A shortfall of $150 billion in tax receipts in April is the reason why the U.S. Treasury is likely to run out of operating funds in early June, according to a study by the Penn Wharton Budget Model (PWBM). The Treasury and the Congressional Budget Office (CBO) had overestimated tax revenues by $117 billion in individual income taxes and payroll taxes, and $36 billion in corporate tax receipts, the study noted.

Individual income tax receipts were lower than expected for fiscal 2023 mainly because taxes on capital gains and other asset income were lower than what the CBO estimated in February 2023, the PWBM study stated.

“Asset prices had fallen quite a bit last year, and it looks like households probably just had a lot less taxable income to pay taxes on this year,” Alexander Arnon, director of business tax and economic analysis at PWBM, who prepared the study, said in an interview on the Wharton Business Daily radio show that airs on SiriusXM. (Listen to the full podcast above.) “Another [reason] is a large number of taxpayers are eligible for delayed filing this year, due mostly to weather-related disaster events.”

Treasury secretary Janet Yellen had warned in a May 1 letter to Congress that funds could run dry as early as June 1 unless the debt ceiling is raised or suspended by then; the CBO had in February estimated that to be between July and September 2023. The current debt ceiling is $31.4 trillion.


Wharton Business Daily: A new report by the Penn Wharton Budget Model shows that the U.S. Treasury could run out of operating funds earlier than expectations, with tax receipts being lower than projections. Alex Arnon, director of Business Tax and Economic Analysis at the Penn Wharton Budget Model, joins us with more. Alex, take us through this, and the connection of tax receipts to the debt ceiling.

Alex Arnon: In terms of the Treasury’s financing and the debt limit, we are running in large part on what we take in. So, currently, spending from day to day is being financed in large part based on what the Treasury is collecting in taxes every day. There are other means that the Treasury still has available to raise some of the financing, but those are pretty close to exhaustion. As time goes on, we get closer and closer where the only means that the government has to finance itself is whatever it collects from day to day.

The Treasury and the Congressional Budget Office had certain expectations for how receipts would come in around tax filing season this year. [But] over the last few weeks, those expectations have been severely disappointed. Receipts are coming in much lower than what was expected. As a result, last week, both the Treasury Secretary and the Congressional Budget Office moved up the date when they expect there will just be no funds left to operate the government.

Wharton Business Daily: Do we know why the expectations are higher than what we’re actually seeing?

Arnon: We won’t know exactly what happened for a little while, until we have more information about the 2023 tax season. But one hypothesis that seems fairly compelling to us, at this point, is that they were expecting more capital gains receipts this year than they actually got. They thought that households had earned more capital gains and other financial income on which they would pay taxes in April. As it shook out, asset prices had fallen quite a bit last year, and it looks like households probably just had a lot less taxable income to pay taxes on this year. So that seems like the biggest factor.

Another consideration is that a large number of taxpayers are eligible for delayed filing this year, due mostly to weather-related disaster events. So it is possible that over the rest of the year, we will see some pick-up as those filers do file their returns.

At this point, those seem like two of the leading candidate explanations.

Wharton Business Daily: A variety of taxes are in play here, such as estate and gift taxes, and payroll taxes. While tax revenues from some of those are relatively higher, payroll taxes has been down.

Arnon: Yes. It seems like the entire shortfall that emerged over the last few weeks is coming from individual income tax receipts. Usually, individual income tax receipts paid at filing are a small part of total income taxes collected in the year; we mostly pay our income taxes as it’s withheld from our paychecks. But for items like capital gains income, you pay what you owe when you file your return.

Can June Tax Revenues Help?

Wharton Business Daily: Can you guesstimate what the path of receipts would be over the course of the next several months? You hinted at the possibility that we may see a pickup in the next few months. Is that still a possibility?

Arnon: The next big infusion that the Treasury can expect is in June, when businesses, especially corporations, make quarterly tax payments. That should lead to a fairly significant inflow of cash in mid-June.

The question for the Treasury and for the debt limit is: can they make it to that quarterly tax payment in June based on what they have on hand and the little bit that they have coming in before then?

As for individual tax receipts, which by far are the biggest component of the government’s tax income, there’s less room for hope that we’re going to see a significant reversal. It would be historically unprecedented for revenues to catch up at this point. That doesn’t mean it’s impossible. We are in unusual times, still. But it would be very unlikely.

Before we saw the results of the tax filing in 2023, the expectation was that they could make it probably to July, definitely past early June. Now that we have the disappointing results of tax filing, it looks like early June is the most likely date at which the Treasury won’t be able to fund operations. That is not guaranteed, but there is a high likelihood that at that point the Treasury will not have enough cash on hand to run the government.

Wharton Business Daily: Does the system that is in place do a good enough job of estimating tax revenues?

Arnon: These are inherently very difficult things to predict. There are infinitely many different factors affecting what the Treasury will end up collecting in any given year. We [at the PWBM] certainly had some view that probably tax receipts would come in lower than expected, and that was based on our assessment of capital gains last year.

But there is not just the economic uncertainty of how much income people will end up having; there are all sorts of other uncertainties. In 2022 we saw a huge, unexpected surge of tax receipts around tax filing in April, because in 2021, asset markets went gangbusters and households realized tons of capital gains. You can’t anticipate what how stock market will perform ahead of time. It’s a lot of uncertainty. But arguably, some of this was predictable.