Tax revenues continue to plummet: Is it time to panic?

Two months ago, the predictions were dire. The Treasury Department calculated that at the then-current pace, tax receipts for 2009 would be almost 20% less than last year. The drop in tax revenues was thought to be the steepest decline since 1932 during the Great Depression.

Data out this week, however, is even worse. Collections through the end of August are down 25%. Those numbers include collection rates for individual taxes, corporate taxes, Social Security and Medicare revenues and other payroll taxes. Corporate income tax revenues alone plunged nearly 60%.

There may, however, be some good news: with the economy looking as if it may rebound (soon, we hope), revenue estimates for next year are already a bit more rosy. One wonders, however, if that's not just wishful thinking. There are a number of bills currently in Congress targeted at lowering taxes and extending existing breaks. Trickle down theories aside, the result of those bills is that tax revenues are likely not going to increase significantly next year.

Which tax breaks may make the cut? Lawmakers are considering provisions, among others, which would extend the first time homebuyer's credit; permanently eliminate the federal estate tax; provide further AMT relief; broaden corporate tax cuts; and expand the level of exempted income for the unemployed. New tax breaks for the working class and a second round of Cash for Clunkers have also been mentioned as possibilities.

If tax cuts or expansions of existing credits are indeed in the picture for 2010, should we be worried? Most economists and tax professionals, surprisingly, say no. While the picture for 2009 was darker than expected, the forecast for 2010 wasn't much better to begin with. In other words, it's the blessing of low expectations.