Re: Taxes and Corporate Losses

One of the functions of taxes is to regulate our behavior. We, as a citizenry, are encouraged to have children, buy houses, buy hybrid cars, move into cities, and stop smoking (among other things) through both affirmative measures -- tax breaks -- or punitive measures -- taxes.

Similarly, the corporate world is encouraged to lessen their tax liability through investing in tax credit programs in which, essentially, companies reduce their overall taxes by buying into certain programs that the government deems worth, i.e., the historic renovation of buildings, inner-city development, etc. etc. The system is a more-market-driven-but-not-quite government investment into certain areas of public interest. The net result is a win for business (lessening of corporate taxes) and a win for the government (no direct subsidies into projects).

There is, however, another way to lessen a company's corporate tax liability: take a loss or, in today's economy, a humongous loss. That's pretty much what PNC is about to do when it picks up National City. My guess is that, because of certain accounting rules, PNC is going to have a couple years to spread out these losses and, therefore, will not need to invest in things like the National Historic Tax Credit (HTC) Program. That gives you a pretty decent sense of how bad National City was really doing.

But, of course, PNC is just a microcosm of all the other firms that are swishing around the drain -- and are probably going to showing some substantial losses in the quarters to come. This forces the question: if all kinds of firms aren't going to have any income to speak of, who will buy all these tax credits, and if the answer is "no one," how will the programs that are dependent on these credits get funded?