CQ TODAY PRINT EDITION
– TAXES
Jan. 5, 2009 – 8:09 p.m.
Obama Supports Corporate Tax Refund That Was Rejected Twice in 2008
By Richard Rubin, CQ Staff
Some of the biggest winners in the economic stimulus package might be the biggest money losers in corporate America.
President-elect Barack Obama is resurrecting an idea that fell short of enactment twice in 2008: allowing companies a speedier recovery of their current losses through refunds of taxes they paid on earnings in previous years.
The extension of net operating loss carryback from two years to five, which is favored by Republicans, would provide instant refunds to some of the firms that have been hit hardest by the recession, including large portions of the financial services and real estate industries.
That’s welcome news to companies that would otherwise face the prospect of gradually using those losses over the next 20 years to offset taxes on future profits.
The provision would “strengthen the balance sheet and strengthen current lending programs,” said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable. “That’s the heart of what we’re talking about here.”
But it’s also far from certain that the provision would stimulate the economy as intended, said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities, which advocates for low-income workers.
“If you just provide more money to businesses in general, that doesn’t necessarily mean they’re going to do any more investments or hire any more employees,” he said, adding that getting money to people who are likely to spend it is a more effective approach to spurring demand and corporate investment.
Some companies being affected by tightening credit would spend any new tax refund, Horney said, but others could just sit on it until the economy gets better.
And the fact that the likely beneficiaries of the carryback provision include companies that profited from the housing bubble earlier this decade is likely to rankle some lawmakers. Last year, when the Senate considered a similar proposal, Judd Gregg , R-N.H., called it “modified socialism,” arguing that the housing industry was asking the government to insure companies against their own risks.
“It’s a lot like that story of the fellow who shot both his parents and then threw himself on the court and asked for mercy because he was an orphan,” he said on the Senate floor.
Accelerating Benefits
Lawmakers have not yet released legislative text or a revenue estimate for the plan, but a similar proposal considered in 2008 by the Senate Finance Committee would have cost $23.1 billion over the first two years and $10.4 billion over 6 years.
Here’s how loss carryback works: Assume that a company made $1 million a year in 2004, 2005, 2006 and 2007, then lost $2 million in 2008 and another $2 million in 2009.
Under current law, the company would have paid income taxes on its profits in those first four years. Then, because it lost money in 2008, it could get a refund for the taxes it paid on the $2 million in profits from 2006 and 2007, its most recent profitable years.
When it rang up another $2 million in losses in 2009, the company could not get back any money immediately, but it would be allowed to use those losses to offset $2 million worth of profits over the next 20 years.
Under the expected Obama proposal, however, the company could look back five years and get a refund equal to the taxes it paid in 2004 and 2005 when filing its taxes for 2009.
The proposal would help many companies across the economy, except perhaps in still-profitable sectors such as pharmaceuticals and consumer products, said Robert Willens, a corporate tax expert in New York.
“All you’re doing is accelerating the use of the losses,” he said. “It’s not as if you’re allowing people to use losses they wouldn’t otherwise be able to use.”
Idea Had Been Shunned
Homebuilders and others tried in 2008 to get Congress to enact a similar extension, but they fell short, particularly in the House. In January, the Senate Finance Committee added the provision by voice vote to last year’s stimulus bill, but the package died on the floor, one member shy of the 60 votes needed to add it to the narrower House stimulus plan (PL 110-185).
Then, in April, the Senate added the loss-carryback provision to a housing bill (PL 110-289). House Democrats immediately resisted the move, and Ways and Means Chairman Charles B. Rangel , Da?`N.Y., announced that he would not include it and took a shot at the Senate bill as he introduced his own version.
“We need to provide relief to the [home] buyers and families themselves, not just the banks and builders,” he said.
But just nine months later, House Democrats may turn around and embrace the provision. That may be a signal of bipartisanship, and Republican leaders have said that they are more likely to support a stimulus bill that contains GOP ideas.
Among the array of Republican-favored tax proposals, such as a tax holiday for repatriating income earned overseas, the extension of loss carryback is the most palatable, a House Democratic aide said.
That logic, however, has just emboldened Republicans, said Steve Wamhoff, legislative director at the liberal Citizens for Tax Justice, who cited a proposal to reduce the 25 percent income tax bracket to 15 percent as a particularly bad idea because its benefits would flow to wealthier taxpayers.
“They’ve already been given goodies to buy them off,” he said, “so they’re moving on to crazier things.”
Comments
Obama either hasn't been paying attention, or he's just being a pawn of the housing industry. Either one is very disturbing, and is 'more of the same.' None of these industries deserve any breaks. Builders, lenders, etc, all contributed to the housing bubble, at times through fraud. For these industries now to lobby our elected officials for a taxpayer funded bailout is obscene.
There is very little evidence that tax cuts accomplish anything positive, but this tax cut should be scrapped and income averaging for individuals should be restored.
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