Politicians aren’t ready as signs point to budget trouble ahead.
by The Wall Street Journal Editorial Board, December 18, 2022
The federal and state governments have had a good pandemic, enjoying the gusher of tax revenue and federal largesse. But those fat years are about to end, and the political class in most places isn’t ready for it.
The latest evidence came this month in the federal revenue news for October and November, the first two months of the 2023 fiscal year. Revenue rose only 1%, in contrast to an 21% increase in all of fiscal 2022. Individual taxes rose 4% but corporate tax revenue fell 6% and other revenue fell 21%.
The latter includes Federal Reserve remittances from interest on its bond holdings, which fell to $1 billion from $15 billion, according to the Congressional Budget Office. Those remittances will turn into deficits as the central bank pares its bond portfolio.
State revenues are also headed for an adjustment, especially in capitals that built in new structural spending obligations during the pandemic. California, that means you, and Sacramento now faces a $25 billion deficit. The New York state comptroller is also warning about potential deficits, as federal pandemic aid winds down and tax revenue falls.
One irony is that high-tax progressive states have benefitted in particular from the capital-gains income of the high earners they claim to despise. But capital-gains revenue is sure to plunge given the enormous decline in stock prices this year. Corporate tax revenue is also likely to slow as earnings are under pressure.
All of this was predictable since the good times were kept afloat by easy money and a highly progressive tax code. Federal tax receipts as a share of GDP hit a near record 19.6% in fiscal 2022, and Congress spent like it would never end. Well, it always does, and that is before the widely predicted recession in 2023.