Tax break for builders: "perverse, absurd, unwarranted"

The main housing debate in our nation's great sausage factory is over write-downs, or cram-downs: Should lenders be encouraged (forced?) to write down bad mortgages, and if so, under what terms, and what possible benefits? And where do the new mortgages come from, and who is on the hook for them?

That said, the Senate, in its great wisdom, continues to push for a seemingly unrelated tax break for home-builders. The headline above comes from a particularly scathing Slate.com analysis in which Daniel Gross argues that the tax break -- technically a "tax-loss carryback" -- is better described as "a bubble-head tax break." Oh, yes, and it's "perverse, absurd and unwarranted."

Gross: "The proposed tax break is hard to justify for several reasons. It does nothing for slow and steady companies that keep their heads and simply rack up profits year after year — and pay their taxes accordingly. Rather, it rewards the most reckless participants in the bubble. If you borrowed a ton of money to build spec houses in Miami and reported $2 billion in profits between 2002 and 2007 but gave up all those profits by notching a $2 billion loss this year, the extended carryback has a great deal of value. If you've been building affordable housing in Wichita, Kan., and booked $300 million in profits in those years, and then, through careful management of costs, managed to eke out a $5 million profit this year, it has no value. The big public homebuilders, whose shares rallied on the news of this potential tax break, didn't pay any windfall taxes on the bubble-era earnings. Why should they get an extraordinary post-bubble windfall?"

More: "The proposal to give new tax breaks to homebuilders and banks is yet another example of the pernicious trend of privatizing profit and socializing losses, which is gnawing away at faith in the system. Dilute the shareholders, not the taxpayers."

Your thoughts? Comments? Email story tips to peter.viles@latimes.com
Hat Tip: Patrick.net
Photo Credit: Getty Images

Comments

[Fred]

"Gnawing away at faith in the system" is right. Disgusting.

[InspiredLA]

"privatizing profit and socializing losses"

YES! That's it, exactly. What an apt description of our national agenda.

[GDC]

I don't entirely agree with this one. Although the home builders were part of the problem, spreading out profits and losses over time seems equitable.

For instance, let's say Company A made $1m profits/year from 2002 - 2005, lost $4m in 2006, and made $1m in 2007. It gets taxed for $5m in profits even though "net" it earned only $1m.

Company B makes $1m in 2002 but breaks even the next 5 years.

Even though A and B made the same profits ($1m), Company A pays taxes on $4m more. Tax issues should not impact business planning one way or another. Unfortunately, it does because of this inequity.

I believe individuals should also be able to spread losses against future gains. It already exists in the tax code for capital loss carryovers.

[arroyogrande]

"The proposal to give new tax breaks to homebuilders and banks..."

...is probably due to the number and effectiveness of lobbyists each industry has.

No wonder people have been losing faith in the government ...for the past 5, 10, 15, 20, 30 years.

[JohnnyB]

I propose a new "3 strikes" law for our "government".

If you vote for any legislation/bill that bailouts any or all 3 of the following, you are assessed 3 STRIKES and you’re out… you GO TO JAIL, directly to jail, do not pass GO, do not collect $$$ billion;

Bailout ANY or ALL 3 = 3 strike’s and your out law for government officials:

1) investment banks
2) homebuilders
3) homeowners

Justification: If they want to treat our hard earned tax dollars like their personal Monopoly money - which only ends up greasing the already mega wealthy insider's palms, they should suffer the Monopoly game rules and receive the "community chest" GO TO JAIL card results.

[puckhead]

WaMu is in bad shape with bad loans. WaMu received a lifeline last week when a private equity firm invested $7 billion in the bank. I’m sure that the $7 billion came with many strings attached. One of the strings was probably that WaMu would have to raise more capital in case more loans went bad, hence the action with HELCO’s. Don’t take WaMu’s action personally; they’re just in survival mode.

