Be Careful When the Government Tells You the Check Is in the Mail!

by Bill Leary, CPA, Director, Tax Group, Doeren Mayhew

Among the looming federal crises, don’t forget about the federal debt ceiling debate. Congress just moved it off of its short-term radar earlier this month to focus on the sequestration crisis, which itself could impact all aspects of future governmental services and commitments – and you and me as well.

The AICPA recently released a paper on the potential implications of the debt ceiling. Some assume that the crisis will only affect financial markets and international lenders, but it’s not that simple. Imagine government checks not being honored by banks and Social Security and federal employees not paid. The Administration cannot unilaterally curb spending or delay payments indefinitely to manage cash, but it can delay hiring, cancel contracts and slow down projects. Translation: government contractors beware! Closer to home, the AICPA warns that without relief, tax refunds could be delayed this summer.

We faced a fractious debate last year about raising the allowable federal debt ceiling to pay its bills. The 2011statutory limit of $16.4 trillion was reached at the end of December, and Treasury Secretary Geithner suggested extraordinary measures last year to meet the government’s daily cash needs. In January,

Geithner predicted that government funds would soon run out.

A crisis was averted earlier this month when legislation suspended the debt ceiling through mid-May and allowed federal borrowing to continue. Once again, Congress “kicked the can down the road.” Senate Majority Leader Reid (D-NV) viewed “a short-term solution is better than another imminent, manufactured crisis.”

If there is no action by May, it will be “déjà vu all over again.” Temporary funding measures could let the government pay bills through the middle of July, an auspicious time in Washington when Congress approaches its sacred August recess and abandons its legislative functions.

In Washington, crises drive political insiders to suggest clever, radical or “flimflamsical” solutions. After lively debate, we are told a platinum coin will not allow us to side-step the debt crisis. It has been suggested that the Federal Reserve destroy the $1.6 trillion in government bonds it now holds to avoid the crisis. Some have suggested selling federal assets such as its gold reserves and public properties. An Assistant Secretary of the Treasury ironically concluded “a ‘fire sale’ of financial assets would be damaging to the economy… and undermine confidence in the United States.”

Treasury Secretary-designate, Jacob Lew commented on Congress’ “political dysfunction” during his confirmation hearings. Stating what the public knows, Lew observed, “Congress’ short-term-crisis, deadline-driven practices … are undermining the economy.” If confirmed Lew will faces a host of challenges himself, including the debt crisis and sequestration.

Bill Leary is a Director in the Tax Group at Doeren Mayhew, and can be reached at 713.789.7077 orleary@doeren.com.