WASHINGTON - Overly burdensome tax laws are forcing community bankers to charge higher fees and limiting their ability to support economic development in their communities, the American Bankers Association argued in a report released Monday.

The report, compiled by a working group of the ABA's Community Bankers Council, contains a wish list of changes to the U.S. tax code that would reduce the compliance burden on banks and encourage savings.

"Community banks are the lifeblood of their local economies. The targeted tax relief proposed by the working group enables community banks to invest locally and spur economic growth," said Earl McVicker, president of Central Bank and Trust Co. of Hutchinson, Kan., and chairman of the working group.

The 23-page report calls for equitable tax treatment for banks, credit unions, and Farm Credit System institutions. It says banks should be allowed to retain earnings without being taxed on them, as credit unions do.

The eligibility standards for tax-advantaged Subchapter S filing status should be loosened to admit more banks, the report argues. Jay Fritz, chairman and chief executive of Royal American Bank in Inverness, Ill., and a member of the working group, said the Subchapter S changes may have the best chance of enactment. "This is definitely possible, whereas some of the other items on the our list are a little further off in terms of probability."

Congress is also considering easing estate taxes, another item on the ABA wish list, along with lower capital gains taxes.

To encourage savings and to help banks compete with mutual funds for scarce deposits, the working group recommends the creation of deposit accounts that pay tax-exempt interest.

Internet-based banking transactions should not be subject to more burdensome tax-related information gathering and reporting obligations than non-Internet transactions, the report says. Also, banks that do business online should be subject to state taxes only in states where they have physical presence.

The ABA report also defends the industry's existing tax advantages, including writing off loan origination costs and certain interest costs associated with investment in certain types of bonds, such as tax-exempt municipal debt. However, bond issuers are allowed to designate only $10 million of debt per year to these so-called "qualified tax-exempt obligations." The report claims that raising that cap would stimulate economic development.

Community banks, the ABA argues, should be exempt from mark-to-market tax accounting and be allowed to base their loan-loss reserve requirements on the previous three years' loss average, rather than the current six-year requirement.

The report, "Compliance, Competition and the Community Bank Tax Burden: A Blueprint for Reform," is available at www.aba.com.

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