IRS ruling may push state budgets further into the red

Thanks to the economic downturn, states across the country are drowning in red ink – and now we have a not-very-well-publicized ruling from the IRS that could add to our fiscal woes.

Up until this point, tax law prevented companies from using a newly-purchased company’s tax losses to write off their own taxes. This was quite intentional – it prevented companies from buying other companies just so they could avoid paying taxes. But in late September, the IRS issued a ruling making an exception to this: a bank that acquires a failing bank with tax losses attributable to bad loans can use the losses from the deal to write off future taxable profits.  The first case that this applies to: Wells Fargo’s pending acquisition of the uber-troubled Wachovia Corp.

This is a huge policy shift, done without Congressional approval, and the cost is considerable. As the SF Chronicle reported, some experts are saying that these new tax advantages will more than pay for the entire Wachovia deal. That’s worth repeating – the cost of buying Wachovia could essentially be – nothing. It’s a tax write-off worth more than $14.4 billion for Wells Fargo. And when the dust settles from all other acquisitions, the total tax revenue loss from this IRS ruling is estimated around $140 billion. This has understandably incited a reaction from members of the U.S. House and Senate, where legislation was recently introduced to reverse the IRS ruling.

Pending legislation notwithstanding, the practical question of the moment for Minnesota is whether this new ability of acquiring banks to minimize their corporate tax liabilities will trickle-down to states, resulting in less revenue for our already-in-deficit state of Minnesota. According to an analysis from Citizens for Tax Justice, a nonpartisan tax research and advocacy organization, at least 18 states – including Minnesota – could be hit. Wells Fargo certainly has a large presence in our state, so I’d expect some impact. According to their web site, Wells Fargo is “the second largest private employer with 20,000 team members…it has the largest distribution of any financial organization in the state.”

Certainly an issue worthwhile for Minnesota to follow.

-Katherine Blauvelt

About Katherine Blauvelt

Katherine Blauvelt served as the Minnesota Budget Project’s policy analyst from 2007 to 2009.
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2 Responses to IRS ruling may push state budgets further into the red

  1. This problem was discussed during a House Committee on Financial Services on Wednesday, November 12. [Note : Minnesota’s Congresswoman Bachmann who is assigned to the committee was not in attendance.]
    One the best comments came from Steven LaTourette (OH-14) who expressed outrage at the potential tax benefits used by banks to acquire each other. “When you have a handful of people picking winning and losing banks and deciding how to spend hundreds of billions of dollars of taxpayer money, transparency must be required,” LaTourette has stated. Describing the PNC buyout of National City Bank, “This was no ordinary bank acquisition once the government stepped in with billions of dollars. We need to shine a light on this and see if it was on the up and up.”

    One of the amazing aspects is that the IRS issued it’s Notice 2008-83 on September 30, the IRS issued Notice 2008-83 while the Senate approved it on October 1st … so essentially, Congress could have addressed this issue then.
    Overall, the TARP legislation was enacted too quickly for anyone to know what they were enacting.

  2. herb davis says:

    Thanks…I don’t think many people are going to get this insight from the mainstream press!

    I’m grateful for your willingness to keep citizens informed!

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