Kentucky bankers are fuming over a new law that requires banks to help keep track of delinquent taxpayers, and banks there are suing to overturn it.
The banks claim in their suit, filed May 2 against Gov. Ernie Fletcher and the Kentucky Department of Revenue, that legislators unlawfully slipped the provision into the state’s 2006-2008 budget bill so that bankers could not testify against it.
The provision, which would take effect July 1, would require banks to develop a way to match the names of delinquent taxpayers provided by the state with the names of their customers. The banks would report matches to the Department of Revenue, which would have the authority to direct the banks to freeze customers’ assets until they pay their back taxes.
Debra Stamper, the general counsel of the Kentucky Bankers Association, said in an interview last week that modifying computer systems to track delinquent taxpayers would be costly. Legislation requiring banks to do so had been introduced three times in recent years but never got past the committee level, because of bankers’ objections, she said.
“It was inappropriate to include it in the budget bill, because we really had no opportunity to speak against it,” Ms. Stamper said
Citizens National Bank of Paintsville and Hyden Citizens Bank and filed the suit in the Franklin Circuit Court in Frankfort on behalf of the state trade group.
The budget bill, HB 380, was approved unanimously by both houses of the General Assembly before they adjourned April 12. However, the House and Senate Appropriation and Revenue committees allowed no public testimony during their ’s closed-door hearings on the measure.
Gov. Ernie Fletcher, a Republican, signed the bill into law April 24.
Ms. Stamper said lawmakers violated the Kentucky Constitution by attaching the provision to the budget bill, because the provision has nothing to do with appropriations. She also said lawmakers violated state law by making those provisions permanent; provisions in budget bills are supposed to expire after two years.
Brett Hall, a spokesman for Gov. Fletcher, said he “took exception” to the allegation that it was illegal to include the delinquent taxpayer provision in the budget bill.
“There’s no requirement that a series of hearings be held on every line item on every single piece of legislation,” Mr. Hall said.
The provision is critical to help the state collect an estimated $1 billion of back taxes, he said.
Ms. Stamper said that, in addition to the law’s costs, bankers are concerned that they could end up mistakenly freezing accounts — and angering customers.
Massachusetts bankers have had to comply with a similar law since 1994. William Marshall, the president and chief executive of the $341 million-asset North Middlesex Savings Bank in Ayer, says that mistakes do happen from time to time — and they can be bad for business.
“Then we become the bad guys, because they’re now blaming the institution, and they tell 30 people that we’re terrible,” Mr. Marshall said.
It is costly to modify systems and perform the matches, he said, “but the burden can’t be passed on to the customer.” He could not say how much it costs to comply with the law.
