Deal Calls for Thrifts to Pay $1B in Back Taxes on Bad Debt Reserves

reserves under an agreement reached by congressional budget negotiators this week. Under the plan, taxes would be due on bad debt reserves taken after 1987. Reserves made in prior years would be exempt. Thrift lobbyists said the industry had hoped to avoid paying any taxes, but expressed relief that the bulk of the industry's reserves had been protected. Thrifts hold an estimated $10 billion in reserves, which could cost the industry $4 billion in taxes, said Brian Smith, director of policy development at America's Community Bankers, the thrift industry trade group. "We're very fortunate the bad debt protection is in the bill at all; there was some discussion of dropping it completely," he said. The tax on bad debt reserves is part of the budget reconciliation bill Congress expects to complete this week and send to President Clinton. The president will almost certainly veto the budget bill for reasons not related to banking, but the thrift agreement is expected to survive and be forwarded to the White House again this session. Under the agreement, taxes on post-1987 reserves must be paid in six years, beginning in 1996. However, individual thrifts can delay those payments by two years if they meet a residential lending requirement. The two-year limit represents a compromise between the House and Senate. The House Ways and Means Committee had voted earlier to allow thrifts to protect their post-1987 reserves indefinitely by meeting the lending requirement. The Senate pressed for the tax in order to raise more money. The new rules are expected to raise $1.5 billion in seven years. That's $1 billion in taxes from thrifts plus $500 million from eliminating bad debt deductions going forward. Some industry observers said the deal could bring about a consolidation of the bank and thrift industries, even if Congress doesn't mandate a charter merger. Household International lobbyist J. Denis O'Toole said the deal would eliminate a major obstacle for thrifts that want to become banks. Current law requires thrifts to recapture bad debt reserves and pay taxes if they flip charters. Mr. O'Toole said that many thrifts may decide that "if they're taxed like banks, they ought to be banks." The tax legislation, he added, "moves us closer to having a dialogue on the charter merger issue." Congressional budget negotiators agreed Tuesday to other provisions important to the banking industry, including expanded Individual Retirement Accounts, a reduction in corporate capital gains taxes to 28% from 50%, and tax-exempt conversion of common trusts to mutual funds. "These are things we've needed for a long time. Not only will banks have new improved products, but customers will new advantages," said Donna Fisher, director of tax and accounting policy at the American Bankers Association.