The 2017 Tax Act stopped carrybacks of losses generally, primarily as a revenue raising ploy. Now in a mad dash to Do Something about the corona virus, Congress is going to allow carrybacks so corporations can get cash.
That brings to mind filling out a form last year, in connection with my 50thcollege reunion, that describes my proudest accomplishment. That was dreaming up Sec. 172(b)(1)(D), the so-called corporate equity reduction transaction rule, preventing the “carryback of excess interest losses attributable to corporate equity reduction transactions.”
Here’s the story. At the height of the Leveraged Buy Out (LBO) craze in the late 1980s, Senator Bentsen asked staff (me) to Do Something about LBOs, which were making headlines and out of favor. But I had to be sure not to Spook the Markets. I was reading Forbes or Fortune in my office one day when a transaction caught my eye. An LBO artist bought a profitable company in a merger transaction that incurred huge debt. The debt created huge interest expenses. Those deductible interest expenses were sot big that the new operation had losses. Those losses were carried back to the profitable years of the profitable company, creating a TAX REFUND. That looked like the Code was subsidizing LBOs. That didn’t sound right, so we drafted up something that Senator Bentsen introduced; Mr. Rostenkowski put it in the House bill and it sailed into the law without any opposition rearing its head. The rule was estimated as picking up $2.2 billion in revenue over five years.
A side note: To make sure we didn’t Spook the Markets, Senator Bentsen had me hold a Staff Briefing to float the notion. Famous journalist Jeff Birnbaum, with the WSJ then, left the briefing in the middle once he understood the plan. The Markets were Not Spooked, and the provision stayed in the Code until it got subsumed into a broader rule in the 2017 Tax Act. I hope it comes back.
Localities in Colorado, which has been allowing local marijuana taxation for years, are figuring it out. In California, which legalized six years later, they are still stumbling:
Here is a nuanced and thoughtful proposal from Aurora, about to increase retail sales taxes.
COFFMAN: A hike in marijuana tax can save critical Aurora services – Sentinel Colorado; https://sentinelcolorado.com/opinion/coffman-a-hike-in-marijuana-tax-can-save-critical-aurora-services/
“Under Lawson’s proposal, there would be a 25% tax increase on the local sales tax rate on recreational marijuana raising the tax rate from 4% to 5%. This increase would still allow our 24 recreational marijuana stores to keep a competitive tax rate. For example, even with the increase, Denver would still be half a percent higher than Aurora at 5.5%.
“The proceeds from the marijuana tax increase is estimated to be around $1 million in the first year replacing the $1 million lost revenue from the photo red light program to fully restore the funding shortfall for these critical Nexus programs.
“As Aurora’s new Mayor, I strongly support Council Member Lawson’s proposal and I will encourage our City Council to pass it.”
Mike Coffman is mayor of Aurora.
In California, meanwhile, a blunt approach in Costa Mesa doesn’t distinguish among retail, growing, and testing taxes: https://www.latimes.com/socal/daily-pilot/news/story/2020-02-29/costa-mesa-city-council-will-consider-lowering-tax-for-marijuana-companies
Look, there is some room for local retail taxation in any locality. Consumers aren’t totally mobile in the long run. Prohibitionists say there are negative externalities with consumption, and they can’t be persuaded.
Processing and distribution are different. They create jobs, with no negative externalities (right?), and they will drift to low- or zero-tax jurisdictions.
And here’s the thing: A tax on testing (also mobile in the long run) is a sure sign that lawmakers don’t have the long-term best interests of the community in mind. Testing is the kind of enterprise most localities want – clean, high-paying jobs. Those are positive externalities. Taxing testing is both primitive and unprincipled.
Tax growing? That’s pretty mobile, too. Is there a negative externality? Smell? Some people like the smell.
More at How tax competition can threaten marijuana revenue; https://thehill.com/opinion/finance/372396-how-tax-competition-can-threaten-marijuana-revenue
Continue reading Experience in Colorado; Naivete in California