If debt ceiling deal fails, U.S. could delay tax refunds

McClatchy NewspapersJanuary 7, 2013 

— Absent an early deal to raise the nation’s debt ceiling, the federal government could run out of ways to pay creditors and Social Security recipients by mid-February, earlier than expected, according to a new analysis released Monday.

Among the unpleasant choices to help stave off a default on U.S. government bonds could be temporarily halting tax refunds, or choosing to pay the Chinese government and other bondholders rather than send Social Security checks to elderly recipients, according to the authors of the report.

“Think about what we’re talking about here,” said Steve Bell, director of economic policy for the Bipartisan Policy Center, outlining the very real possibility that the United States, whose dollar is the world’s reserve currency, could follow in the footsteps of basket-case governments such as Argentina or Greece and fail to pay its creditors.

The New Year’s deal between Congress and the Obama administration to avoid the so-called fiscal cliff did not include anything on raising the nation’s debt ceiling of $16.4 trillion, which the Treasury Department said was hit on Dec. 31, 2012. Without a new debt ceiling, the government lacks the ability to borrow in order to pay the debt it already has incurred and owes. It could be forced to determine an order on who gets paid first, China or the elderly, in the event no deal is reached.

To buy more time, the Treasury is tapping into about $200 billion in emergency borrowing authority, described as “extraordinary measures” that allow the agency to raise additional cash to pay creditors. Lawmakers have been talking as if the debt-ceiling fight would be resolved in March along with a deadline to prevent about $109 billion in automatic government spending cuts from taking place.

But the government is likely to run out of ways to juggle accounts before that, mostly like between Feb. 15 and March 1, according to the center. And on March 1 alone, there are $83 billion in payments due, about $45 billion owed to Social Security recipients and doctors who are owed Medicare payments for services rendered.

One of the big question marks is whether the Internal Revenue Service could or would be used to bridge funding shortfalls by delaying tax refunds due to millions of Americans.

When Congress and the administration locked horns on the debt ceiling in August 2011, there was more wiggle room on funding pressures. This year, the “extraordinary measures” won’t go as far because February is a month in which the government has more cash going out than coming in. That’s when the IRS historically sends back lots of tax refunds.

The Obama administration could delay those refunds if necessary, the center said. By law, the IRS does not have to pay interest on any refund owed taxpayers until 45 days after the tax filing deadline, which this year is April 15.

The administration could, hypothetically, delay tax refunds until the end of May. Realistically, the benefit of any delay in refunds would probably fall just in February and March because of the hefty payments due in those months to taxpayers.

The Bipartisan Policy Center projects that between Feb. 15 and March 15, the federal government is expected to send out roughly $86 billion in refunds to taxpayers.

When that sum is added to what’s owed for interest on the debt, Social Security benefits, Medicare payments, defense contracts, food stamps, federal salaries and other programmed spending, the government must spend about $452 billion from mid-February to mid-March just for services rendered and past commitments made.

Meanwhile, there’s expected inflow of about $277 billion in revenue during that period, according to the center, or a shortage of $175 billion that can’t be made up by deferring tax refunds alone.

Still, delaying tax refunds, either openly or via a “slow walk” process where it happens but is never publicized, remains a possibility. White House spokesman Jay Carney refused to answer McClatchy questions on the tax refunds, as did both the IRS and the Treasury Department.

Appearing Sunday on CBS’ “Face the Nation,” House Minority Leader Nancy Pelosi, D-Calif., urged President Barack Obama to ignore the debt ceiling. Like Senate Majority Leader Harry Reid, D-Nev., Pelosi argues that the 14th Amendment orders the president to pay the nation’s debt, irrespective of congressional approval or disapproval. The government could just issue new debt.

The White House, however, said in December that it does not believe the Constitution grants the president the power to ignore the debt ceiling.

White House correspondent Anita Kumar contributed.

Email: khall@mcclatchydc.com; Twitter: @KevinGHall

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