President Biden and Speaker McCarthy are running out of time. That’s what the numbers are telling us in the months since January, when the Treasury said it could employ “extraordinary measures” to remain under the debt ceiling for five months.

The most important “measure” is income tax collections. They look likely to fall significantly short of Washington’s expectations this filing season, dragged down by plunging receipts from capital gains taxes. Unfortunately, we may not know for sure until it’s too late.

Capital gains taxes are likely to come in below the Congressional Budget Office projection of $315 billion for the full fiscal year of 2023. CBO’s forecast is down only $63 billion, or 17 percent, from last fiscal year’s record high of $378 billion that was produced by the eye-popping rise in stocks of 27 percent, as measured by the S&P Index, in 2021.

Such a modest decline seems unlikely given that the stock market in 2022 had a dramatic reversal of fortune and plunged almost 20 percent. That’s a greater annual decline than in any year since 2008, when the S&P plunged 38 percent and capital gains taxes fell about 50 percent the next fiscal year, according to CBO. 

The CBO forecast for fiscal 2023 does not appear to recognize the volatility of capital gains, especially in recent history. Before fiscal 2021, capital gains taxes never exceeded $200 billion, suggesting that $378 billion in fiscal 2022 and the forecasted $315 billion in fiscal 2023 are significantly above long-term trend. 

Ironically, CBO recognizes this reality. CBO’s February 2023 policy paper outlining its approach for projecting capital gains over the next ten years states that CBO expects capital gains realizations (and, thus, taxes) to return to “their historical average relative to the size of the economy,” down” to a long-run average of 3.7 percent of GDP by 2033,”  from 8.7 percent in 2021.

While acknowledging that capital gains “fluctuate more than other economic variables,” CBO’s forecast of a very modest decline in fiscal 2023 belies that statement. History demonstrates that capital gains taxes are extremely volatile — on both the upside and the downside.  

Most of this volatility manifests itself in taxes not withheld from paychecks, known in federal reports simply as “other receipts.” Last fiscal year, 40 percent of total individual income tax receipts were composed of “other receipts,” a major component of which were the $378 billion of capital gains taxes, which amounted to 33 percent of total other receipts.

By comparison, in fiscal 2019, other receipts accounted for only 32 percent of that fiscal year’s total individual income taxes, of which, in turn, capital gains taxes were just 27 percent by CBO estimate. 

In April 2022, the IRS received $642 billion, or 23 percent of last fiscal year’s total individual income taxes, and other receipts in April accounted for a whopping $515 billion, or 80 percent of the total paid that month. 

In April 2019, the IRS received only $397 billion, or 20 percent of the fiscal year’s total, and other receipts were just $283 billion, or only 71 percent of the month’s total. Manifestly, capital gains taxes are both volatile and determinative of tax collections in the critically important month of April. 

IRS rules magnify the volatility from fiscal year to fiscal year. Estimated payments of non-withheld income are due and payable in April, June and September in one fiscal year and the last estimate in January, and final payments (or refund claims) are due in the next fiscal year. 

If taxpayers underpay with their estimated tax payments, they are liable for penalties, unless they have followed IRS “safe harbor” rules, the determinative one of which says they won’t be penalized if they make estimated payments equal to 110 percent of their prior year’s actual taxes due (100 percent for lower income taxpayers).

The effect is that taxpayers with capital gains tend to overpay their first three quarterly estimates if the stock market in the prior year was higher than in the current year. This results in refunds of the overpayments when final tax returns are filed primarily in February, March and April. 

This past February and March reflected this dynamic dramatically. Among taxpayers who file estimated taxes, more claimed refunds than paid taxes, according to data in the CBO Monthly Budget Review and the Monthly Treasury Statement. Other receipts were a net negative $70 billion.

In any event, Treasury had a mere $87 billion in cash in its General Account on April 12, according to the Daily Treasury Statement. That’s down from $178 billion at the end of March and $545 billion a year ago on April 12, 2022.

The upshot is that the United States Treasury may not be able to employ “extraordinary measures” for many more months, and Messrs. Biden and McCarthy may have less time to negotiate a debt ceiling deal than they may think.