US tax revenues fall short as refunds rise, raising early debt ceiling default risks

The United States is experiencing a major tax revenue shortfall as larger-than-expected refunds shrink government income. The decline in revenue could make it run out of money quicker than expected. If the trend persists, Congress may have to raise the debt ceiling soon to avoid a default.

A default means the government cannot meet all its financial obligations on time, which could damage the economy and rattle investors. 

Some experts had forecasted the US would run out of funds around late summer or early fall. However, if tax collections stay weak, the government could face financial trouble as early as May or June.

As of Thursday, the US Treasury had $281 billion in cash and $207 billion in special measures to pay its bills, but that money is running dry.

The Congressional Budget Office (CBO) has told Congress that if tax collections remain weak this spring, the government could hit its financial ceiling by May rather than later this spring.

IRS cuts and political gridlock may compound the problem

The IRS is bringing in less money than expected. At this point in the year, just 1.1% fewer tax returns have been submitted than at the same time last year. However, since many taxpayers wait until the April 15 deadline to pay taxes, revenue may still rise.

But refunds are a different matter. The IRS has issued 4.6% more refunds than last year, implying that the government is losing more money than it gains.

Some experts say budget cuts to the IRS could be part of the problem. Elon Musk’s Department of Government Efficiency (DOGE) has slashed the IRS headcount, leading to fewer tax audits. With diminished oversight, more taxpayers may be inflating deductions or even avoiding taxes altogether.

However, according to a summer report from the Yale Budget Lab, IRS job cuts have two unintended effects. While fewer audits might encourage risky tax filings, they could also result in underreported revenue slipping through the cracks.

As the financial deadline on the debt ceiling approaches, lawmakers have yet to outline a clear plan. Senate Majority Leader John Thune is attempting a budget plan with Republicans in control. The plan extends President Donald Trump’s tax cuts and raises the debt ceiling by $4 trillion.

But political battles could slow down any decision. If the government is in crisis in May, the Republicans may be forced to set tax cuts aside and only raise the debt ceiling. This would compel them to partner with Democrats, but it will not be easy to strike an agreement.

Analysts clash over the timeline amid growing uncertainty

Phillip Swagel, director of the CBO, says that although April and June tax payments offer immediate relief to the government, they do not solve its long-term issues at all. Many people wait until the deadline to file, he explains, while some businesses pay in June.

But other analysts aren’t buying it. And if IRS budget cuts translate into more people not paying taxes, the government might not receive enough dollars.

Treasury Secretary Scott Bessent will provide a fresh update on the state of the debt ceiling in early May. That update will be key in deciding how quickly the government could run out of money.

One big question is whether fewer IRS audits translate to lower tax payments. Richard Prisinzano, a tax expert at the Yale Budget Lab, said people may be bolder about claiming large deductions or even skipping taxes altogether if they know that the IRS has been weakened.

He said that if tax payments did not increase markedly, it would mean that people were exploiting their situation.

Shai Akabas, an economic policy expert, said the situation is still unclear. He also thought there is a chance the government could exhaust its cash sooner than anticipated. But he argued it is also unlikely that all the worst-case worries would happen simultaneously. He noted that while it is possible, it is not the most likely outcome.

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