The Congressional Budget Office (CBO) on August 23 released its revised economic report: “An Update to the Budget and Economic Outlook: 2016 to 2026.” The CBO estimates that, for the first time since 2009, the federal budget deficit in fiscal year (FY) 2016 will increase in relation to economic output.
The budget outlook estimates the 2016 deficit totaling $590 billion will exceed the 2015 deficit by $152 billion. The current estimate is $56 billion larger than the last estimate published in March, citing lower than expected collections of individual and corporate income taxes as the reason.
The CBO expects federal revenues to top out at $3.3 trillion in FY 2016. The CBO’s estimate relies solely on the basis of tax collections.
Individual Income Tax
The report anticipates taxes withheld from taxpayers’ paychecks will rise in FY 2016 by $30 billion, attributing the increase to growth in wages and salaries. It is estimates that collections of individual income taxes will increase by $13 billion.
Income tax for corporations, however, is predicted to decrease by $44 billion in FY 2016. A portion of the decline likely originates from the Consolidated Appropriations Act, 2016 (P.L. 114-113), enacted in December 2015. The legislation retroactively extended tax rules that allow qualifying businesses to accelerate their deductions for certain large investments. The CBO noted, however, that the drop in 2016 is far greater than currently available data on business activity can fully explain.
The CBO predicts that individual income tax collection will increase each year from 2017 to 2026 because of “real bracket creep.” With the real bracket creep process, “real income rises, an ever-larger proportion becomes subject to higher tax rates), rising distributions from tax-deferred retirement accounts, an expected increase in the share of wages and salaries earned by higher-income taxpayers, and other factors,” the CBO explained.
In contrast, corporate income tax collection is projected to stay relative stable over the next 10 years. All of the CBO estimates, however, reflect analysis under current tax law, and do not take into consideration the much anticipated tax reform expected in 2017.
By Jessica Jeane, Wolters Kluwer News Staff
CBO Report—An Update to the Budget and Economic Outlook: 2016 to 2026, August 2016