NCPA - National Center for Policy Analysis

Shrinking Revenues Could Cause Deficit to Balloon

April 26, 2002

Government and private analysts report that tax revenues have been flowing into the federal government at far lower levels than anticipated -- raising the specter of a budget deficit this year double the amount previously projected.

  • While it will be another week or two before a tally can be made, receipts could end up as much as $70 billion below expectations.
  • Previous estimates had placed the deficit this fiscal year at $73 billion -- but the final total could be in excess of $140 billion if there is not a pickup in receipts.
  • A shortfall of $70 billion would equal a little less than 5 percent of anticipated revenues of $1.42 trillion from personal and corporate income taxes.
  • If the early indications of a substantial shortfall hold up as the Internal Revenue Service finishes opening envelopes and depositing checks from taxpayers, it would suggest that last year's recession eliminated or reversed the positive revenue surprises of the past five years.

The shortfall appears to be largely from non-withheld individual tax payments -- which includes taxes on capital gains, stock options, dividends, real estate sales and other non-wage income.

But analysts say tax refunds have also been larger than expected, suggesting that wages last year may have fallen more than other economic statistics captured.

The re-emergence of deficits has had little economic impact so far, and was not a surprise, observers say. It was due to a combination of the $1.35 trillion, 10-year tax cut signed into law last year, the weak economy and increased government spending after the September 11 terrorist attacks.

Source: Richard W. Stevenson, "Tax Revenues Lag, Threatening to Double Deficit," New York Times, April 26, 2002.

 

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