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No 'April Surprise' in Store for Federal Budget This Year

The Budget
By George Hager
Washington Post Staff Writer
Friday, April 30, 1999; Page E1

For the past three years, April has been a great month for federal budget drafters, as waves of unexpected tax revenue made deficits sharply smaller or surpluses much bigger than anticipated.

No more.

If preliminary indications are right, this April's tax returns are delivering just about the amount of money forecasters predicted, which means little or no "April surprise" and little or none of the extra cash boost the Republican Congress was counting on to fatten its tax-cut proposals or help ease the sting of tight spending bills.

Tax analysts say that the economy is still healthy and that revenue is still expected to grow a little more than 5 percent this year. What's missing is the out-of-the-blue revenue surge that produced a stunning string of windfalls in 1996-98. Instead, revenue, while strong, has been dampened a little by a boom in tax refunds, last summer's stock market plunge and the fallout from global economic weakness.

Big tax refunds are going to parents claiming the new child tax credit for the first time. The Internal Revenue Service is even applying the child credit to the tax returns of parents who forgot to claim it. Though the child credit and two education-related credits were enacted in 1997, taxpayers couldn't claim them until they paid their 1998 taxes. As of April 23, refunds were running about 22 percent ahead of last year, according to the IRS.

Meanwhile, taxpayers reported lower profits from mutual funds last year. Capital gains distributions from mutual funds had rocketed up at astonishing rates in previous years, soaring from $55 billion in 1995 to $183 billion in 1997 before falling back to $165 billion in 1998, according to John Rhea, chief economist with the Investment Company Institute, the mutual fund industry's Washington-based research and lobbying arm. Last year's falloff probably occurred because the stock market suffered a deep drop beginning late last summer and recovered only after many funds had made their initial gains distributions last fall.

And finally, corporate tax revenue is running below last year's levels. Analysts said many firms were hampered by slumping earnings, particularly those hurt by weak exports to struggling overseas markets. Financial firms also took a hit when the stock market tanked at the end of the summer.

The IRS is still processing returns and will not be through all the April 15 envelopes until sometime next month. So neither of the federal government's chief revenue forecasters -- the Treasury Department or the Congressional Budget Office -- rules out the chances of a windfall. But analysts say they've seen little or nothing so far to indicate a surprise.

And on Capitol Hill, where House and Senate budget committees wrote special provisions into their initial budget plans to specify how to spend the extra surplus they believed they would get, there is little hope now that they'll get much.

"There's no surprise coming," G. William Hoagland, chief of staff for the Senate Budget Committee, said after looking at the latest revenue figures yesterday. "There's no question about it."

Washington got the first of three April revenue jolts in 1996, when the strong economy unexpectedly pushed the tax take up to $27 billion above the official forecasts. That was only about 2 percent of expected revenue, but it was serious money at a time when Congress and the White House were scrambling to find budget cuts as small as $1 billion or less.

The biggest April surprise came the following year, when CBO dropped a bomb into the 1997 budget talks by informing negotiators that revenue was running about $45 billion ahead of projections -- and would continue to do so for the five-year period for which negotiators were crafting the budget deal.

Analysts attribute that $225 billion surprise chiefly to a huge and utterly unforeseen boom in capital gains -- the profits from the sale of stocks, bonds and other assets.

Forecasters adjusted their model for 1998 to anticipate more gains, but they got another surprise anyway when income shot up disproportionately for upper-income Americans. The nation's progressive tax system turned that into the third-revenue surprise in as many years.

While both of the government's chief forecasters repeatedly missed the boat, the experience was especially searing for the CBO.

The agency's low-ball revenue estimates infuriated GOP congressional leaders by projecting less money to pay for the GOP's ambitious tax-cut plans. Then-House Speaker Newt Gingrich (R-Ga.) openly threatened to cut the CBO's funding if the agency couldn't get the numbers right.

The CBO reacted in part by moving toward the upper end of the forecasting range. Going into this year, the CBO projected a fiscal 1999 surplus $32 billion higher than the White House number, with about a third of that coming from higher revenue projections.

Even without a revenue surprise, though, GOP tax cutters could get a little extra money to work with when the CBO reestimates its surplus projections in early July. That's due in part to lower-than-expected spending on Medicare, the federal health insurance program for the elderly, which is running about 2.5 percent below last year's costs.

The CBO's deputy director, Barry Anderson, noted that trying to estimate the exact difference between the roughly $1.7 trillion the government spends and the roughly $1.8 trillion it takes in is a dicey job.

"It is an imprecise science at its very, very best," Anderson said.

"A change of 5, 10, 20, even 30 billion dollars -- it's easy to have that without an April surprise."

© Copyright 1999 The Washington Post Company

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