The future of NOLs

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THE FUTURE OF LOSS SPREADING: Here’s the thing about businesses having the ability to use their losses in one year to offset profits in another year for tax purposes: Generally speaking, it’s not that controversial an idea among a broad range of tax experts. But it’s a fair question to ask if Democrats and liberals will make more of a stink the next time policymakers consider whether to give companies more ability to spread around their losses.


For starters, the latest New York Times revelations make it clear that President Donald Trump used net operating losses to help tamp down his tax bill, which raised eyebrows among at least some on the left.

On top of that, Democrats were still refighting the battle last week over the CARES Act, which expanded net operating losses for corporations, giving them more ability to spread losses forward and backward, and also gave the owners of pass-through businesses more generous policies on offsetting their losses.

“Yes, I think NOLs have been stigmatized,” said Steve Rosenthal of the Urban-Brookings Tax Policy Center, who also pointed to potential arbitrage opportunities made possible by the CARES Act. “I think there still are good policy arguments to allow NOLs to be carried back or forward, but the policy arguments may be ‘trumped’ by tax abuse concerns.”

MORE ON THAT in a bit, but first welcome to the even dozen edition of Weekly Tax. What a weekend, huh?

Who knew it was younger than “Sesame Street”? Today marks an even half century since the Public Broadcasting Service went on the air. (Though, yes: “Sesame Street” actually premiered on the forerunner to PBS, the National Education Television network.)

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STEP BACK REAL QUICK: Republicans actually crimped companies’ ability to help their tax bills (and even get refunds) by moving around their losses, through the 2017 tax law. But it didn’t take long after the coronavirus hit for the business community to start lobbying to loosen those restrictions.

Republicans proposed just such a thing almost immediately after negotiations over the CARES Act started, but some key Democratic tax writers said they weren’t aware of those provisions until after a deal was struck. (It didn’t help that a Joint Committee on Taxation score, which showed the vast majority of the benefits from those proposals would flow to the top end, didn’t come out until after Congress voted on the measure. It also didn’t help that some business groups particularly questioned JCT’s projections for how much the pass-through provision would cost, a score that the committee eventually lowered.)

In any event, the Democrats who struck the deal acknowledged that they fought harder against other GOP ideas for the CARES Act — remember, this wasn’t all that controversial before — and noted they got wins like the expanded unemployment insurance.

“Obviously we’ll be more on guard if it comes along again,” said Frank Clemente of the progressive Americans for Tax Fairness, who called Democratic staff on the Hill “surprisingly passive” about the JCT projections. Still, Clemente added that “in some ways it was part of the horse trading.”

A couple of “to be clears” before we go finish: Democrats have focused far more on lax IRS enforcement and the general need to tax the rich more in the aftermath of the latest NYT stories than on any specific policy changes. In fact, Jared Bernstein, a longtime adviser to Democratic presidential nominee Joe Biden, told Pro Tax last week that any discussion of the policy utility of NOLs was a distraction.

Plus, several K Street types — particularly Republicans — said they believed the Democrats’ push to roll back the CARES Act treatment of business losses last week was more posturing than anything else.

They noted, for instance, that Speaker Nancy Pelosi dropped net operating losses as a potential hangup once it looked like she and Treasury Secretary Steven Mnuchin had a little momentum toward a deal — suggesting the NOL chatter was more political positioning that allowed Democrats to again go after Republicans about tax cuts for the rich.

So what’s it all mean? Let’s be honest — there’s still a decent chance that Washington will lean on net operating losses in a future downturn to try to help businesses, especially if there’s some sort of big negotiation going on.

But at least among some professionals, there is some concern that the heightened criticism of today might make it harder the next time around. “The problem with rhetoric is that it sometimes becomes reality, and usually when you least want it to,” as one put it. “Today’s posture could be tomorrow’s problem.”

MORE ON COVID-19 RELIEF: Trump hasn’t been the most aggressive in seeking a new pandemic response, but one of his relatively few tweets over the weekend was pushing for a new deal.

It’s hard to think that even another trillion dollars or two would have that much actual economic impact in the last weeks until the election, though there could still clearly be some political benefits.

That said: There are still a fair number of hurdles to the latest Pelosi-Mnuchin agreement, including the skepticism among GOP lawmakers.

As of Friday, Pelosi sent her conference an update detailing five separate areas of disagreement, a couple of which are tax issues. Additional state and local funding has for months been a knot that Republicans and Democrats haven’t been able to untie, and Pelosi also mentioned her push to expand the Child Tax Credit and Earned Income Tax Credit in any deal. (It doesn’t help matters that the full Senate isn’t returning until Oct. 19, either.)

PLEASE KEEP BUYING HOUSES: The Saudi government is changing the tax system to offer new incentives to home buyers, Bloomberg reports. Riyadh is getting rid of a 15 percent value-added tax on property sales, instead shifting to a new 5 percent real estate sales tax, according to Saudi Arabia’ state-run news service. Even better for first time buyers: The government will excuse the taxes on properties worth up to 1 million riyals, or about $267,000. (Previously, that exemption was capped at 850,000 riyals.) Saudi Arabia hasn’t been so generous in other parts of its fiscal policy, including tripling its VAT to 15 percent over the summer, as it faces the double whammy of the pandemic and falling oil prices.

GOT THE WRONG GUY: The Oregon Health and Science University, the third-largest employer in the Portland, Ore., area, says it shouldn’t have to pay a proposed tax that would fund a $4 billion transportation measure that voters will consider in November, Willamette Week reports. Under the proposal, businesses and nonprofits will pay a tax of up to 0.75 percent of their payroll. Local governments don’t have to pay the tax, which would help pay for a new light rail line. OHSU, which already pays a transportation payroll tax that the new proposal was modeled on, has a strange operating structure. The state legislature made it a public corporation about a quarter-century ago, which gives OHSU more latitude to raise its own money and set its own budget — while also reducing the amount of funding it gets from the state to 2 percent.

GOP tax writers step up to defend Trump on tax returns.

The NYT examines why millionaires might not flee New Jersey even after the state enacted a millionaires’ tax.

NYT op-ed: “The American Dream is tax reform’s biggest obstacle.”

Bartlett’s Familiar Quotations includes this, from Cookie Monster: “Me want cookie!”

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