- The Washington Times - Wednesday, June 27, 2001

The weak economy is eroding the federal budget surplus, slowing the rapidly rising revenues that since 1996 turned gaping deficits into surpluses and provided Congress each year with surprise revenue windfalls.

This year's federal surplus will be at least $20 billion below projections, analysts say, because personal income-tax receipts are growing by half as much as last year and corporate profits have collapsed, prompting a dramatic 25 percent drop in corporate income-tax receipts in the crucial spring quarter.

The falloff in revenues that became apparent this spring, when combined with this year's $75 billion dose of tax cuts, has forced budget forecasters to reduce their surplus estimates for the year ending Sept. 30 to as low as $170 billion from levels near $300 billion at the beginning of the year.

Next year's surplus would be little higher, about $200 billion, had Congress not provided itself with a revenue cushion to finance popular spending increases for defense, Medicare and other programs by shifting $33 billion of corporate-tax payments due Sept. 15 into the 2002 fiscal year.

"If you take away the flim-flam, we're saying the surplus will be about flat at $200 billion" this year and next, said Lou Crandall, analyst with Wrightson & Associates, a Wall Street forecaster.

The leveling off of surpluses caused by this year's declining economy will linger for a while and should take some of the steam out of Congress' heady spending plans this fall, he said.

"It will be a long two years before we get another revenue surprise. They'll hope for that in vain," he said.

Carol Cox Wait, president of the Committee for a Responsible Federal Budget, a group that includes a number of prominent former government officials, said the revenue slowdown may have come just in time to prevent another spending spree this fall like the ones in the past three years that drove up federal spending by double-digit rates.

"I hope the surplus does go down next year," she said, noting that under previous estimates the $33 billion tax shift had left Congress with a $90 billion non-Social Security surplus that would have made it irresistible to fritter away huge amounts of money this year.

Even with the latest drop in surplus projections, "they do not need a revenue surprise to go on a spending splurge in the appropriations process this fall," she said.

Mrs. Wait added that many in Congress continue to count on revenues coming in higher than forecast each year, as is seen in the multitude of legislative plans for tax cuts, entitlement programs and other new spending that would drain future surpluses.

"They still think they're going to get positive revenue surprises over the next 10 years," she said.

L. Douglas Lee of the firm Economics from Washington Inc. said members of Congress have gotten into the habit of being miraculously saved by revenue windfalls just when budget negotiators otherwise would be at an impasse trying to fit in all their spending plans.

"The surprise is there will be no revenue surprise to bail Congress out this year," he said.

"The tax on profits will be very weak in 2001. It will start to increase again next year, but the rate of increase will not be as large as the growth in corporate profits" during the 1990s, he said.

The outlook for other revenues also has dimmed as the economy has slowed to almost a standstill, cutting growth in income-tax revenues in half to between 3 percent and 4 percent from between 8 percent and 9 percent in the past five years.

The downdraft in the stock market has hit another major source of past revenue growth. It is expected to lower future revenues from capital gains as well as zap the fast-growing share of income taxes attributable to the growth of stock options in recent years.

Analysts could not say whether the recent reversal in revenue flows signals a permanent leveling off or declining trend in the surpluses that could one day lead to deficits again, or only a temporary pause in the growth of surpluses resulting from the lull in the economy.

The future of the surpluses depends on how the economy weathers the current downturn. Most economists remain optimistic that in the long run, the economy will regain the vibrant growth in incomes and productivity that created the surpluses in the 1990s and continued through last year.

"It's reasonable to think this slowdown is cyclical," Mrs. Wait said. "The real underlying story is the economy and the surpluses are still so healthy, we can talk about unhappy surprises of $30 billion to $50 billion and say, 'we can still live with that,' " she said.

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