Tax Return Backlog, Economy Week Ahead, and G7 Plans

Tax Policy:

June 22: Taxpayer advocate sees much larger backlog than IRS reported

Overall, the IRS said that as of June 10, 2022, it had 11 million unprocessed individual returns, counting both paper and electronically filed returns. Over 90% of individual income taxpayers e-file their returns, but last year, about 17 million taxpayers filed their returns on paper. The report said the IRS has failed to make progress in eliminating its paper backlog because "Its pace of processing paper tax returns has not kept up with new receipts." In May, the IRS processed an average of approximately 205,000 individual income tax returns per week.

Millions of business tax returns and amended tax returns are also filed on paper.

"From a taxpayer perspective, returning to a four-to-six-week refund delivery period is a reasonable definition of 'healthy.'" Largely because of the likelihood that the IRS will carry a large inventory of unprocessed paper tax returns into the 2023 filing season, Collins issued a Taxpayer Advocate Directive in March directing the IRS to implement 2-D barcoding or other scanning technology to automate the transcription of paper tax returns.

"Had the IRS implemented 2-D barcoding, optical character recognition, or similar technology in time for the 2022 filing season, it could have reduced the need for employees to engage in the highly manual task of transcribing paper tax returns. Had the IRS quickly used some of the $1.5 billion of additional funds provided by the American Rescue Plan Act of 2021, which was enacted 15 months ago, to hire and train additional employees, it could have worked through the backlog, answered more taxpayer telephone calls and otherwise improved taxpayer service." At the end of May 2021, the IRS had an additional 15.8 million returns that had been suspended during processing and required manual review by IRS employees.

The suspended returns consisted largely of e-filed returns on which taxpayers claimed Recovery Rebate Credit amounts that differed from the allowable amounts shown on IRS records.

June 21: IRS makes more progress on tax return backlog

The Internal Revenue Service provided updated details Tuesday on where it stands in its processing of millions of tax returns in its backlog, saying that as of June 10, it had processed more than 4.5 million of the more than 4.7 million individual paper tax returns received in 2021. As of June 10, 2022, the IRS had 11 million unprocessed individual returns, which include returns received before 2022, in addition to new returns received this year for tax year 2021.

Of these, 1.9 million returns require error correction or other special handling, and 9.1 million are paper returns that are waiting to be reviewed and processed. The IRS is continuing to receive both current and prior-year individual returns and related correspondence as people file extensions, amended returns, and a variety of business tax returns.

To date, more than double the number of tax returns await processing compared to a typical year at this point in the calendar year, although the IRS said it has worked through almost a million more returns to date than it had at this time last year. A bigger percentage of this year's inventory awaiting processing is made up of original returns, which typically take less time to process than amended returns.

The IRS plans to continue its efforts to make progress on processing paper tax returns in the months ahead. Rettig noted that sustained funding increases for the IRS will help it add more employees to process tax returns and answer the phones as well as help improve technology and provide fair enforcement of the tax laws.

Economic News/Policy: 

June 26: Central Banks Should Raise Rates Sharply or Risk High-Inflation Era, BIS Warns

“Gradually raising policy rates at a pace that falls short of inflation increases means falling real interest rates. This is hard to reconcile with the need to keep inflation risks in check," the BIS said. "Given the extent of the inflationary pressure unleashed over the past year, real policy rates will need to increase significantly to moderate demand." Inflation erodes the value of money.

If the interest rate is below the inflation rate, debtors pay back less than they borrowed, measured in terms of what that money can buy. Real policy rates fell far below zero, meaning central banks were stimulating rather than slowing economic activity as inflation surged.

"A modest slowdown may not be enough. Lowering inflation could involve significant output costs, as after the 'Great Inflation' of the 1970s," the BIS wrote.

Economies are more likely to land in a recession during an interest-rate hiking cycle if inflation was high to start with and if their policy rates were low after adjusting for inflation, according to a BIS study of 35 countries between 1985 and 2018.

Real wage growth Unemployment rate Job-vacancy rate U.S. Eurozone Japan Other AEs -7.5 -5.0 -2.5 0 2.5 5.0 7.5 Another key challenge: The longer high inflation persists, the more likely it is to remain high.