[jason]

To GDC

Your reference to the tax code is apt but upside down. You and every private individual in the US has their capital gains socialized and their losses privatized by the tax code. Your losses are limited to 3k per year.Yeah Yeah, they can carry forward against your gains in the future. But many people do not know this, and common tax software does not prompt for this issue. Personal profits are socialized. Personal Losses are privatized. Corporations get a better deal than citizens.

And no this bill is a piece of Kstreet trash from the housing lobby.

[Fred]

Given the ongoing and sure-to-be-accelerating trend of "walking away," why don't we pass some legislation that keeps foreclosures on your credit score for more than 7 years. How about 15? Seems only fair.

[Kyle]

The National Association of Homebuilders has got the best congressional representation that money can buy.

Several month ago, the NAHB cut off political contributions to pressure congress into bailing them out:

“This extraordinary action was taken because … over the past six months Congress and the administration have not adequately addressed the underlying economic issues that would help to stabilize the housing sector and keep the economy moving forward,” said NAHB President Brian Catalde. via Reuters.

In the taxpayer funded bailout game, you have got to "Pay to Play."

[Ginna Green, Center for Responsible Lending]

Yep -- privatizing profit and socializing losses. Let us not forget the homeowners -- both those who are at risk of foreclosure and their neighbors -- in this scenario. None of the proposed tax breaks will do anything to help borrowers in crisis, but a simple tweak to the bankruptcy code could -- and it wouldn't cost taxpayers a dime! Additionally, the tax credits for purchasing foreclosed homes is actually a disincentive for lenders to help keep people in their homes -- now it will be economically beneficial to let a property go into foreclosure (often it is more economically beneficial to do a modification with the borrower in trouble). And this will make it harder for neighbors who may be selling their properties ... how can they compete with an REO and its $7,000 tax credit?

[Jacinto]

This proposal is not a big deal. Today if a corporate builder loses $100m in 2007 he gets to carry it back to 2005 and take a deduction against income he had that year. If there is any loss remaining, he carries it to 2006 and takes a deduction against that income, then carries it to 2008 and so on until the loss is used up.

The proposal just means the builder carries the loss back to 2002 instead of 2005. Otherwise it works the same as before. Yes, it is a “bubble-smoothing” device but economic extremes are dangerous and have unintended consequences. We just had one, no?

[CSC]

No one in the housing or finance industries is a victim of the housing market problems, but they ARE in many cases a perpetrator. The FBI has reported that 80% of mortgage fraud is done by industry insiders. Several builders have been investigated and fined millions but fines have little if any deterrent effect. Jail time might. It's obscene that the elected officials are siding with the very businesses that caused the housing bubble. Houses were never worth those inflated prices. Even into the beginning of the 'pop' the mainstream media was neglecting to report on the problem, so many Amerians, dependent on those sources for news and info, were misled by industry influence over what's reported. Advertising money, lobbying money, etc, are all very influential. There were plenty of warnings that the industry's practices would lead to these current problems but no one in a position to do anything cared or acted. They all acted surprised when it happened, despite warning signs and outright warnings by consumer groups, economists, etc. Anyone who dared say the bubble was phony and would pop was branded a nut back then, when something could've been done to avert the current economic damage. There is no way the industry was ignorant of what they were doing, what would happen, or that in many cases they were breaking the law. Some in this industry deserve to do jail time, and NONE deserve a govt bailout.

[Sam Stray]

The Developers have made Billions of Dollars profit. They have the funds to finance their own projects. They continue to loot the Banks for their construction. A high poressure Mortgage Broker closes on the sale of overvalued homes that the buyer cannot afford, The Bank gets looted again on the sale by financing it. The Developer gets paid in full. RULE 120 foreclosure will eventually proceed. The home will go up for Bid through the Public Trustee. The Bank will take a huge loss. The Subprime home loan will be recycled and the Bank will be looted again.

