April brought a big surprise – unexpectedly robust individual income tax receipts of $483 billion, a $103 billion, or 27%, increase over April 2023, according to the Congressional Budget Office. Uncle Sam can use the revenue, but even a $100 billion surprise will hardly make a dent in ongoing massive federal deficits. But why was it unexpected?
The increase included a $77 billion, or 26%, increase in final payment of taxes paid in estimated installments throughout the year, so-called non-withheld taxes. A large portion of non-withheld taxes are taxes on capital gains.
The pattern repeated in several states. Connecticut reported non-withheld individual income taxes in April of $1.7 billion, an unexpected surge of $275 million, or 19%, over April 2023.
April regularly accounts for more than 40% of annual federal non-withheld individual income taxes and more than one-third of the annual total in Connecticut. Shouldn’t budget officials have a better fix on such an important revenue month?
They should recognize that capital gains taxes have a major impact every April and that capital gains tax revenue rises and falls in relation to the performance of the stock market in the prior calendar year.
Certainly, the data on year-to-date collections before April give little indication of upcoming April receipts. In the first six months of the current federal fiscal year through March 31st, federal non-withheld income taxes were up only about $60 billion from last fiscal year’s six-month total of $1.03 trillion.
In Connecticut, non-withheld receipts for the first nine months of its fiscal year actually fell below the prior fiscal year’s first nine months. In response, Connecticut budget agencies lowered their projection for the full current fiscal year. Now, with April receipts in hand, actual receipts for just ten months equal the lowered projection for the full year. That’s a big miss.
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Yet, there would be no big surprises or misses if budget officials simply looked at stock market performance in the prior calendar year. In 2023, the S&P index rose a stunning 26%, the very same percentage that non-withheld income taxes in April rose over the prior April.
The stock market is a good predictor on the downside as well. In the first half of federal fiscal year 2023, federal non-withheld income tax receipts were unchanged from the prior comparable period; then in April, they dropped $189 billion from the prior April. Why? The S&P index plunged about 20% in 2022. A parallel plunge in Connecticut took receipts far below forecast.
While CBO updated its forecast in February, its regular forecasts do not break out non-withheld income taxes, despite that CBO does tally them separately once received each month. It should forecast them too, given their volatility and importance in April each year.
Good forecasts matter. Overly optimistic forecasts risk that politicians will spend money they think they have, but don’t. Even overly cautious forecasts entail the same risk once the unexpected new money arrives.
Once robust receipts poured in this April, revealing Connecticut’s serious underestimate, budget officials raised their current year projection of non-withheld receipts by $645 million. In addition, they added $1.5 billion over the next three years. This after removing $1.5 billion from their long-term forecast last year after their big overestimate.
Within days, state Democrats awarded $246 million of American Rescue Plan money to UCONN and other public universities. Yet, already over the last two years, the universities have received $415 million of ARP funds, which is supposed to go for temporary or one-time expenses. How long is temporary and how much can be one-time? Likely, it was spent on ongoing budget increases, and the new-found $1.5 billion in the newly revised long-term forecast will encourage more of the same.
Large flip-flopping budget projections don’t encourage restraint.
Restraint should be even more important at the federal level. Ongoing enormous budget deficits – CBO projects a $1.6 trillion deficit this year – have driven the national debt to a stratospheric level. But the increasing debt has little immediate impact.
Interest on the debt, however, does have immediate impact. Already in the first seven months of the fiscal year, net interest has increased $157 billion, or a whopping 42%, from $374 billion last year to $531 billion, more than defense spending so far this year. It is headed toward $1 trillion for the fiscal year.
The irony is that this April’s big tax revenue surprise should matter, but it doesn’t. While budget officials should not miss such a big and easily predictable number, $100 billion will cover only about 10% of net interest expense for the fiscal year. Uncle Sam is simply too deep in debt for conventional good news to matter.
Red Jahncke is a nationally recognized columnist, who writes about politics and policy. His columns appear in numerous national publications, such as The Wall Street Journal, Bloomberg, USA Today, The Hill, Issues & Insights and National Review as well as many Connecticut newspapers.