SACRAMENTO — Even as California's fiscal woes mount, the state is slated to lose an additional $2 billion in coming years as a result of new tax breaks the Bush administration created for a small group of banks including California-based Wells Fargo.
A tax change put into effect by the U.S. Treasury Department provides new federal and state breaks for banks that take over other failing financial institutions. The subsidies come on top of the $700 billion in bailout money that Congress authorized as part of the federal rescue plan.
The move is provoking anger among lawmakers and activists from Washington to Sacramento. The primary beneficiary here will be Wells Fargo, which acquired Wachovia Corp. days after the Bush administration changed the tax law.
"It is an affront to the state's taxpayers," said Lenny Goldberg, executive director of the nonprofit California Tax Reform Assn. "While struggling with a revenue crisis, we now have to contribute to the federal bank bailout."
At issue is the extent to which banks can write off losses they absorb when taking over other banks. Decades-old limits on those write-offs were removed by the Treasury Department on Sept. 30. An estimate by the law firm Jones Day, which represents banks, found that the change will save banks as much as $140 billion, mostly in federal tax relief.
Officials at the state Franchise Tax Board, California's tax collection agency, say state law requires them to conform with the new rule.
Days after the tax rule was changed, Wells Fargo successfully moved to acquire Wachovia Corp., whose losses on loans could reach more than $70 billion. Tax experts at Jones Day and elsewhere have projected that those losses will allow Wells Fargo to claim $20 billion to $25 billion in total tax breaks.
Officials at Wells Fargo declined to comment.
Experts say other banks will also benefit, but to a lesser extent. PNC Financial Services Group, which recently acquired National City Corp., could receive as much as $5 billion in tax savings, they say. Banco Santander, which took over Sovereign Bancorp, is expected to receive a smaller boost.
As other banks take over failing institutions in coming months and years, the tax breaks will be extended to them for losses absorbed.
Treasury spokesman Andrew DeSouza said the rule change was not intended to help any particular bank or to be part of the federal bailout package, which was being debated in Congress when the agency acted.
