The Closed Loophole That Keeps on Giving: Subprime lenders could get bigger than usual tax breaks if the proposal, which is snarling budget talks, goes through. The idea is to offset a three-year suspension of write-offs, backed by Democrats.
By Evan Halper- Los Angeles Times Staff Writer
August 13, 2008 — SACRAMENTO -- — One reason California still has no state budget is a closed-door dispute over a tax proposal that could be a multimillion-dollar boon to banks that engage in subprime lending.
The proposal, according to legislative sources and industry lobbyists involved in the private budget talks, was brought to the table by the Schwarzenegger administration at the urging of lenders and other corporate interests. The proponents argued that it would help offset costs to businesses that could result from other tax changes under consideration.
The plan would allow many large financial companies that are currently enduring record losses to eventually receive tax breaks millions of dollars greater than are currently available to them. Subprime lenders would be among the largest beneficiaries because they experienced a large boom followed by a bust.
Businesses that have had more modest revenue swings might not benefit at all.
"This is all about bailing out the subprime lending industry," said Jean Ross, executive director of the California Budget Project, a nonprofit that advocates for low-income Californians in the state budget process. "They will have checks written to them by the state of California if this goes through."
The budget stalemate is now more than six weeks old. The new fiscal year began July 1, and neither the Assembly nor the Senate has voted on a spending plan. The negotiation over how businesses are allowed to write off losses -- part of a larger debate about taxes -- is among the latest sticking points and one that threatens to keep lawmakers from reaching a deal.
It stems from a Democratic proposal to close the budget gap by suspending loss write-offs for three years, saving the state $1.1 billion a year. The counter-proposal crafted by the business groups would put the more generous tax breaks in effect once the suspension ended.
The new tax breaks would ultimately permit financial institutions to use this year's losses to claim refunds against large tax bills they paid in 2006 and perhaps 2005, years when they had record profits. Business lobbyists who support the tax breaks point out that companies can already claim them on their federal taxes.
Administration officials refused to comment on the proposal.
"The governor continues to urge Republicans and Democrats in the Legislature to reach a compromise," said administration spokesman Matt David. "He believes the legislators understand that we are running out of time."
Officials at the California Bankers Assn., a trade group that represents 85% of the state's banks, would not comment on details of the proposal but said businesses should get something in return if lawmakers take away their tax credits.
"We do feel it is important for businesses and any taxpayer to be made whole," said Beth Mills, an association spokeswoman.
Most lenders have eliminated or scaled back their subprime loan offerings. But that would not prevent them from claiming big refunds under the proposed changes. The cost to the state would be $420 million in 2010 if the refunds were claimed by all the companies entitled to them, according to state fiscal analysts.
Senate Leader Don Perata (D-Oakland) said through a spokeswoman that he would not sign off on the proposed incentives. "Democrats would not ever agree to any provision that would benefit subprime mortgage companies," said Lynda Gledhill.
And Republican lawmakers say privately that they would not even consider voting to suspend the existing write-offs -- they view a suspension as a $1.1-billion tax increase -- unless companies were entitled to the expanded refunds as part of the package.
"I can't comment on what's being discussed in budget negotiations, but Republicans won't support anything that hurts our economy," said Assembly Republican Leader Mike Villines of Clovis.
Some business groups engaged in the discussions said they would prefer simply keeping the existing tax break for small businesses.
Scott Hauge, president of the trade group Small Business California, suggested that lawmakers exempt from the Democrats' proposed suspension any firms with gross annual receipts of under $5 million.
Hauge noted that large companies, which make up a relatively small share of California's businesses, claim the bulk of existing tax breaks. Even if small businesses continued to use existing write-offs, the state would still save $880 million of the $1.1 billion that Democrats seek, he said.