New Tax Breaks Increase Bailout Cost

Outside of the financial sectors and the business pages of newspapers and magazines, most people likely missed the recent Treasury Department moves that will likely add tens of billions of dollars to the cost of the banking bailout package – and thus to the federal deficit.

One change would be particularly costly. Up until the release of the Treasury’s move on September 30^th, companies were typically allowed to count losses in one year against profits in other years, the intent of which was to help companies smooth out their fluctuations in year to year corporate income. Prior to September 30^th the law limited the amount of losses companies could count against future profits.

Treasury’s ruling removes the limit in cases where a company buys a bank that has “tax losses” that are attributable to a portfolio of loans. All of the losses will be able to count against future profits, reducing corporate taxes amounting to billions in lost federal revenues that could help offset the multi-billion dollar cost of the bailout, and the increasing deficit.

According to Wall Street Journal reports and others, three banks have already jumped at the new opportunity. Wells Fargo, which purchased Wachovia, PNC Financial, which purchased National City Corp., and Banco Santander SA, which is buying the rest of Sovereign Bancorp Inc., stand to reap billions in additional tax breaks under the ruling.

In fact, Wells Fargo swooped in to acquire Wachovia immediately after this ruling. Their effort was rewarded when Wachovia announced a $24 billion third quarter loss, which is tidy sum to protect future profits from the tax man. Some estimate that the total losses may be as much as $74 billion.

Information was obtained from Taxpayers for Common Sense.

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