[Sandibe]

Actually, under GDC's example, Company A would pay taxes on only $2 million in profits. The current regime allows carryback and carryforward of losses subject to certain time limits. In GDC's example, $3 million of the $4 million loss in 2006 could be applied against the $1 million profit in each of 2004, 2005 and 2007. If Company A earned another $1 million in profit before the losses expire, then it could apply the remaining $1 million in losses against that profit. In such a case, Company A would have paid taxes only on $1 million in profits and be in the same position as Company B.

The current proposal would extend the period by which a company could apply losses retroactively. In theory, the companies are simply using up today the losses that they would be able to use against future profits. In reality, this benefits the companies in two ways: First, because losses sometimes expire unused, any extension in the time period increases the chance that a company could use up all of its losses. Second, there is the time value of money. For the payor, paying $1 less in taxes today is better than paying $1 less in taxes next year. Even if all of the losses would eventually have been used under the current regime, the government would be giving up tax revenue today in exchange for an equal amount of future tax revenues.

Not tax advice.

[waco wally]

"That's socialism... and it must not happen again!"
-- Senator Bunning on the Bear Stearns bailout.

ANYBODY LISTENING ???

[cm]

The home builders and banks can already take loss deductions. Generally, if you have an Net Operating Loss (NOL) for a tax year ending in 2007, you must carry back the entire amount of the NOL to the 2 tax years before the NOL year (the carryback period), and then carry forward any remaining NOL for up to 20 years after the NOL year (the carryforward period).

The bill will extend the carryback period to 5 years so they can get their tax refunds now, rather than having to offset future years earnings.

[MyLessThanPrimeBeef]

Like I said, children shouldn't be allowed to watch this perverse, pornographic stuff. Get them to bed before the evening news.

Further evidence, this time from the man who let the emerging markets sink, rather than bailing them out. I give you Lawrence Summers and according to him, 'It may be a perilous time to be a citizen, but it is a very exciting time to be an economist.'

He's excited. Everything is just some econometric number. But hey, they turn him on.

Like I said, get the kids in bed.

[Lou]

Isn't it ironic that the same Congress who grilled the oil executives for taking tax breaks that are in the tax code (I'm not defending the oil execs, but they are just exploited legal loopholes) are creating loopholes and breaks to give a horribly run industry billions of dollars.

[MyLessThanPrimeBeef]

Another perverse act from one of the leading eggheads. Bin Lackey on the crisis cause, courtesy of CNBC: breakdown in credit model.

http://www.cnbc.com/id/24051407

No, I beg to differ. To me, it's the regretable extinction of that endangered species: common sense...as in, hey, common sense would tell you not to lend 120% with 0% down, even if it is a loan to people giving 110% effort at work.

But, hey, he's one of the experts; so maybe we can at least understand etiologically the source of that bizarre statement.

By the way, Charles Heston's Omega Man, as in The Last Man on Earth or I Am Legend, there was a line about scientists - a scientist is one who knows nothing until there is nothing to know.

Well, for me, a 'real' expert is one who knows that he knows nothing.

[firesale]

Gina Green wrote --
"Now it will be economically beneficial to let a property go into foreclosure
(often it is more economically beneficial to do a modification with the borrower in trouble).
And this will make it harder for neighbors who may be selling their properties
... how can they compete with an REO and its $7,000 tax credit?"

Answer: They can compete by lowering their asking
prices even more! Since all asking price seem to be so far off reality,
the REO with the $7,000 tax credit will just help homeowners wake-up.
A major part of the current problem is that the vast majority of sellers
still believe their paper profits of the last seven years
are real. Let's have a race to the bottom so we can
start all over again for the good of ALL involved.

[Ethan]

The operating loss carry-backs are insane. They reward the idiot risk takers at the expense of the carefully managed sensible participants -- and on the backs of all of us tax-payers. Better to let the idiots fall by the way side and the remaining industry consolidate.

On the other hand fire sale makes a good point. Anything to get the house price back to trend levels will help us get past all this mess. For the good of the country, housing has to be affordable, and it isn't at present price and wage levels. If we have to spend a little tax money to force sellers to wake up to reality, I guess it is worth $7,000/house. Not as if it were $30 or even $29 billion. Right?