Wednesday, January 7, 2009

Tax Cuts Aren't Off Obama's Table

Tax Cuts Arent Off Obamas Table

As the economy heads deeper into a recessionary abyss, business tax cut ideas that seemed to be nonstarters just a few short months ago are suddenly back on the table. Take the incoming Obama Administration's embrace of a measure that would lengthen the period for money-losing companies to write off net operating losses against profits from the current two years to four or five years.

The proposal, floated on Dec. 5 following a meeting between Obama and congressional leaders, was originally discussed last spring when the Bush Administration assembled a stimulus package. (The idea was modeled after a similar measure enacted after the September 11 terrorist attacks.) But the provision was viewed as a giant giveaway to banks and money-losing homebuilders and it was scrapped from the package.

Quick Cash

Now, with the incoming Administration looking to pump something close to $1 trillion into the economy, business and personal tax cuts of as much as $300 billion—with perhaps $100 billion aimed at business—are seen as quick ways to inject money. While infrastructure spending is getting a lot of attention, business groups note that this stimulus can go only so far. Aric Newhouse, senior vice-president for policy and government relations for the National Association of Manufacturers (NAM), said that he has heard projections of stimulus spending reaching $1.3 trillion over two years. "The idea of spending $1.3 trillion—it's hard to think about how you would spend that all on infrastructure alone," he says. "The last highway bill was about $270 billion for all highway projects, for five years total."

The business tax cuts would get strong political and business support—in particular, the net operating loss provision is favored by Max Baucus (D-Mont.), chairman of the Senate Finance Committee. Other business tax cuts Obama is considering would extend so-called bonus depreciation, which allows profitable companies to write off investments more quickly, and give companies that hire new workers a one-year tax credit at a total cost of $40 billion to $50 billion over two years.

But many around Washington are dubious about whether a new jobs tax credit would produce a lot of hiring that wouldn't take place otherwise. "I don't think a $2,000 or $3,000 credit will create a job," said John Engler, president of the NAM. "You need a business reason first. A job credit by itself is not a business reason."

The Obama team has not fixed a dollar figure on the net operating loss provision. When Congress considered the same idea last year, carrying back losses to offset profits in the previous five years would have provided businesses an estimated $25.5 billion in refunds.

Courting Republicans

"Extending bonus depreciation and extending net operating loss will help get Republicans on board," says Dan Clifton, head of policy research for Strategas Research Partners. "There's no question a stimulus bill will pass. The question is whether it looks bipartisan or not."

Clifton, in a report on the net operating loss provision, says it would be a "net positive" for homebuilders, regional banks, automakers, and other companies that made money in recent years but are now facing losses. Among companies Clifton thinks could potentially benefit from the stimulus provision are Sprint Nextel (S); General Motors (GM); Citigroup (C); CBS (CBS); Ford (F); MBIA (MBI); Coca-Cola Enterprises (CCE) and D.R. Horton (DHI).

"The government is just pouring money into these companies," Clifton says. "It remains to be seen if it will be enough to get them investing again—or it just stops further destruction of their financial position."

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