NCPA - National Center for Policy Analysis


January 7, 2009

The main business tax cuts proposed by President-elect Barack Obama are likely to be a windfall for two industries particularly tied to the current economic meltdown:  Wall Street investment banks and home builders.  Under the proposal being crafted by the incoming Obama administration and congressional Democrats:

  • Companies would be able to use their so-called tax losses to offset taxable U.S. profits earned in the past five years; typically, companies can carry back such losses only two years.
  • The Obama proposals likely would mean that companies with enormous losses from last year and this year could use the losses to help wipe out tax obligations from the previous five years and receive sizable tax-refund checks from the U.S. Treasury Department; for some firms that would mean payments of billions of dollars.
  • That tax cut would be particularly helpful to industries that were flying high for the past several years, but now aren't expected to report much profit for the foreseeable future -- such as Wall Street firms, home builders and construction companies.
  • Typically, such tax losses can still be taken as deductions in the future for years to come. But for companies expecting slim or nonexistent profits for the immediate future, that can mean years before they realize the full benefit of the deductions stemming from the tax losses.

The same break was included in a stimulus package enacted in 2002, and home builders had lobbied Congress for a nearly identical tax break last year -- estimated to cost $6.1 billion -- ultimately without success.

But will companies use the newfound cash solely to repair their balance sheets, or will they use it to spend money and, in the case of banks, make new loans?

Source: Jesse Drucker, "Write-Offs a Boon to Builders, Bankers," Wall Street Journal, January 6, 2009.

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