With the Republicans once again playing a game of chicken with the debt limit, there has been a lot of chatter about options that the Biden Administration has if the Republicans continue to make unreasonable demands.

To understand the legal issues, it is necessary to understand the different legislative actions related to the debt ceiling.  First, there are the laws related to the budget process.  There are two key aspects to these laws, the first requires Congress to annually pass a budget resolution.  The problem with this law is that one Congress is unable to bind a future Congress.  So Congress does not always pass a budget resolution.  The key thing to remember is that a budget resolution is a concurrent resolution which means that it has to pass both houses but does not go to the President.  In other words, it is not a law.  Instead, the impact of the concurrent resolution is internal to the legislative process.  The budget resolution sets the broad limits for the two Appropriations Committees in drafting the annual appropriations bills.   Additionally, if a budget resolution passes, the budget resolution triggers the reconciliation process which allows the Senate to pass budget related bills without having to overcome the filibuster.  A budget resolution (like the President’s budget proposal which starts the budget process) will typically contain estimates/target numbers for the other components of the budget.  The budget laws also restrict the ability of the President to refuse to spend or to reallocate the money allocated in the budget.

And here is where we get to the actual laws at issue.  In thinking of the budget, there are three types of laws.  In any budget, there are two sides of the equation:  1) income/revenue; and 2) expenditures.  For the most part, the laws on the income side of the equation are tax laws.  (There are certain other things like mineral leases on federal land and user fees at federal facilities, but the primary source of revenue is from taxes).  By its nature, revenue is not entirely predictable.  If every investor tomorrow decided that now was a good time to sell their current stock holdings and buy an entirely new stock, that decision would trigger a significant amount of capital gains and capital losses which in turn would dramatically alter the total income taxes received by the federal government.  But, while there is a degree of unpredictability, there is also a good amount of predictability — subject to changes in the economic climate. In other words, the revenue estimate for any given year will be close but not exact. Continue Reading...