Analysis
- The U.S. May Finally Breach the Debt Ceiling. Here’s Why That Would Be Very Bad. – Alan Rappeport, Jim Tankersley and Jeanna Smialek, New York Times
- The House GOP’s Vote to Cut IRS Funding Was Just One Skirmish in a Long War – Howard Gleckman, Tax Policy Center
- The Debt Ceiling Is a Red Herring – James K. Galbraith, Project Syndicate
- The GOP’s Shift Against Supporting Ukraine Hits a New Milestone – Aaron Blake, Washington Post
- A New Congress Gets Its First Ukraine Test – Olivier Knox, Washington Post
- The House GOP’s Risky Return to Budget Warfare – Peter Spiliakos, National Review
- The IRS Needs Billions to Make Trillions – Alexis Leondis, Bloomberg
- 5 Reasons Why the Republican Claim About 87,000 New IRS Agents Is an Exaggeration – Katie Lobosco, CNN
- Why Wall Street Should Worry About the Debt Ceiling – Zachary Warmbrodt, Politico
- Jerome Powell: Stop Stirring the Inflation Pot – Avraham Shama, The Hill
- There Are No Moderate House Republicans – Jennifer Rubin, Washington Post
- Kevin McCarthy Can’t Give Republican Rebels What They Really Want – Peter Beinart, New York Times
- For the Nation’s Health, Break Up the Food and Drug Administration – Washington Post Editorial Board