When Congress passed the stimulus bill last February, it included a provision allowing companies to apply 2008 losses against taxes paid during the past five years, up from the normal two-year limit. For several reasons, that’s a sensible provision during an economic downturn. Because firms are taxed when their risky investments pay off in a strong economy, it’s only fair to allow a deduction when a downturn sends them into the red. The more generous loss deduction also boosts firms’ cash flows, which may promote investment if they can’t borrow in today’s troubled financial markets. Besides, until firms deduct all of their outstanding losses, they get no benefit from tax breaks for new investment, which dilutes the incentive effects of those tax breaks.
At the last minute, though, Congress changed the stimulus bill to give this tax relief only to small businesses. As we pointed out last June, that is just one example of the favoritism for small businesses that is so prevalent in the U.S. tax code. Lawmakers mistakenly think that small business, to the exclusion of big business, is the engine of economic growth. In reality, firms of all sizes contribute to the strength of the U.S. economy and the prosperity of the American people.
Last week, Congress partially corrected its mistake, adopting a proposal by President Obama to extend this relief to firms of all sizes. The new provision, signed into law on Friday as the Worker, Homeownership, and Business Act of 2009, is still somewhat more generous to small firms than to large ones. But it’s a step toward fairly recognizing both large and small businesses as engines of economic growth.