June 26: Economy Week Ahead: Factories, Inflation, and Consumer Spending in Focus

MONDAY: Demand for U.S. factory goods has been strong during the recent expansion, with consumers and businesses spending heavily on autos, appliances, equipment, and other goods. The Commerce Department’s report on new orders for durable goods—products designed to last at least three years—will show whether soaring prices, rising interest rates, and an uncertain economic outlook weighed on demand in May.

TUESDAY: The S&P CoreLogic Case-Shiller home-price index is expected to show housing costs continued to climb at an elevated rate in April. Separate figures out last week showed record prices for existing-home sales in May as demand from buyers exceeded unusually low levels of supply.

U.S. consumer confidence has deteriorated as inflation runs at a four-decade high. The Conference Board’s monthly index is expected to show that household attitudes toward the economy slipped in June as price increases remained persistent and the outlook darkened further.

THURSDAY: China’s economic activity declined for a third-straight month in May as the government pursued its zero-tolerance approach to Covid-19 outbreaks, including mass lockdowns and business closures. Official purchasing-managers indexes for June will show whether manufacturing and service-sector activity started to rebound as Beijing tries to rekindle growth momentum.

U.S. consumer spending has been the driving force of economic growth since pandemic restrictions first started to ease in 2020. Recent data, however, suggest that households are starting to feel the pinch from inflation, higher gasoline prices, and rising interest rates. The Commerce Department’s report on personal spending, income, and prices will show how broader economic forces shaped household expenditures in May.

FRIDAY: Eurozone consumer prices in May rose at the fastest pace since records for the currency bloc began at the start of 1997. June could set another fresh high, underlining the growing fallout from Russia’s invasion of Ukraine, European government sanctions in response, and resulting surges in food and energy costs.

The Institute for Supply Management’s report on U.S. factories is expected to show that manufacturing activity decelerated in June as consumers and businesses became more cautious about spending, and challenges from supply-chain bottlenecks, labor shortages, and rising prices continued to bedevil U.S. industry.

June 24: Fed Confronts a ‘New World’ of Inflation

Federal Reserve officials are questioning whether their longstanding assumptions about inflation still apply as price gains remain stubbornly and surprisingly rapid - a bout of economic soul-searching that could have big implications for the American economy. For years, Fed policymakers had a playbook for handling inflation surprises: They mostly ignored disruptions to the supply of goods and services when setting monetary policy, assuming they would work themselves out.

If the Fed determines that shocks are unlikely to ease - or will take so long that they leave inflation elevated for years - the result could be an even more aggressive series of rate increases as policymakers try to quash demand into balance with a more limited supply of goods and services.

The path to lower inflation without causing a recession "Has been made significantly more challenging by the events of the last few months, thinking there of the war and, you know, commodities prices, and further problems with supply chains," Mr. Powell said Wednesday.

Should supply shocks and higher prices last long enough, they could persuade consumers to expect inflation to endure - changing behavior in ways that make rapid price increases a more permanent feature of the economy.

June 23: Jerome Powell Pressed Over How Fed Would Respond to Economic Slowdown

Lawmakers pressed Federal Reserve Chairman Jerome Powell over how the central bank would manage trade-offs it could confront if its interest-rate increases slow the economy sharply but don’t reduce inflation quickly.

Mr. Powell on Thursday said that in such a scenario, the central bank would be reluctant to shift from raising rates to cutting them until it saw clear evidence that inflation was coming down in a convincing fashion. "In that hypothetical situation, that would be a setting in which inflation could be expected to come down," Mr. Powell said, which could meet a test the Fed has established to slow or stop rate rises.

Faced with high inflation in the mid-1970s, for example, the Fed raised rates aggressively but not enough to break the back of high inflation, forcing stiffer action later. The hearing underscored a related challenge facing the Fed: Officials are raising rates at the most aggressive pace since the 1980s in part because of concerns that higher prices could change consumer psychology in ways that sustain high inflation.

