Posted on May 14, 2020
The Treasury Department released the Monthly Treasury Statement for April on Tuesday, showing that revenues for the month fell by 55 percent compared to the amount collected in April of last year. That’s quite a drop, but it’s a smaller decline than we expected last week (see post) of 70 percent to 85 percent. The reason we overestimated the decline, which importantly has no effect on the federal deficit, revolves around the somewhat arcane budgetary issue of whether the federal budget should treat as outlays (that is spending), or instead as a combination of outlays and revenue reductions, the tax rebate payments instituted by the CARES Act; we thought they’d be treated as part revenue reductions and part outlays, but instead they were treated fully as outlays. Although the treatment doesn’t affect the size of the federal deficit, it does affect the perceived size of government. Details follow if you are interested in the budgetary treatment.
Perhaps we should have taken the hint from Treasury because all their communication has referred to the rebate payments to taxpayers as “economic impact payments,” not the “recovery rebates” referred to in the enacting legislation itself. “Payments” sound more like government spending, and rebates, especially tax rebates, sound more like revenue reductions. The rebates were structured in the law as an income-limited, fully refundable tax credit for 2020, with an advanced payment mechanism so most people don’t have to wait until next year to get the benefit. The advance payment is based either on the taxpayer’s 2019 tax return, if available, or otherwise on the 2018 return (or other sources of information if necessary and available). The fully refundable part means that the taxpayer receives the benefit of the credit even if it exceeds his or her tax liability. Any amounts not received in advance–for example, if a taxpayer’s income was above the qualifying thresholds in 2018 and 2019 but not in 2020–could be claimed on the 2020 tax return filed next year; those later claimed amounts should, however, have effects on revenues. I told you it is arcane, maybe more than somewhat.
So, all of the more than $200 billion in rebates in April are classified as outlays in the budget, while we expected that about half would be recorded as revenue reductions (basically refunds of past taxes paid) and half as outlays (the portion that exceeds people’s tax liability). We had followed the revenue/outlay split of the Joint Committee on Taxation and the Congressional Budget Office, which were provided to the Congress with the estimated budgetary effects of the CARES Act. They were perhaps looking at past precedents (see next paragraph.) We had a range around our estimate of total revenues for the month, figuring that the outlay share could be a lot bigger or smaller, but we didn’t expand our range for the possibility that Treasury would call them all outlays.
There are arguments both ways about the budgetary treatment, and that may be reflected by different treatment of different rebates historically. None of the three other rebate payments in my memory–in 2001, 2003, and 2008– were treated as all outlays, but they all, including the 2019 rebate, have had different characteristics. The one most similar to the current rebate, in 2008, was treated as partly outlays and partly revenue reductions. (Indeed, the differently-structured 2001 and 2003 rebates were treated as all revenue reductions.) There certainly is, nonetheless, an argument for treating the current rebates as entirely outlays. The payments, in this case a fixed amount per adult (and less for dependents) goes out to most all individuals (there are exceptions) and regardless of their tax liability, as long as their income isn’t above the thresholds. That doesn’t seem very linked to tax liability and thus to federal revenues. But several other tax credits are refundable, most notably the earned income credit, and most of them have both revenue and outlay effects in the budget. But most of those credits aren’t set up with an advanced payment mechanism. It gets too complicated and I won’t go on and on. Let’s just say I think it can be argued both ways.
And we can add that, although the effect on the deficit is the same, whether the rebates are treated as spending or revenue reductions has an effect on the perceived size of government. The way this one is being treated results in higher amounts of both outlays and revenues compared to the case if the rebates were treated as partly outlays and partly revenue reductions.