Wrong Relief

Thursday, April 3, 2008

DEMOCRATS and Republicans in the Senate have joined hands and are marching to rescue the U.S. housing market. Far be it from us to rain on this bipartisan parade, which would marshal such measures as tax incentives for buying foreclosed homes and expanded mortgage revenue bonds. But the mere fact that both parties agree on "principles" to deal with the mortgage problem does not guarantee that those principles are valid. In the case of at least one proposal reportedly included in the Senate package, bipartisan support actually seems to prove the opposite. We refer to the awful idea of extending the tax code's current "carryback" provisions for net operating losses.

A net operating loss is the amount by which a company's expenses exceed its income in a tax year. Under current law, companies can use net operating losses to offset the taxes they owe on profits made in the two previous years. A company that made a combined profit of $1,000 in 2006 and 2007 could use a $1,000 net operating loss to claim zero net profit for 2006 and 2007 and thus get back the taxes it paid for those two years. The Senate is considering extending this "carryback" period from two years to four, meaning that companies that lose money in 2008 and 2009 could get money from Uncle Sam on the basis of profits they made way back in the first half of this decade.

And who would be the biggest beneficiaries of this new tax break (estimated cost: $6 billion)? Well, a good guess is the folks who made money hand over fist during the housing bubble but have been losing money at the same rate since the subprime mortgage market collapsed last year: the home construction industry and Wall Street firms such as Merrill Lynch and Citigroup. In other words, this provision is a large, unwarranted bailout for the very industries that helped send the U.S. economy on its scary roller-coaster ride in the first place. Business lobbies failed to get the carryback provision written into the fiscal stimulus plan that sailed through Congress in February. But it is dear to key players such as Senate Majority Leader Harry M. Reid (D-Nev.) and Finance Committee Chairman Max Baucus (D-Mont.), and so now it is back, dressed up as relief for the beleaguered housing sector. It deserves to die again.

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