The New York Times

April 26, 2002, Friday, Late Edition - Final

SECTION: Section A; Page 1; Column 1; National Desk

Tax Revenues Lag, Threatening to Double Deficit

By RICHARD W. STEVENSON

DATELINE: WASHINGTON, April 25

Tax revenues have been flowing in to the federal government at far lower levels than anticipated, raising the possibility that this year's budget deficit could be twice as big as projected, government and private analysts said today.

A big portion of tax receipts reach Washington in the weeks after the April 15 tax-filing deadline, and the analysts said it would be another week or two before a definitive tally is available. But they said the trend so far suggested that receipts could end up as much as $70 billion lower than expected. A shortfall of that magnitude would equal a little less than 5 percent of anticipated revenues of $1.42 trillion from personal and corporate income taxes. But it would roughly double the projected deficit for the current fiscal year, which stands at $73 billion after accounting for a corporate tax cut enacted last month and President Bush's request for $27 billion in additional spending this year, using Congressional Budget Office figures.

A $70 billion shortfall in tax revenues, combined with deficit projections, would produce a deficit of more than $140 billion for the fiscal year ending Sept. 30.

"It's too early to know for sure, but if these trends continue, this is bad news for the budget, no question about it," said Representative John M. Spratt Jr. of South Carolina, the senior Democrat on the House Budget Committee.

Officials at the White House and the Treasury Department declined to comment, saying it was too early to draw any conclusions about how much revenue the government would collect. Analysts said the government had processed about two-thirds of this month's tax receipts.

If the early indications of a substantial shortfall hold up as the Internal Revenue Service finishes opening envelopes and depositing checks from taxpayers, it would suggest that last year's recession eliminated or reversed the positive revenue surprises of the last five years. For reasons that are still partly unexplained, tax receipts in much of the economic boom of the late 1990's ran at higher-than-expected levels, playing a crucial role in the swing from budget deficits to surpluses. Though figures are still sketchy, the shortfall this year appears to be largely from nonwithheld individual tax payments, a category that includes taxes on capital gains, stock options, dividends, real estate sales and other nonwage income.

But analysts said tax refunds had also been larger than expected, suggesting that wages last year might have fallen more than other economic statistics had captured.

Economists at Goldman Sachs, the investment firm, said nonwithheld receipts appeared to be running about 30 percent below projections, implying that the deficit would be $40 billion or so higher than anticipated.

Other analysts said refunds had been running about $20 billion more than anticipated going into April, and that revenue from withholding for some individual and corporate tax payments was about $10 billion lower than expected. It is unclear how much of the likely shortfall stems directly from corporate rather than individual tax payments. As a result, they said, it was possible that the total shortfall could come to about $70 billion.

"We're getting close to the time when these numbers get pretty firm," said Jan Hatzius, an economist at Goldman Sachs. "It's trending pretty negative at this point, at a time when government spending is still on an upward path."

The government ran surpluses for the last four years. But even before this year's likely revenue shortfalls became apparent, the government was expected to be in the red for at least the next several years.

The turnabout was due to a combination of the $1.35 trillion, 10-year tax cut signed into law last year by President Bush, the weak economy and increased government spending after the Sept. 11 terrorist attacks.

The re-emergence of deficits has had little economic impact so far. But the political implications, though muted by the bipartisan consensus after Sept. 11 that the government should spend whatever is necessary to fight terrorism, could still be substantial.

Should the deficit grow this year, Democrats said, it would strengthen their case that last year's tax cut was fiscally irresponsible and that there was no room for the additional tax cuts the administration is seeking.

"It's bad news for those who are pushing for new tax cuts," Mr. Spratt said. Any additional tax cuts, he said, would mean "more borrowing and more spending of the Social Security trust funds" -- a theme that Democrats have already been hitting hard in an effort to beat back Republican efforts to make last year's 10-year tax cut permanent.

But Republicans are sure to use any deterioration in the fiscal outlook to argue against further increases in spending beyond what Mr. Bush has sought for the military and increased domestic security. Without referring to any revenue shortfall, Representative Jim Nussle, Republican of Iowa, the chairman of the House Budget Committee, warned members of the appropriations committees from both parties today not to tack any extra spending onto Mr. Bush's request for an additional $27 billion to cover antiterrorism programs through the end of the fiscal year on Sept. 30.

"If we are to reinvigorate our economy, it is imperative that we take steps to control spending," Mr. Nussle said.