August 4, 2009

Government sees biggest revenue drop since 1932

The Associated Press

WASHINGTON - The recession is starving the government of tax revenue, just
as the president and Congress are piling a major expansion of health care
and other programs on the nation's plate and struggling to find money to pay
the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18
percent this year, the biggest |single-year decline since the Great
Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's
impact: Individual income tax |receipts are down 22 percent from a year ago.
Corporate income taxes are down 57 percent. Social Security tax receipts
could drop for only the second time since 1940, and Medicare taxes are on
pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932
in the midst of the Depression.

"Our tax system is already inadequate to support the promises our government
has made," said Eugene Steuerle, a former Treasury Department official in
the Reagan administration who is now vice president of the Peter |G.
Peterson Foundation. "This just adds to the problem."

While much of Washington is focused on how to pay for new programs such as
overhauling health care - at a cost of $1 trillion over the next decade -
existing programs are feeling the pinch, too.

Social Security is in danger of running out of money earlier than the
government projected just a few month ago. Highway, mass transit and airport
projects are at risk because fuel and industry taxes are declining.

The national debt already exceeds $11 trillion. And bills just completed by
the House would boost domestic agencies' spending by 11 percent in 2010 and
military spending by 4 percent.

For this report, the AP analyzed annual tax receipts dating back to the
inception of the federal income tax in 1913. Tax receipts for the 2009
budget year were available through June. They were compared to the same
period last year. The budget year runs from October to September, meaning
there will be three more months of receipts this year.

A small part of the drop in tax receipts can be attributed to new tax
credits for individuals and corporations enacted in February as part of the
$787 billion economic stimulus package. The sheer magnitude of the tax
decline, however, points to the deep recession that is reducing incomes,
wiping out corporate profits and straining government programs.

Is there a way out of the financial mess?

A key factor is the economy's health. The future of current programs will
depend largely on how fast the economy recovers from the recession, said
William Gale, co-director of the Tax Policy Center.

"The numbers for 2009 are striking, head-snapping. But what really matters
is what happens next," said Gale, who previously taught economics at UCLA
and was an adviser to President George H. W. Bush's Council of Economic
Advisers.

"If it's just one year, then it's a remarkable thing, but it's totally
manageable. If the economy doesn't recover soon, it doesn't matter what your
social, economic and political agenda is. There's not going to be any
revenue to pay for it."

A small part of the drop in tax receipts can be attributed to new tax
credits for individuals and corporations enacted in February as part of the
$787 billion economic stimulus package. The sheer magnitude of the tax
decline, however, points to the deep recession that is reducing incomes,
wiping out corporate profits and straining government programs.

Social Security tax receipts are down less than a percentage point from last
year, but in May the government had been projecting a slight increase. At
the time, the government's best estimate was that Social Security would
start to pay out more money than it receives in taxes in 2016, and that the
fund would be depleted in 2037 unless changes are enacted.

Some experts think the sour economy has made those numbers outdated.

"You could easily move that number up three or four years, then you're
talking about 2013, and that's not very far off," said Kent Smetters,
associate professor of insurance and risk management at the University of
Pennsylvania.

The government's projections included best- and worst-case scenarios. Under
the worst, Social Security would start to pay out more money than it
received in taxes in 2013, and the fund would be depleted in 2029.

The fund's trustees are still confident the solvency dates are within the
range of the worst-case scenario, said Jason Fichtner, the Social Security
Administration's acting deputy commissioner.

"We're not outside our boundaries yet," Fichtner said. "As the recovery
comes, we'll see how that plays out."

The recession's toll on Social Security makes it even more urgent for
Congress to address the fund's long-term solvency, said Sen. Herb Kohl,
D-Wis., chairman of the Senate Aging Committee.

"Over the past year, millions of older Americans have watched their
retirement savings crumble, making the guaranteed income of Social Security
more important than ever," Kohl said.

President Barack Obama has said he wants to tackle Social Security next
year, after he clears an already crowded agenda that includes overhauling
health care, addressing climate change and imposing new regulations on
financial companies.

Medicare tax receipts are also down less than a percentage point for the
year, pretty close to government projections. Medicare started paying out
more money than it received last year.

Meanwhile, the recession is taking a toll on fuel and industry excise taxes
that pay for highway, mass transit and airport projects. Fuel taxes that
support road construction and mass transit projects are on pace to fall for
the second straight year. Receipts from taxes on jet fuel and airline
tickets are also dropping, meaning Congress will have to borrow more money
to fund airport projects and the Federal Aviation Administration.

Last week, Congress voted to spend $7 billion to replenish the highway fund,
which would otherwise run out of money in August. Congress spent $8 billion
to replenish the fund last year.

Rep. Richard Neal, D-Mass., chairman of the House subcommittee that oversees
fuel taxes, is working on a package to make the fund more self-sufficient.
The U.S. Chamber of Commerce, which doesn't back many tax increases,
supports increasing the federal gasoline tax, currently 18.4 cents per
gallon.



Neal said he hasn't endorsed a specific plan. But, he added, "You can't keep
going back to the general fund."

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