Smaller Federal Budget Deficit Expected This Year

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The Congressional Budget Office (CBO) has released a new report estimating that the federal budget deficit for the current fiscal year will drop by $81 billion to $331 billion. Last year's record budget deficit was $412 billion. Since these estimates have been compiled so close to the end of the current fiscal year, they are considered extremely dependable.

These results seem to support the President and Congress' economic policies although the CBO report doesn't foresee any improvement in the long-term fiscal outlook for the remainder of the decade. The CBO expects the budget deficit amount to $314 billion in 2006 and remain above $300 billion until 2010.

"The budget outlook has improved noticeably for this year, fiscal year 2005, but is largely unchanged for the decade past that, and the economy remains in very good shape," said CBO Director Douglas J. Holtz-Eakin speaking with the New York Times.

An unexpected increase in corporate tax payments helped reduce the deficit by the 20 percent. The CBO anticipated a 14 percent increase in corporate tax payments in their March report but now expect an increase of 42 percent in these tax payments instead. Corporate tax payments amounted to $189 billion in 2004 and came to $269 billion this year.

"While this year's deficit will be lower than last year's record shortfall, the improvement is likely to be short-lived," said Senator Kent Conrad (ND-D). "Declarations of victory over budget deficits only distract from the disturbing long-term budget outlook," added the leading Democrat on the Senate Budget Committee.

The Treasury finances our budget deficits by borrowing from the public which now holds $4.6 trillion in government debt. The CBO expects that figure to grow to $6.3 trillion by 2010.

Budget horizons are still dark with increased spending for federal benefit programs. The expectation is that the federal government will depend less on corporate tax payments and more on individual income taxes into the future. Currently at 43 percent, the CBO anticipates individual income tax payments will be amount to 53 percent of all federal revenue by 2015. Corporate tax payments amounted to 13 percent of all federal revenue this year but will decrease to 8 percent by 2015.

Tax cuts have been a hard point of the president's domestic policy. Most of the President's tax cuts will expire in 2011 but if the Congress makes his recent tax cuts permanent, any future budget deficits will be significantly higher. The CBO figures such a move would increase government deficit spending by more than $250 billion a year from 2012 to 2015.

Also as the population ages, spending on programs such as Social Security, Medicare, and Medicaid is expected to amount to some 53 percent of all federal spending by 2015.

On the other side of corporate taxes, Arizona has legislated a new law that slashes state corporate taxes and promotes investment in their in-state operations. About 15,000 multistate companies with operations in Arizona will be able to use the new tax formula. Interest is gathering among companies wanting information.

“We want companies to export products, not jobs. This is an effort to improve our competativeness,” said Barry Broome speaking to the Arizona Republic. He is the CEO of the Greater Phoenix Economic Council (GPEC).

Calculating corporate state income taxes is usually based on a combination of company sales, payroll, and in-state property with equal weight being given to each category. This basically penalizes companies for expanding their in-state facilities and hiring employees.

The existing formula balanced to 50 percent to sales, 25 percent to payroll, and 25 percent to in-state property value. The fully phased-in formula will balance sales to 80 percent, 10 percent to payroll, and 10 percent to in-state property value. The new formula will be phased in over three years starting in 2007 with sales at 60 percent, 70 percent in 2008, and the 80 percent in 2009.

The new formula is estimated to cost Arizona $8 to $8.75 million in 2007 and $90 to $100 million when fully implemented as calculated by the Arizona Department of Revenue. These revenue drops were calculated without considering revenue gains from other sources, said legislative liaison Anthony Forshino speaking to the Arizona Republic.

The GPEC commissioned a revenue impact study considering conservative factors. It found that a $15.3 million tax gain was possible in fiscal year 2007 and a $45.6 million drop in 2010. The actual outcome of Arizona's actions are still to be seen but 17 other high-tech states already have similar corporate tax structures.


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