Mr. Powell said the Fed might be less willing to look past higher prices at the pump because that could push up consumers' inflation expectations. Rep. Alexandria Ocasio-Cortez pressed Mr. Powell to endorse other methods besides rate increases to bring down inflation, such as stiffer antitrust regulation or limiting price increases for government contractors.

"There's a long history of price controls when inflation has been high," Mr. Powell demurred., "And it was not a successful one." 

After Democrats highlighted the global nature of high inflation, Rep. Ann Wagner retorted, "No one in [my] district gives a rip what the price of gas and groceries are in Europe. They care about what they are at the corner of Manchester Road and Weidman."

June 23: Fed’s Bowman expects a 75 basis point hike in July

Federal Reserve Governor Michelle Bowman said Thursday that she expects the central bank to raise interest rates by another 0.75 percentage points at its next monetary policy meeting in July. In a speech to Massachusetts bankers on Thursday, Bowman said she believes the Fed will need to issue its second consecutive 75 basis point hike in July, with several 50 basis point hikes to follow.

"I expect that an additional rate increase of 75 basis points will be appropriate at our next meeting, as well as increases of at least 50 basis points in the next few subsequent meetings, as long as the incoming data support them," Bowman said at a conference hosted by the Massachusetts Bankers Association, according to prepared remarks.

Bowman's projection comes a week after the Fed hiked interest rates by 75 basis points for the first time since 1994. While Fed Chairman Jerome Powell and other top officials signaled for weeks that the bank would only hike by 50 basis points, the bank issued a larger hike after an unexpectedly high inflation report alarmed both the Fed and financial markets in the prior week.

Bowman said Wednesday that she "Strongly supported" the Fed's 75 basis point hike rate last week and will support further rate hikes until inflation makes "Significant progress" downward. Inflation has continued to surge despite several rapid rate hikes, and economists fear it may not come down until the Fed raises rates to a high enough level to slow the economy into recession.

June 23: Jobless claims fall slightly amid recession fears

New applications for unemployment aid fell slightly last week as the U.S. job market showed few signs of a slowdown despite rising interest rates. The labor market has remained historically strong, even as the Federal Reserve has raised interest rates at a rapid pace to help cool inflation. Higher interest rates usually slow job growth as businesses facing higher borrowing costs and slower sales pull back job openings and lay off employees.

"The steady weekly data suggests that the impact of the Federal Reserve's interest rate increases has yet to show up in earnest as monetary policies often take months to make their way through the economy," wrote Tuan Nguyen, an economist at RSM, in a Thursday analysis.

Companies within the technology and housing industries have begun shedding jobs in the wake of the Fed's recent rate hikes, which have walloped tech stocks, boosted mortgage rates, and slowed housing sales. Jobless claims on the whole are just slightly above the 60-year lows seen earlier in the year before the Fed began hiking rates. Inflation has continued to surge despite several rapid rate hikes, and economists fear it may not come down until the Fed raises rates to a high enough level to slow the economy into recession.

June 22: Tech firms cut staff amid recession fears

The hiring impacts are hitting companies of all sizes across tech, from industry giants to more nascent startups, signaling that the industry's growth is slowing amid rising interest rates and surging inflation. "It's the perfect storm for tech companies," said Dan Ives, an analyst at Wedbush.

Tech companies, especially smaller ones, are "Pulling back on what was probably overaggressive hiring," said Steven Weber, a professor at the Graduate School of Information at UC Berkeley.

"Even six months or a year ago the view was, in many of the smaller firms of course, 'Profits aren't important, we just gotta grow. We grow into profits.' During recessions, and during valuation shifts like we've seen in the markets in the last couple of months, unprofitable growth companies are getting killed. Their stock prices are collapsing," Weber said.

Last week, real estate tech companies Redfin and Compass each said they would lay off around 450 workers due to a slowdown in home buying demand sparked by interest rate hikes.

Tim Herbert, CompTIA's chief research officer, said that for every tech company announcing layoffs, there's another firm ramping up hiring or continuing at their current pace, suggesting that the slowdown is more company-specific than industry-wide. Herbert noted that the market for developers, data scientists, and other tech jobs remains strong, as companies are choosing to keep those tech workers on staff even as they let other employees go.

