Tax Bill May Kill Tax Relief For Banks

June 5, 2002
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GRAND RAPIDS — How ironic is this? The nation’s largest tax cut in two decades will likely stymie efforts to bring tax relief this year to community banks.

Following the passage of a ten-year, $1.35 trillion tax cut, Congress will probably see the legislation, which is solidly supported by the American Bankers Association, as being too costly to implement.

“The administration is going to be looking to how they’re going to pay for the $1.35 trillion cut. That’s going to slow down anything that relates with any business acts that are coming up, including the ones that affect the banking industry,” said Michael Thompson, an associate and tax expert with Plante & Moran LLP in Kalamazoo.

“So it’s probably going to slow it down, if anything,” he added.

The quest to pay for the cut also means there is a good possibility that the banking bills are dead in the Congressional waters for this year.

“Obviously there are people who don’t want to say that. But my personal opinion is that the bills are not going to get in this year and I know that there are other people here that feel the same way. I would go as far as to say that,” said Thompson.

Republicans largely designed the bills to help community banks compete with nonprofit credit unions and other financial organizations. Even if sponsors can get the bills on the floors, the GOP might not be able to push the legislation through the Senate with Vermont Sen. James Jeffords having left the party.

“That is part of what is going to help slow this down and probably kill it for the year because you now have a climate that is changed. The conservatives do not have both the House and Senate. So the pro-business side of it is going to be slowed down somewhat by that as well,” said Thompson.

Thompson added that voters aren’t terribly sympathetic to tax cuts for businesses, either, so he expects that lawmakers will focus on other issues considering the mid-term elections coming next year.

One piece of legislation has some support in the House and Senate, as each chamber has its own version of the bill. H.R. 1263 and S. 936 aim to ease the tax burden on community lenders by expanding the filing eligibility for Subchapter S.

Under both, a bank, and other small businesses, could double its total of “S” shareholders from 75 to 150, issue preferred stock in addition to the common variety, and make other corporate changes.

But the key element of the “S” expansion is that community banks would only be taxed at the shareholder level, instead of the so-called double-taxation standard found under the “C” corporate rules.

According to the ABA, about 1,500 banks have elected to travel the “S” route over the last four years.

“This number represents more than 15 percent of the banking industry, primarily community banks seeking to survive in an extremely competitive financial services environment,” said Donald Ogilvie, executive vice president of the ABA, the largest bank trade association in the nation.

Rep. Scott McInnis (R-Colo.) introduced H.R. 1263. Sens. Wayne Allard (R-Colo.), Craig Thomas (R-Wyo.), and Tim Johnson (D-SD) did the same for S. 936, also known as the Small Business and Financial Institutions Tax Relief Act of 2001.

Another bill would allow a bank to exempt the first $250,000 of corporate income from federal taxes if it qualifies as a community lender. Also, corporate income over $250,000, but less than $1 million, would be taxed at a rate of 15 percent. Amounts over $1 million would be taxed at current rates.

To qualify as a community lender, a bank must make 60 percent of its loans within its home base, and its total assets must be less than $1 billion. Rep. Pete Sessions (R-Texas) introduced the bill as H.R. 1220.

“If that would pass, the savings would equate to $190,000. Generally speaking, the first $1 million is taxed at 34 percent and they’re talking 15 percent,” said Thompson. “So, you’re looking at quite an amount of savings there.”

The bill would allow community banks to reinvest the tax savings within the community and offer rates that are similar to those offered by credit unions, which don’t have the same tax burden.

Don’t look for changes in the way credit unions are taxed anytime soon. Thompson felt it was unlikely that either Congress or President Bush would restart the campaign to tax credit unions; that drive ran out of gas about two years ago. He said both parties and the president support credit unions.

Still, the ABA is looking for relief.

“The tax code governing community banks is overgrown. Sometimes you need to weed and prune to encourage growth — in business and personal savings,” said Joe Williams, chair of the ABA’s Community Bankers Council (CBC).

The ABA formed the CBC last June to help smaller banks compete better with credit unions, insurance companies and securities firms, and the tax code is one area the council has targeted to accomplish its goal.

“There are 300 provisions in the tax code that apply exclusively to community banks,” said Williams, “and many of them are outdated, unnecessary or overly complex.”

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