Managing Treasury Flow of Funds

Treasury Tax and Loan Program 

The answer is that the Treasury spends on average as much as it receives.  Its spending replenishes banking system reserves about as fast as they are used.  However there can be significant short-term imbalances between inflows and outflows.  Banks would be in trouble if the Treasury made no provision for those imbalances.  That is the principal purpose of the Treasury Tax and Loan (TT&L) program. 

All tax payments by individuals and businesses go into Treasury accounts at depository institutions called TT&L accounts.  Government spending, however, is paid out of the Treasury account at the Federal Reserve.  The Treasury must therefore replenish its Fed account with frequent transfers from its TT&L accounts.

Payments deposited in TT&L accounts cause a transfer of reserves within the banking system but do not change the total.  However when TT&L deposits are moved to the Treasury's account at the Fed, banking system reserves decrease accordingly.  By targeting a constant balance in its Fed account, nominally $6 billion, the Treasury helps to maintain the reserves of the banking system at a nearly constant level.  This is key to enabling the Fed to maintain control of the Fed funds rate, its primary monetary policy tool.

The Role of Depository Institutions

A depository institution can participate in the TT&L program in any of three ways: as a collector, retainer, or investor institution.  Collector institutions act as tax collection conduits.  They accept tax payments from businesses, and transfer the payments to Treasury accounts at district Federal Reserve Banks.

A retainer institution also accepts tax payments, but retains the payments in an interest-bearing "Main Account" until called for by the Treasury.  If the Main Account balance exceeds the institution's balance limit or if it exceeds the collateral value of assets pledged by the institution, the rest is transferred promptly to a Treasury account at the district Federal Reserve Bank.

An investor institution does everything a retainer institution does, and also accepts discretionary investments from the Treasury.  Direct investments are credited to the institutions Main Account, and must be collateralized.  They pay interest to the Treasury at the weekly average overnight federal funds rate, less 25 basis points. 

Tax Collection Methods from Businesses

The taxes paid by businesses consist mainly of witholdings of personal income taxes, corporate income taxes, and social security contributions.  The Treasury now uses two mechanisms to collect these taxes: The Paper Tax System (PATAX), and the Electronic Federal Tax Payment System (EFTPS). 

In the PATAX system, a business makes federal tax payments by preparing a federal tax deposit coupon and delivers the coupon and the check to its depository institution.  Upon receipt, the institution debits the customer's checking account and credits an interest-free Treasury tax collection account.  The depository institution must pledge collateral to cover any balances that exceed its insurance coverage.  The following day, the balance in the account is transferred to a Federal Reserve bank if the institution is a collector institution, otherwise to the Main Account in the same institution.

A business enrolled in the EFTPS makes a tax payment by authorizing, by telephone or computer, withdrawal of the payment from its account at a participating depository institution on a specified future date.  On the payment date, the funds are transmitted to a Treasury account at a Federal Reserve Bank via an automated clearinghouse (ACH) transfer. 

If the participating institution is a retainer or investor institution with sufficient free collateral and room under its balance limit to accept additional funds, the payment is immediately routed back to the institution's Main Account.  EFTPS was first required for large business taxpayers in the fall of 1996.  Subsequently it became mandatory for any business making more than $200,000 in aggregate annual tax payments.

Stabilizing Treasury Balances at the Fed

In July 2000, the Treasury and the Fed implemented the Treasury Investment Program (TIP), a major revamping of the TT&L infrastructure that centralized at the FRB St. Louis many of the functions previously carried out by the individual Federal Reserve Banks.  The consolidated functions include tracking Main Account balances, monitoring collateral, and investing and calling Treasury balances.

TIP now allows Treasury cash managers to monitor many fund transfers on a nearly real-time basis and thus reduce the errors in maintaining the Treasury balance at the Fed.  This in turn reduces the amount of open market operations the Fed must conduct to hold the interbank lending rate (Fed funds rate) on target.