Tax News

CCH (cch.taxgroup.com) reports:

The federal budget is on an unsustainable fiscal path, largely due to increasing expenditures in the Medicare and Medicaid programs over the next 10 years, the Congressional Budget Office (CBO) announced on August 23. The nonpartisan agency's annual report, "The Budget and Economic Outlook: An Update," shows the federal budget deficit at $158 billion --or roughly $90 billion below the deficit for 2006.
CBO Director Peter Orszag told reporters that the lower deficit figure is attributable to slower federal spending and strong, but diminishing, corporate tax revenues coupled with an unanticipated increase in individual tax revenues. The CBO report projected that revenues from corporate income taxes will peak in 2007 at 2.7 percent of GDP and then gradually diminish. Most of the continued rise in tax revenues, as a percentage of GDP, will come from individual taxes, Orszag said. The federal budget would see a small surplus from higher tax revenues if tax cuts passed in President Bush's first term are allowed to expire after 2010.
The CBO report notes that the 2007 increase in individual income tax receipts is due partly to solid growth in wage and salary income and partly to rapid growth in nonwage income. For the most part, they appear to reflect underlying economic events that are unrelated to recent changes in fiscal policy, the report states. Sluggish economic growth and the current instability in the national housing market are unlikely to have an impact on the federal budget outlook, the CBO report said. The CBO noted that the cost of the wars in Iraq and Afghanistan contributed to the deficit, but that war spending was partially offset by lower-than-expected outlays from earlier appropriations.
White House Reaction
Acting Office of Management and Budget (OM Director Stephen McMillan said the CBO deficit projection reaffirms the Bush administration's forecast of a decline in federal red ink and indicate that the administration is on track to reach a balanced budget by 2012. The OMB Mid-Session Review on July 11 predicted the fiscal year 2007 federal deficit would decline to $205 billion, or 1.5 percent of the gross domestic product, due largely to revenue growth (TAXDAY, 2007/07/12, W.1).
McMillan asserted that economic growth and higher tax revenues are further proof that the U.S. economy remains on "sound footing." He urged Congress to complete its work on the 12 annual appropriations bills before the fiscal year ends on September 30. Federal spending restraint is "equally important to achieving balance," McMillan noted in a written statement.
By Stephen K. Cooper and Paula Cruickshank, CCH News Staff.
CBO: The Budget and Economic Outlook: An Update, August 2007.