May 12, 2003

NEW CBO DATA SHOW DEFICIT WILL BE HIGHER THAN EARLIER FORECAST AS REVENUES
FALL TO THEIR LOWEST LEVEL IN DECADES, AS A SHARE OF GDP

With Pending Tax Cut, Revenues This Year Will Hit Lowest Level,
As Share of GDP, Since the Eisenhower Administration
by Isaac Shapiro

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A new report that the Congressional Budget Office issued on May 9 shows that federal revenues for fiscal year 2003 are falling $50 billion to $80 billion below CBO’s earlier projections and that deficits this year consequently will be substantially larger than CBO projected as recently as two months ago, in March.[1]  The CBO report, which is based on Treasury data on revenue collections through April 30, comes at a time when legislation is moving through Congress that would cut federal taxes further.

In combination, the deterioration in federal revenues reflected in the new CBO report and the additional tax cuts contained in legislation likely to be enacted within the next few weeks will lead taxes to fall this year to their lowest level as a share of the economy since 1959, the next-to-last year of the Eisenhower administration.  This finding applies regardless of whether Congress ultimately approves the Senate tax-cut level or the House level.  The new CBO figures also have disturbing implications for revenue collections and deficits for years to come. 

Even without any new tax cuts, receipts, measured as a percentage of the economy, are on course to fall to levels not seen for a number of decades.

 

Revenues as a Share of GDP, 2003

 

Notes

CBO estimate that revenues will be $50 billion below its earlier forecast

 

17.1%

 

Lowest since 1965

   With Senate Tax Cut

16.9%

Lowest since 1959

   With House Tax Cut

16.6%

Lowest since 1959

 

 

 

CBO estimate that revenues will be $80 billion below its earlier forecast

 

16.8%

 

Lowest since 1959

   With Senate Tax Cut

16.6%

Lowest since 1959

   With House Tax Cut

16.3%

Lowest since 1959

The tax cuts moving forward in Congress will cause these levels to drop further and will assure that revenues fall to their lowest level as a share of the economy since 1959. 

Moreover, the figures cited so far refer to total federal revenues as a share of the economy.  The story becomes even more remarkable when just federal income taxes are considered.  Even under CBO’s most optimistic scenario — and before adding in any new tax cuts — income tax receipts are on course to drop to their lowest level, measured as a share of the economy, since 1943. 

Although the decline in revenues partly reflects the decline in the U.S. economy, other factors clearly are at work as well, since revenues would drop to levels well below those seen in the deeper recessions of the mid-1970s and early 1980s.  In particular, these historically low levels of revenue collections reflect the impact of tax cuts enacted in the past few years.  The tax cuts enacted in 2001 and 2002 will reduce revenues by $126 billion in 2003, based on CBO estimates.[4]  Without those tax cuts, revenues as a percent of the economy would not be close to being at their lowest level since 1959 or 1965.

These findings should give some pause to the current drive to enact further tax cuts.  They also intensify concerns over recent press reports that the Administration plans a tax cut every year.[5]  Receipts have already fallen to sufficiently low levels that questions about the adequacy of the nation’s revenue base must be raised, especially with the retirement of the baby-boom generation fast approaching.  Moreover, the data showing that the decline in receipts has been greater than expected also means that the economy already is receiving a larger fiscal stimulus than had previously been recognized; the decline in revenues translates into a larger deficit, which means more fiscal stimulus.

Federal Receipts as a Share of Gross Domestic Product,
1951-2003

Figures do not reflect any further tax cuts

1951

16.1%

 

1978

18.0%

1952

19.0

 

1979

18.5

1953

18.6

 

1980

18.9

1954

18.4

 

1981

19.6

1955

16.6

 

1982

19.1

1956

17.4

 

1983

17.5

1957

17.7

 

1984

17.4

1958

17.3

 

1985

17.7

1959

16.1

 

1986

17.5

1960

17.8

 

1987

18.4

1961

17.7

 

1988

18.1

1962

17.5

 

1989

18.3

1963

17.8

 

1990

18.0

1964

17.6

 

1991

17.8

1965

17.0

 

1992

17.5

1966

17.3

 

1993

17.6

1967

18.3

 

1994

18.1

1968

17.6

 

1995

18.5

1969

19.7

 

1996

18.9

1970

19.0

 

1997

19.3

1971

17.3

 

1998

19.9

1972

17.5

 

1999

20.0

1973

17.6

 

2000

20.8

1974

18.3

 

2001

19.9

1975

17.9

 

2002

17.9

1976

17.2

 

2003est.

17.6*

1977

18.0

 

2003est.

17.1**

 

 

 

2003est.

16.8***

   *CBO baseline, March 2003.
 **Estimate if revenues fall $50 billion below the baseline.

***Estimate if revenues fall $80 billion below the baseline.


End Notes:

[1] In its new report — “Monthly Budget Review,” May 2003 — CBO raised its deficit estimate for the year from $246 billion to “over $300 billion.”   (The Center on Budget and Policy Priorities released a report on this trend last week.  See “Federal Revenues Appear To Be Drying Up More Than Expected,” Center on Budget and Policy Priorities, May 5, 2003. )

[2] This calculation reflects both CBO’s projection of receipts and its projection of the size of the economy (i.e., the Gross Domestic Product).  With actual GDP information available for the first half of fiscal 2003, CBO’s GDP.

[3] Revenues were $2.025 trillion in fiscal year 2000.  They declined to $1.991 trillion in FY 2001 and $1.853 trillion in FY 2002.  CBO now projects they will total $1.811 trillion to $1.841 trillion in FY 2003.

[4] Even if one assumes the level of positive economic feedback from the 2001 tax cut that the President’s Council of Economic Advisors has claimed, the tax cuts enacted in the past two years will reduce revenues by an estimated $109 billion in 2003.  See the Center on Budget and Policy Priorities publication, “Are Tax Cuts a Minor or Major Factor in the Return of Deficits?  What the CBO Data Show,” February 12, 2003.

[5] Dana Milbank and Dan Balz, “GOP Eyes Tax Cuts as Annual Events,” The Washington Post, May 11, 2003