Thursday, April 10, 2008

Senate Passes Bill with Builder Tax Breaks

by Bill McBride on 4/10/2008 01:28:00 PM

From Reuters: Senate backs tax break-focused housing rescue bill

At a cost of $15 billion over 10 years, the Senate bill would give a $6 billion tax break to home builders by temporarily extending a rule that lets businesses count current losses against taxes from prior profitable years.

Home builders such as Pulte Homes and KB Home would benefit from this proposed two-year extension of the net operating loss carry-back rule, according to analysts.

But the House's bill excludes the extension. ...

The Senate bill would also raise the limit on the size of mortgages the Federal Housing Administration may insure, to $550,000, while setting up a $7,000 tax credit, spread over two years, for buyers of homes in or near foreclosure.
Daniel Gross at Slate wrote about this proposed builder tax break: A Tax Break for Bubble Heads
"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?"
...
"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."
I'd go a step further: The U.S. has too much home building capacity, and delaying the bankruptcy of some "bubble head" builders will delay the eventual recovery for housing and the economy. Hopefully this provision will be removed from the bill by the House.