Ukraine Crisis/Russia’s Economic Impact: 

June 28: G-7 leaders united behind Ukraine, aim at Kremlin oil money

Leaders of the world's biggest developed economies said Tuesday they would explore far-reaching steps to cap Russia's income from oil sales that are financing its invasion of Ukraine and struck a united stance to support Kyiv for "As long as it takes" as the war grinds on.

French President Emmanuel Macron said Russia "Cannot and should not win" the war in Ukraine - as its terrible toll was in full view the day after a Russian missile strike hit a shopping mall in the town of Kremenchuk, killing 18 people.

The European Union has decided to impose a ban on the 90% of Russian oil that comes by sea, but the ban does not take effect until the end of the year, meaning Europe continues to send money to Russia for energy even while condemning the war.

Higher global oil prices have softened the blow to Russia's income, even as Western traders shun Russian oil. Europe is scrambling to find new sources of oil and fresh supplies of gas as Russia dials back gas supplies in what leaders say is a political move.

The leaders stressed that it is "Necessary to cooperate with China on shared global challenges" but underlined their stance that China should urge Russia to halt the war, respect human rights in Hong Kong, refrain from military action against Taiwan, and improve its non-transparent trade and economic practices.

From the secluded Schloss Elmau hotel in the Bavarian Alps, the G-7 leaders will move to Madrid for a summit of NATO leaders, where fallout from Russia's invasion of Ukraine will again dominate the agenda.

June 28: G7 Draws to a Close With Deal Over Price Cap on Russian Oil

The Russian leader hopes the meeting will serve as a counterweight to his increasing economic and political isolation from the West. The visit to Tajikistan - Mr. Putin's first overseas trip since Russia's invasion of Ukraine in February - is a show of confidence by the Russian leader, whose forces continue to make grinding progress in seizing more of eastern Ukraine while inflicting indiscriminate harm against civilians.

President Vladimir V. Putin of Russia flew to Tajikistan on Tuesday, leaving Russia for the first time since his forces invaded Ukraine in February and for only the fourth time since the start of the pandemic.

As sanctions over the war in Ukraine redraw trade routes, countries friendly to Russia such as Iran are also emerging as newly critical economic partners for Russia. The United States and its Western allies are scrambling to find new ways to tighten pressure on Russia and shore up the global economy, after four months of sanctions against Moscow and military support for Ukraine have failed to slow Russia's aggression.

The British army chief's comments, part of his first speech since taking up his post, came as Prime Minister Boris Johnson of Britain prepared to meet Western leaders at a NATO summit in Madrid, where they are expected to agree on the alliance's biggest overhaul since the end of the Cold War. Later, Ben Wallace, the British defense secretary, urged more investment in defense, describing Russia as the "Most direct and pressing threat to Europe to our allies and these shores." He added: "I am serious when I say that there is a very real danger that Russia will lash out against wider Europe."

Leaders of the Group of 7 nations meeting in Germany, seeking a new way to throttle Russia's finances while limiting the harm to Western economies, are discussing imposing a ceiling on the price paid for Russian oil.

A price cap is being considered because, despite sanctions imposed by the West after Russia's invasion of Ukraine, Moscow is still earning substantial revenue from oil as countries such as China and India buy Russian oil, which Moscow has been selling at a significant discount.

June 26: Biden says G7 will ban Russian gold imports

President Biden said Sunday that the Group of Seven nations will ban Russian gold imports to further impose financial costs on Moscow for its invasion of Ukraine.

"The United States has imposed unprecedented costs on Putin to deny him the revenue he needs to fund his war against Ukraine," Biden tweeted on Sunday. "Together, the G7 will announce that we will ban the import of Russian gold, a major export that rakes in tens of billions of dollars for Russia."

Biden has announced waves of penalties coordinated with allies that range from sanctions on Russian officials and oligarchs to export controls to sanctions on major Russian banks. Still, Europeans are limited in what they can do because of their dependence on Russian energy imports.

