WASHINGTON - Deposits could flood into banks under a Senate bill introduced Tuesday that would exempt all savings from taxation.

The Unlimited Savings Allowance Tax Act, introduced by Sen. Pete V. Domenici, R-N.M., and Sen. Sam Nunn, D-Ga., would exempt from federal income tax net increases in bank accounts, among other investments.

"Banks and other financial intermediaries will definitely have more savings entrusted to them," said Jim O'Connor, tax counsel for America's Community Bankers. "It will free up more money to be loaned, and it will be loaned at better and cheaper rates."

Sen. Domenici said the current tax code creates a disincentive for saving.

"Our current code penalizes savings by taxing income when it is earned and then taxing interest and dividends that are generated by the initial investment," he said.

Sen. Nunn pointed out that the current tax-exempt savings vehicle, the individual retirement account, curbs annual contributions. Under his bill, the amount a person would be able to save tax-free would be unlimited.

He added that the legislation would close an IRA loophole: shifting money from another savings account into the IRA to take advantage of the tax deduction.

"With the IRA, you did not have to save more to get a deduction, you merely had to move your savings into an IRA," Sen. Nunn said. "Since the government was handing out tax deductions for moving savings from your right pocket to your left pocket, it is not surprising that those IRA provisions did not increase national savings."

The House recently approved a tax bill containing a provision that permits individuals to withdraw IRA savings for certain expenses tax-free.

Herb Spira, counsel for the Independent Bankers Association of America, applauded the broader Nunn-Domenici bill but warned that Congress should still push for incremental changes in the tax code, such as the House's expanded IRA.

"Sometimes it takes one or two years to enact these bills," Mr. Spira said. "In the meantime, why not go ahead and improve savings in ways which we believe will be swift, sure, and will address the nation's savings problems."

However, Sen. Nunn warned against "tinkering with our tax code."

"Incremental changes, however well intentioned, will complicate an already Byzantine tax code without yielding the increased savings and investment we all seek," Sen. Nunn said.

While there is growing interest on Capitol Hill in overhauling the tax code, Karen Shaw, president of ISD/Shaw Inc., said the Nunn-Domenici bill may not come up for a vote until next year.

Ms. Shaw said other issues, such as deficit reduction, are likely to steal the spotlight.

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