What bankers need to know about the government funding compromise

March 27, 2024 9:53 AM

WASHINGTON — Over the weekend, President Joe Biden signed a $1.2 trillion funding package that averts a government shutdown and pushes the next spending fight to September.

As has become typical in Washington, the path to getting the compromise to Biden's desk was fraught with leadership intrigue and a late-night vote to avoid a shutdown.

The final package includes defense, homeland security, financial services and general government and labor. Lawmakers cut financial services and general government funding — by $1 billion, or 4%, from the prior fiscal year, although that doesn't include the prudential banking regulators, which are largely self-funded .

While the funding package includes vital funding details for the government's oversight of financial services, it's in some ways more interesting for the things it doesn't include. Some big ticket items for bankers didn't make it into the final version, and remain live items for future debates.

Senate Majority Whip Dick Durbin, a Democrat from Illinois, has not gotten his credit card swipe fee bill in the funding package. Photographer: Ting Shen/Bloomberg

Ting Shen/Bloomberg

No Durbin 2.0

Despite a last ditch attempt from Sens. Dick Durbin, D-Ill., and Roger Marshall, R-Kansas, the swipe fee bill falls short of getting a vote in another must-pass piece of legislation.

The bill's sponsors have tried to get the bill, which would require cards from banks with $100 billion or more of assets to offer merchants the choice of two unaffiliated card networks that aren't both Visa and Mastercard, included on a number of packages.

The bill has been fiercely opposed by the banking industry.

"Given the fractured condition of Congress, adding non-germane legislation that's controversial upsets the balance that the overall bill strikes and threatens to kill it," said Brian Gardner, chief Washington policy strategist for Stifel. "I don't think congressional leaders are wanting to waste political capital on what they see are second and third tier issues."

Its absence on yet another package doesn't bode well for the future of the legislation, but there's a number of options coming up for the lawmakers, including the next spending fight in September and defense spending legislation that will also need to pass this year.

Durbin and Marshall have been successful in generating some level of momentum for the credit card fee bill, adding bipartisan cosponsors to it and trying to wrangle executives for a hearing to convince their fellow lawmakers.

Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), asked Congress for additional funding to account for the growth of the cryptocurrency market. Photographer: Al Drago/Bloomberg

Al Drago/Bloomberg

Did the SEC get its crypto funding?

The Securities and Exchange Commission has increasingly become a political football, with Republicans criticizing what they see as Chairman Gary Gensler's overreach into environmental policy and crypto enforcement.

The final spending tally for the SEC ended up being something of a compromise. The deal gives the SEC $2.189 billion, lower than the $2.594 billion it asked for to fund another 23 people in its examinations division. Part of the reason the SEC asked for that additional personnel was to address "evolving risks" in crypto activity.

"New products and services, such as decentralized finance in the blockchain space and computer-assisted financial activities in the AI space, are being introduced on a compressed time frame and have an immediate impact on the financial industry," the agency said in its budget request.

Still, the agency's funding grew slightly from the $2.15 billion it received in the prior fiscal year, despite House Republicans wanting to cut it to about $2 billion.

closeup of IRS headquarters, focusing on "Internal Revenue Service" sign over doorway

The Internal Revenue Service (IRS) headquarters in Washington, D.C., U.S. The funding bill claws back $20 billion originally set aside for the agency in pandemic-era spending legislation.

Al Drago/Bloomberg

Deep debate on IRS funding

Most notably, the package claws back about $20 billion of the $80 billion that the Internal Revenue Service received as part of the pandemic-era Inflation Reduction Act. Those funds were meant to be disbursed to the IRS over a 10-year period and help modernize the agency, and bolster its enforcement efforts.

Although it's a cut, it's still $1 billion more than Republicans wanted to spend on the agency.

IRS funding has been a particular point of contention between Republicans and Democrats. Democratic lawmakers have wanted to fund the tax agency's enforcement function and enable it to go after high earners, which they say would help address government funding shortfalls. Republicans, meanwhile, don't want an empowered enforcement function, and haven't believed Democrat assurances that the IRS wouldn't increase enforcement on those earning less than $400,000 a year. Instead, Republicans have worried that the IRS would crack down on middle-class taxpayers and small business owners.

Aside from the IRS, the legislation provides $1.8 billion for the Department of the Treasury.

Despite fintech criticisms, SBA stays uncontroversial

In total, the legislation includes $1.18 billion for Small Business Administration programs.

The bill provides $143 million for disaster relief efforts at the SBA, the same amount as last year, and $316.8 million for entrepreneurial development grants.

SBA programs have come under scrutiny, particularly in how they disburse their loans. The SBA's flagship loan program, for example, ended a four-decade moratorium on nondepository institutions, allowing for fintech participation in the program instead of just banks, angering bankers.

In previous attempts to expand the SBA's flagship program to direct loans, some lawmakers have cited the SBA's track record with fraud within its pandemic-era lending programs.

"Fraud and inefficiency characterize the Small Business Administration's history in direct lending," said Sen. John Kennendy, R-La., last week as he introduced a bill to prevent the Biden administration from being a direct lender for the loan program. "The government shouldn't crowd out private lenders that are already doing a good job getting funds to the small businesses that need them."

Those attempts by the Biden administration to expand the SBA's remit has been stopped by concerns that the SBA would be directly competing with private lenders. The Biden administration proposed giving SBA nearly $4.5 billion to make direct small-dollar loans in 2021, but later dropped the plan in the face of vocal opposition from banks, credit unions and other groups representing lenders.

Biden's tax initiatives absent

Although it was expected, some high-profile tax proposals from the White House budget didn't make it into the final version. Still, those proposals could come back during the campaign season, and they signal where the Democratic party wants to move on funding going forward.

Some of these would affect bankers in particular. Biden called to quadruple the stock buyback tax, raising the tax rate on corporate stock buybacks from 1% to 4%. Banks are more exposed to stock buyback taxes because their regulators generally prefer buybacks to higher dividends, according to Jaret Seiberg, financial analyst at Cowen.

"It means a higher buyback tax will now be on the list of revenue raisers each time Congress needs to offset new spending," Seiberg said. "Risk is highest if Democrats control the White House, House and Senate, but this could end up as part of a broader package even with divided government."

Biden in his budget also proposed applying the wash-sale rule to crypto, another element of his proposed funding bill that didn't make it into the final version.

The wash-sale rule prevents investors from claiming capital losses on capital deductions if they purchase the same or a very similar security within 30 days of the initial transaction. So right now, a crypto investor can, unlike a stock or bond investor, sell a crypto asset at a loss, then claim that loss to reduce their tax burden and buy back the same crypto asset the next day.

Similarly, it's an issue that could reemerge as the Trump tax cuts expire, and the government — whether it be a Democratic or Republican one at that point — could revisit to offset the tax losses when Congress looks to extend the Trump tax cuts.