Biden administration officials teased new announcements to squeeze Russia ahead of Biden's trip to Europe and it's possible there will be more announcements beyond the plan to ban Russian gold imports. Biden embarked on the trip to Europe for the G7 meeting and, later, a North Atlantic Treaty Organization summit with the goal of demonstrating unity with allies on keeping up the pressure on Russia even as the war roils the global economy.

Environmental and Energy Policy and News:

June 27: Experts see risk with little upside in Biden’s gas tax break

Experts are warning that President Biden's proposed gas tax holiday would do little to defray pain at the pump and actively take a toll on infrastructure and the environment. The 18-cent federal tax, which Biden has said should be suspended for three months amid steep gas prices, is "Very little money" for individuals, said Beverly Moran, professor of law emerita at Vanderbilt Law School.

On a Tuesday night call announcing the president's official backing of a gas tax holiday, White House officials were noncommittal on the prospect of Biden also supporting a windfall profits tax.

"The problem with repealing an 18 cents gas tax is it feeds into a far-right narrative that the problem is government, not Big Oil gouging consumers," Khanna tweeted Wednesday after Biden came out in favor of the suspension.

Even if a suspension was short-lived and had little effect on what consumers actually pay, she said, "You will have a short-run, change in demand relative to no gasoline tax holiday so if you didn't have the gasoline tax holiday, we would see better changes and changes in driving patterns."

"If you have a gas tax holiday, it might be hard to put the gas tax [back] once the crisis has receded," Weiner told The Hill in an interview. "In general, gas taxes are very unpopular. I think there's a real risk that we will end up with a permanent holiday on the gas tax, and the roads won't be as well-maintained as they are now because it's not clear where the money will come from."

June 22: Biden Pushes Congress for Three-Month Gas Tax Holiday

With fuel prices near record highs, President Biden on Wednesday urged Congress to temporarily suspend the federal gas tax and give Americans "Just a little bit of breathing room," even as the proposal faced dim prospects on Capitol Hill. In a speech from the White House, Mr. Biden asked Congress to lift the federal taxes - about 18 cents per gallon of gasoline and 24 cents per gallon of diesel - through the end of September, shortly before the fall midterm elections.

Critics have questioned the effectiveness of gas tax holidays, dismissing the idea as little more than an attempt by the White House and vulnerable Democrats to show that the party is attentive to Americans' financial pain.

Economists have criticized the idea of suspending the federal gas tax as a wasteful step for the government, given the revenue that would be sacrificed in a bid to provide only a mild dose of relief to consumers.

Even if all of the benefits were passed on to consumers, the owner of a Ford F-150 that gets 20 miles to the gallon driving a thousand miles per month would save about $9 if the federal gas tax were suspended.

The administration estimates that the combination of several possible steps - the suspension of the tax, a halt on state gas taxes, and an increase in refining capacity by oil companies - would lower gas prices by at least $1 a gallon.

Congress has not increased the federal gas tax since 1993.

In her 2008 campaign for the presidency, as inflation-adjusted prices approached an even higher point, Hillary Clinton proposed pairing a gas tax holiday with a levy on oil company profits.

For Fun: 

June 23: SLS Moon Rocket Test Declared A Success; August Launch Possible

NASA will not conduct another fueling and countdown test of its moon rocket, the agency said Thursday. NASA got most of the way through the test, known as a "Wet dress rehearsal," this week, fully fueling the Space Launch System rocket's two stages with more than 700,000 gallons of liquid oxygen and liquid hydrogen.

"It was a great day," Charlie Blackwell-Thompson, the Artemis launch director, told reporters after the test.

They said they have enough data to proceed with the first-ever launch attempt of the massive SLS rocket that the agency plans to use to return astronauts to the moon. The agency would roll the rocket and the Orion crew capsule back into the assembly building, repair the leak and prepare the rocket and spacecraft for launch.

"NASA will set a specific target launch date after replacing hardware associated with the leak," the agency said in the statement. The first launch window would come between Aug. 23 and Sept. 6. That launch, known as Artemis I, would send the Orion capsule, without any astronauts on board, into orbit around the moon.