Is Oregon Getting Wells Fargo-ed?
Chuck Sheketoff
The Washington Post today reported (click here for PDF) that while Congress and the public were focused on the $700 billion bailout, the Bush Administration’s Treasury Department wrote a five sentence policy that gave banks a $140 billion tax cut windfall.
Our friends at Citizens for Tax Justice have published a short (2 page) clear explanation of the policy change (PDF) and why it is misguided. In a nutshell, the new rule allows banks acquiring other banks whose tax losses are attributable to bad loans to use the acquired banks’ losses to reduce their tax liability.
CTJ notes that “[t]he single most prominent beneficiary of the new rules is Wells Fargo, which by one estimate will see a federal tax cut of $19 billion from its purchase of Wachovia.”
Wells Fargo and Wachovia operate in Oregon, so this potentially impacts us.
How much will this cost Oregon? Governor Kulongoski and legislators ought to be asking that question.
We need to know how well we’re going to get fargo-ed by Wells Fargo and other banks utilizing the new policy.
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connect with blueoregon
Nov 10, '08
How does their operating in Oregon mean Oregon loses money? Federal tax ≠ state tax.
Nov 10, '08
Oregonians lost money, for sure, along with everyone else, except I guess any Wells Fargo executives who may maintain residences in Oregon. They surely came out OK.
James X, the CTJ paper (that link needs to be fixed, BTW) claims that most states' corporate taxes are based on federal corporate taxes. I don't know exactly what that means, but presumably it means that a cut in average federal corporate tax rates actually implies a cut in state corporate tax income.
Nov 10, '08
It would seem to me that if it adds to Well Fargo profit, then Oregon would get a percentage of that extra profit.
Likewise to those "WF Executives" who live in Oregon.
3:41 p.m.
Nov 10, '08
Oregon taxes are based on the definition of federal taxable income, and Oregon unfortunately chose to automatically connect to changes in the federal definition.
The issue here is whether these changes in the definition of what is an allowable loss to carry forward will apply to Oregon corporate taxpayers such as Wells Fargo and Bank of America.
4:34 p.m.
Nov 10, '08
RichW: Unlike people, corporations pay taxes on net profits not gross income (individuals pay taxes on income, regarddless of what happens to their expenses over the course of the year) and are able to use losses from previous years against their profitable future years to reduce those years. This new rule allows certain banks to capture and use the losses of the entities that they purchase to reduce their profits and pay less in taxes.
Nov 10, '08
The UK is having major issues with the banks that were bailed out not passing rate cuts on to mortgage holders. Dumb enough to have fallen for that once, but if it happens here, collusion must be inferred!
And running through government, the banks and industry is the dirty, unaccountable hand of IT systems eating more, spinning everything and returning less every day.
Nov 10, '08
Chuck,
I knew that. What I was saying is that if such a change increases the profits of a bank or bank executive, that would mean MORE income tax for Oregon, not less.
But I agree that if this change does the opposite then that will mean less tax revenue. Everone can write off realized losses, even me (up to $3K each year and carry the rest forward).
5:36 p.m.
Nov 10, '08
Bush. Is that jerk still screwing us? Isn't it Jan 20th yet, and why the hell isn't he in jail? Aaarrrggghhhhh!
Nov 10, '08
Don't worry Chuck, they're probably each only paying the $10 minimum anyway...
Nov 11, '08
Chuck, I ordinarily take your analysis as gospel; however, in this instance I want to drill down a bit.
Why is it unfair or underhanded for a combined corporate entity to deduct legitimate losses from its taxable income? If the failed entity had survived, its current losses would have generated a tax rebate from taxes paid in prior years, in the same amount as the combined entity will claim next year.
BTW, I don't think connecting Oregon's tax code to the feds is a bad thing per se. That reduces the cost of doing business in Oregon by making it unnecessary to spend money preparing a more complex tax return.
Okay, here's a related wrinkle for you to respond to or just think about. You mentioned that corporations are taxed on their net profits, not gross income. Individuals pay based on "adjusted gross" - earned income minus various exemptions and deductions. This has produced some undesirable behaviors on the part of corporate executives, such as lavish spending on exec salaries, bonuses, options, entertainment and other perks. I would be in favor of changing the corporate tax code to be a bit more intrusive; i.e. not allowing deductions for those kinds of things. (Plus maybe adding some taxes for carbon footprint, waste generation, etc.) The point would be not so much generating more revenues for the government (although it could) as to changing behavior through changing incentives.
Nov 11, '08
Not a bad policy on its own, but the bigger problem is that banks are using the bailout money to aquire other banks. What that means is that, if you are tight with the Paulson-Bush Treasury and get a nice slice of the taxpayer pie, you can spend that on buying out your competitors, even if you would otherwise be going bankrupt and they would be in a position to steal your customers.
Rather than passing the bailout along to consumers to loosen credit, big banks are buying up their competition, gaining pricing power, increasing fees, and doing on your expense. Socialism for the rich.
8:20 p.m.
Nov 11, '08
Fair and Balanced asked "Why is it unfair or underhanded".
As noted by the Washington Post story Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company’s losses to offset their gains and avoid paying taxes.
In other words, if you didn't prevent banks from doing the "underhanded" thing, healthy banks would go around buying failed banks as a tax dodge. They'd do it all the time. You could probably make a good case that the reason Wells Fargo and Wachovia are now a "combined" entity is that Wells Fargo did it for tax reasons. Tax-induced mergers shouldn't be rewarded; that's why Section 382 was a good rule, and that's why waiving it for big banks right now is a bad idea.
Nov 12, '08
If anyone believes banks are lending any of the money, you may be out of touch. Check with your bank, or with anyone that is involved with lending. The truth will wake you up to the upcoming reality of our new depression. At least our electricity is provided by our rivers. As long as we have rain and power, our standard of living may be better than many citizens in other states.
Nov 12, '08
Chuck, thanks for pointing out the comment about 382.
Your point of view is clear, but there are good arguments on the other side. Tax loss carryforwards are created when a business pays taxes on profits, then suffers a loss in subsequent years. Tax law doesn't allow a refund during the losing years (a debatable policy) but sets up a carryforward that can be used to offset future profits, if any occur.
When the losing business is no longer viable, before 1986 it could sell its "shell" with the carryforward and recoup some of the taxes it had previously paid (but at a discount). Section 382 set up some limits on this. But this is also debatable policy, not clearly "progressive" or beneficial. Why should one company pay more net taxes on a given amount of profit, just because its profits came in a different pattern over the years?
Consider the millions of American middle class investors in 401k plans, government and private retirement plans, etc. that bought shares in banks that are now being absorbed into other banks. Those investors will lose less of their nest eggs if those shares aren't completely worthless, but can at least realize some value from their tax loss carryforwards.
<h2>From that standpoint, while taxing authorities might realize a bit less income from the acquiring corporations over the next few years, this is actually a positive step. The alternative, in fact, might be a greater number of outright failures, job losses, and a deeper recession.</h2>