A Questionable Tax Break on Obama's Plate
As the president-elect prepares to expand upon his economic recovery proposal today, it's worth digging deeper into one of the business tax cuts that's said to be a done deal for the package.
Its name is not often used in press coverage -- it's described as "a measure that would allow companies to deduct large portions of recent losses" from their taxes by the Post -- but its full name is the "net operating loss carryback". And it's a pretty nice score for the housing industry from the Obama team.
Right now, businesses are permitted to take tax write-offs on operating losses over a period of two years. The Obama stimulus would reportedly extend that period to five years of losses, a provision similar to one that unions successfully blocked from inclusion in the Democratic foreclosures bill last spring.
Why would the Obama team embrace a tax benefit that inspired 1,800 critical letters from union members to Capitol Hill -- a benefit that would overwhelmingly help the same bankers and builders who helped intensify the present economic crisis? Could be the fact that Senate finance committee chairman Max Baucus (D-MT), Debbie Stabenow (D-MI), Kent Conrad (D-ND), and other senior members have long been on board. Could be that the economic brain trust in the transition genuinely believes the carryback would be stimulative.
But when the Center on Budget and Policy Priorities questions its value, and Slate's estimable Daniel Gross deflates it so neatly, I wonder why the Democratic leadership didn't put a silver bullet in the carryback last year.
NOTHING is a done deal.
January 8, 2009 11:15 AM | Reply | Permalink
You bring up a very good point, Elana. However, I wonder if this isn't aimed at preventing another round of layoffs in the housing industry and keeping people employed.
January 8, 2009 11:15 AM | Reply | Permalink
I get the feeling your right. Last thing Obama needs is for businesses to fold up before he gets a chance to get a harness on the problem.
January 8, 2009 12:25 PM | Reply | Permalink
Well, the obvious question becomes "Why don't you ask them?"
January 8, 2009 11:22 AM | Reply | Permalink
I think this is an example of rewarding bad behavior. That said, it may be the Adderall for our ADHD housing sector. Much like giving speed to a hyper kid calms him down, maybe letting these mortgage lenders off the tax hook may even the mortgage market out.
January 8, 2009 11:22 AM | Reply | Permalink
Re-electing repugs is both rewarding bad behavior and bad taste too, but one has to play the cards as they are dealt. Obama has to keep the good, bad and ugly of the Bu$h years floating until he gets in office and has some time to sort thru the mess Bu$h made over the last eight years. So rewarding bad performers is a necessity for the moment.
January 8, 2009 12:32 PM | Reply | Permalink
What isn't being addressed in the discussion is that the extension of the NOL carryback is in tandem with the NOL carryforward. The current rules allow for a 2 year carry back and a 20 yr carryforward. By extending the carryback to 5 years it allows for a larger cash refund now because it is likely that the big income and corresponding taxes were made more than 2 years ago. In theory, this would allow the company to stay solvent through the current issues but they would then not have the current year NOL to apply against future profits. Again, in theory only, this could be seen as somewhat revenue neutral - trading current year additional refunds for future year additional income. Not that it would come anywhere close in practice, though.
Sure, it may just be a cash flow to the owner who then shuts everything down anyway, lays off their employees, etc, but to the extent it may help some local company stay solvent long enough to finish the homes they started and people have paid for, and helps keep people employed, there are worse ways to spend the money.
Best of all - more tax work for those of us who are tax accountants!
January 8, 2009 11:29 AM | Reply | Permalink
Corporation A loses $1 Billion last year.
Goes to Government for handout
Us Government; "Sure, heres a Billion to cover your loss last year.....and didn't you lose some money two years ago too, we can help you there if you like?
CNN BULLETIN: Accounting industry discontinues use of "Loss" line in Reports.
January 8, 2009 11:32 AM | Reply | Permalink
What I don't like is reading about a taxcut for companies that don't currently pay U.S. taxes because those businesses are out of the country.
January 8, 2009 11:39 AM | Reply | Permalink
Just calling it a "corporate tax break" automatically brings up the evil connotations...
People work for Corporations, no?
January 8, 2009 12:30 PM | Reply | Permalink
DOrn,
yes, people, they're called Corporate Executives.
January 8, 2009 1:01 PM | Reply | Permalink
Corporations benefit, but also small businesses, venture capital firms, and so on. A very conservative policy, it helps keep alive a lot of the businesses that theoretically ought to be shuttered as they are no longer economically viable. Still, people at all levels will be kept employed, and tax revenue in the longer term is more assured if the various businesses are saved from expiring in the current crisis.
As long as it sunsets in a couple years, the abusive aspects are limited.
January 8, 2009 1:20 PM | Reply | Permalink
The criticisms from the Center on Budget and Policy Priorities and Slate's Daniel Gross date from before the world fell apart. Some of the players cited then as healthy and able to finance their own restructuring are, we now know, anything but. I think the case for this tax break is much stronger now than it was a few months ago. As other commenters suggest, it will help some businesses survive.
January 8, 2009 1:40 PM | Reply | Permalink
Sooner or later we're going to have to face the fact that economically, Obama is a Republican.
#1 He's already signed onto the discredited Republican theory that tax cuts are what stimulate the economy - half of the Obama package is more of the same tax cut gospel that got us into this mess in the first place.
#2 He's now talking about cutting social security and medicare to make up for the deficit created by more tax cuts. This is the exact same thing that Reagan did: transferring wealth from the poorest and most vulnerable to the more affluent.
Obama's stimulus plan is destined to fail because it is based upon the same supply-side garbage that got us into this mess in the first place.
January 8, 2009 1:49 PM | Reply | Permalink
I challenge you to show where Obama has talked about cutting SS and medicare. The NYT headlines say so, but I cannot find such talk.
January 8, 2009 2:04 PM | Reply | Permalink
I would also add that although Obama is being said to have talked about the need to reform SS and Medicare by the press, as Ricky points out this has not come out of his aides or his own mouth. That said, I feel that I am a liberal progressive and yet I do not have the same intitial knee-jerk reaction many have in this community when SS and Medicare reform conversations take place. Rather it seems quite obvious to me that the US and the government have to accept the fact that these programs have not been run as efficiently as possible. Administration after administration over the last 30 years have been looting social security, and everyday I read or hear stories about people who are struggling while recieving their primary income from SS. I also frequently read about the problems associated with medicare. These systems need improvement, they surely should not be the only focus of the incoming administration but I would believe that making the two programs more effective towards their goals while also stream-lining them is way over-do.
Obama has an opportunity and so do the American people because of our current situation to actually push the ball forward on any number of issues which have stalled over the last three decades. Immigration, SS, Medicare/Healthcare, Wall Street (SEC, FEC), National and Local mass transit, Energy diversity etc.
January 8, 2009 2:19 PM | Reply | Permalink
You seem to be in denial. Obama was specifically talking about Social Security in terms of balancing the budget. But the Social Security fund is still operating at a surplus, and will be for at least the next 30 years. So what he is really saying is that he's going to use the money from social security to pay for other things in the budget - including those massive tax cuts. That's the same thing that Reagan did when he cut income taxes while raising social security taxes. This is just another transfer of wealth from the poorest and most affluent.
January 8, 2009 3:42 PM | Reply | Permalink