McCarthy Pitches Debt Limit Plan to a Divided GOP

Speaker McCarthy and Republicans just marked their first 100 days in the House majority
Reuters
By Yuval Rosenberg

It’s Tax Day Tuesday! We hope you’ve filed your taxes. We’ve got some astounding tax facts for you — and the latest in D.C.’s dangerous debt limit follies.

McCarthy Tries to Sell His Own Party on Debt Limit Plan

A day after publicly previewing his plan to pressure the White House into negotiating over the debt limit, House Speaker Kevin McCarthy (R-OK) tried to sell his approach to a GOP conference rife with internal divisions ahead of a potential vote next week.

At a private meeting of House Republicans, McCarthy reportedly urged his fractious members to line up in support of a bill that would raise the debt limit for one year while also slashing federal discretionary spending, imposing new work requirements for anti-poverty programs and advancing several other GOP priorities. Party leaders reportedly want to turn the plan into legislative text within days and bring the package to a quick vote, arguing that passage would help force President Joe Biden to start negotiations and that once the two sides are at the table, McCarthy can push for additional concessions.

Rep. Tom Cole (R-OK), an ally of McCarthy’s, dryly told Politico that the GOP meeting was "a chorus of unity and sunshine." In truth, McCarthy reportedly met with some pushback from members frustrated with his proposal and seeking to add to the GOP’s list of demands.

Rep. Chip Roy (R-TX) reportedly was among the House Freedom Caucus members pushing for more cuts, and to have the debt limit bill repeal the Inflation Reduction Act passed by Democrats last year, which included climate and health care provisions as well as $80 billion in additional funding for the IRS over 10 years.

"Many GOP lawmakers have demanded party leaders make those moves, though some aides and budget experts say it’s unclear whether they would yield any real savings," Politico reports, adding that McCarthy laid out the pros and cons of such a move in his slide presentation, according to a meeting attendee who spoke on condition of anonymity.

Rep. Scott Perry (R-PA), chair of the far-right House Freedom Caucus, told Punchbowl News that repeal of the Inflation Reduction Act had to be in the bill for it to pass. Other members have other items on their wish lists. "I think the hardest part is just that there are an unlimited number of conservative policy victories that, of course, we all want to see worked in," Rep. Dusty Johnson (R-SD) told CNN. "The reality is that in a negotiation, you never get everything you want. And so I think our biggest issue right now is how do we squeeze these thousands of desires down to a manageable and credible number of asks?"

Rep. Matt Gaetz (R-FL) made clear that Republicans still had plenty of other hurdles to clear. "We still have to resolve major questions like the dollar amount, and the duration, and the policy concessions we are seeking from the Senate. So it couldn’t possibly have 218 votes, because it doesn’t even exist," he said, according to Politico.

As he addresses those questions, McCarthy has little margin for defections. He can lose only four votes — or fewer, given that a couple of his members have balked at the idea of raising the debt limit under almost any circumstances. With the path to passage of a GOP bill unclear, Rep. Mike Lawler (R-NY) reportedly proposed using a discharge petition as a fallback option to force a floor vote on a debt-limit increase.

Biden on Tuesday criticized the GOP plan during a White House event, warning that McCarthy’s proposals would slash programs that middle-class and working Americans rely on and raise costs for families. The president also worked in a shot about McCarthy’s speech Monday at the New York Stock Exchange. "He did not tell the wealthy or the powerful on Wall Street that it was finally time to start paying their fair share of taxes," Biden said of the speaker. "That didn’t come up."

What’s next: Republicans still hope to release the bill text quickly — as soon as Wednesday or Thursday — and line up a floor vote next week. Remember, their bill will have no chance of passing the Senate. It’s a tactic meant to show that Republicans are unified in rejecting a "clean" debt ceiling increase and requiring spending cuts in exchange for raising the limit. "And even if the measure does squeeze through the House in the coming weeks," CNN’s Stephen Collinson writes, "it will likely be an idealized Republican product on which Biden and the Democratic Senate will never bite. Any subsequent package that emerged would almost certainly feature concessions that could splinter its GOP support."

We haven’t even seen the details of Republicans’ proposed budget cuts, which could prompt further dissent. "It’s also worth noting," writes Bloomberg columnist Jonathan Bernstein, "that McCarthy’s proposals on spending will push Republicans in vulnerable districts to vote for deep, unpopular cuts that won’t even wind up being enacted, just to appease GOP extremists in Congress who won’t back a final deal anyway."

Weak Tax Revenues Could Speed Up the Debt Ceiling Deadline

The exact date on which the U.S. will run out of cash to pay its bills is a moving target, with much depending on how robust tax revenues are this month. With the Treasury Department already taking what it calls extraordinary measures to keep its payments flowing, Treasury Secretary Janet Yellen has warned that those maneuvers may remain viable only until early June, at which point the U.S. could default on its debt if Congress fails to act. Other analysts think the Treasury will likely have a little more time, with Moody’s Chief Economist Mark Zandi citing mid-August as the potential crisis point.

On Tuesday, analysts at Goldman Sachs warned that the date could arrive sooner rather than later due to less robust revenues coming into the IRS. "While the data are still very preliminary, weak tax collections so far in April suggest an increased probability that the debt limit deadline will be reached in the first half of June," Goldman’s Alec Phillips and Tim Krupa said in a research note.

The analysts said their base case is now focused on late July, "but this could easily change to a base case of early June if tax receipts continue to undershoot." If the Treasury can make it past early June, then late July becomes the next potential date, since there is typically a burst of tax revenues in mid-June that should keep the Treasury flush for a few weeks.

Lower capital gains tax revenues are a key factor in the changing outlook. Goldman analysts expected those revenues to fall by 28% relative to last year, when receipts were boosted by strong market returns in 2021, but so far, they have been 39% lower. If capital gains tax revenues remain 35% to 40% lower relative to 2022, then an early June deadline is likely, Goldman said.

Scramble for a deal? We will have a stronger sense of where tax revenues stand later this month as the Treasury updates its numbers. Phillips and Krupa said that if Treasury were to announce that the deadline is just a few weeks away given the updated revenue data, that would raise the probability that lawmakers need to scramble to make a short-term deal to raise the debt ceiling, since there would be little time to strike a more comprehensive agreement.

Shai Akabas, director of economic policy at the Bipartisan Policy Center, underlined the importance of this year’s tax revenues and the effect they could have on the debt ceiling negotiations. "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 get into May," he told CNN. "Whereas if they feel like they have an additional month or two or more, then they’ll likely take up that time, as we’ve seen them do time and again in the past."

Cowen Analyst Chris Krueger said Tuesday that if Treasury sticks with its early June projection, any short-term deal in Congress would likely last just a few months. House Republicans could opt to raise or suspend the debt limit until the end of the fiscal year in September, creating the possibility for a dual showdown over the debt ceiling and government funding that culminates at the start of the new fiscal year on October 1 — neatly combining the threat of a debt default and a government shutdown all at once.

Number of the Day: $4.9 Trillion

That’s how much the IRS collected in gross taxes in fiscal year 2022, according to the agency’s annual data book released last week. The IRS processed more than 262 million tax returns during the fiscal year, while issuing more than $641 billion in tax refunds. Individuals provided the largest single source of revenue, as withheld and paid taxes totaled more than $2.8 trillion before refunds were issued.

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