Sunday July 28, 5:03 pm Eastern Time
Reuters Business Report
Wall St. Woes Hitting Uncle Sam Too
By Jonathan Nicholson
WASHINGTON (Reuters) - Investors are not the only ones watching the wobbly U.S. stock markets closely. The federal government is seeing its budget fortunes fall along with the recent market losses.
As stocks have headed relentlessly south, they have taken a good chunk of government revenues with them, leaving a budget gap estimated between $150 billion and $200 billion, on track to be the biggest deficit since 1994's $203.37 billion.
ADVERTISEMENT
While other factors are widening the gap, including increased spending for national defense, efforts to combat terrorism and the initial stages of President Bush's 10-year tax cut, the steep drop in revenues has been a major culprit.
According to the June monthly budget statement, receipts so far in the current budget year are running more than 11 percent behind last year. Individual income tax receipts, which make up about half of government revenues, were off almost 20 percent.
One reason for that, officials believe, is that capital gains taxes -- levies on the increase in the value of stocks and other investments -- have fallen sharply, reflecting the weakness in U.S. equity markets since 2000.
On Wednesday, Mitch Daniels, head of the White House Office of Management and Budget, warned that a prolonged sell-off in stocks could push the government into deeper deficits.
"It's a bigger phenomenon than it ever has been. We're going to have to watch it closely. We're going to watch it on a monthly basis," he said.
LOOKING AT MODEL
With tax revenues off by about $75 billion more than expected in April, the most crucial month for individual tax collections, the Treasury Department it taking a closer look at the link between the stock markets and the budget situation.
Treasury uses a model that incorporates past stock performance to come up with estimates of capital gains receipts. The model in recent years has been "extremely accurate," according to Treasury spokeswoman Tara Bradshaw.
"Early indications however are that the model may have underestimated the extent of the decline in capital gains income for 2001 ... and this may have been partly responsible for the decline in final payments that occurred in April of this year," she said, adding:
"We are continually working to improve our modeling of this aspect of income as well as all other income sources."
While capital gains provided the boost to U.S. revenues that pulled the government out of almost 30 years of deficit spending in the late nineties, the path down from the stock peak may take longer and be rockier.
Lou Crandall, economist with Wrightson Associates in New York, said the proportion of total federal receipts made up from capital gains has fallen.
"It's a lot less important than it was two years ago," he said.
HALF OF RECORD 2000 SURPLUS
In the 1995 budget year, capital gains receipts made up about 3 percent of total federal revenues, he said, a figure that surged to 7 percent by the 2000 budget year. In 2000, capital gains taxes accounted for about $120 billion, or about half of the record $236.92 billion surplus seen that year.
Since then, stocks have been on a long, downward slide. The broad-based S&P 500 index was off 10.14 percent in 2000 and 13.04 percent in 2001.
But the initial response in revenues was small. Individual income tax receipts were down by only 1.0 percent in 2001.
Crandall said he expected capital gains revenues to be "depressed for several years to come," in part because of the way the tax code treats stock losses. There is an annual limit of $3,000 on stock losses that can be used to reduce taxable income. However, taxpayers can carry losses above that forward into other years, stretching out the period of revenue loss.
In its recent budget review, the OMB said, "This overhang may grow in the near term. Presumably, a large portion of the capital losses incurred since the stock market began its decline have not yet been realized."
Congress, in an effort to ease the pain of the markets' decline on investors, could make the problem worse. On Thursday, House Speaker Dennis Hastert, an Illinois Republican, said increasing the maximum $3,000 loss deduction was something lawmakers were taking a look at. |
