Senate Tacks Unnecessary Corporate Subsidy Onto Housing Bill»

Our guest blogger is David Abromowitz, a Senior Fellow at the Center for American Progress Action Fund.

The bi-partisan Foreclosure Prevention Act of 2008 is a big step towards helping America’s troubled housing market, especially with its fast infusion of funds to localities, which enables responsible local organizations to move quickly in neighborhoods drowning in a tidal wave of recent foreclosures. Mirroring a Great American Dream Neighborhood Stabilization Fund proposal of the Enterprise Foundation, Center for American Progress and others, these funds would allow foreclosed and bank-held properties to be bought at a discount, vacancies and arson prevented, and stability restored to hundreds of communities teetering on the brink of blight.

Yet one component of this admirable package stands out like the odd item in a “One of These Things is Not Like the Others” mind-teaser from elementary school.

As now written, the bill would change current rules law dramatically by extending the Federal taxcode’s “net operating loss (NOL)” carryback provision to four years (back to 2004) from the current two years limit. But what kinds of corporations need this special extended NOL carryback? The short answer is a formerly profitable company hit by sudden, sharp losses that does not expect to recover and produce taxable income in the near term, but paid taxes in earlier years.

Certainly some corporations were innocent bystanders to the subprime Wall Street market meltdown, and are now saddled with large losses as a result of other parties’ bad investments. Small businesses caught in the market turmoil and strapped for cash in the coming year are one group for whom a sensible, carefully crafted case could be made. Homebuilders argue they need such help.

But some of the largest losses around are on the books of the wealthiest financial players at the very center of the debacle. Banks, servicers, packagers of loans, Wall Street underwriters and a host of related parties whose aggressive peddling of no-document and similarly risky loan products would be covered as well. Even creditors and maybe even shareholders of companies whose practices led them into bankruptcy might benefit.

If enacted the NOL carryback clause will have taxpayers writing a direct 35 cents on the dollar subsidy to parties who made billions off mortgages that are now being foreclosed on millions. And while the NOL provision is said to carry an estimated $6 billion cost to the Treasury, the current version apparently has no cap — if banks lose another $150 billion in 2008 and 2009, the taxpayers might cover more than $50 billion of their bad business bet.

The President’s advisers have repeatedly cautioned against the “perverse incentives” that might arise from mitigation of “outcomes of risky behavior”. But even more perverse will be if the NOL carryback windfall provisions become the price of moving forward this otherwise worthy bill.

– David Abramowitz