On balance, the financial services industry stands to benefit from the federal budget accord.

The deal struck this week by Congress and the Clinton administration would cut inheritance and capital gains taxes and expand eligibility for individual retirement accounts. Bankers applauded these provisions and said they would profit from a general economic stimulus.

"Anything that helps our customers helps us," said Philip M. Burns, president of Farmers and Merchants National Bank, West Point, Neb.

But there are downsides: Banks would be forced to write off operating losses faster, and credit card issuers would pay excise taxes on frequent- flier miles.

Negotiated over the past several weeks, the budget and tax package is designed to balance the federal budget by 2002. The bills are expected to be approved by the House tonight and the Senate Friday.

"I think the capital gains portion of this thing will generate some economic activity," said Mr. Burns. "It'll have a positive impact on all sorts of businesses, including the banking industry."

Community bankers could benefit from an immediate increase in the inheritance exemption for small businesses and family-owned farms, to $1.3 million from $700,000. The standard estate tax exemption would rise to $1.3 million from $600,000 over 10 years.

Terry Jorde, president and chief executive officer of Towner County State Bank, a $25 million-asset institution in Cando, N.D., said, "Our customers are our farmers. The farm economy is fairly weak, and it's very cash poor, so in the event of someone's death ... the family ends up having to sell the farm in order to pay the taxes."

Family operations are essential to the health of rural banks and their communities, she said. "If farms just consolidate and become huge, our communities dry up and whither away. The farmers really are the lifeblood of a community."

Bank owners also would benefit directly, said Bill McQuillan, president and CEO of City National Bank in Greeley, Neb.

"It should benefit our community banks and allow these banks to be passed from generation to generation," he said, noting that his grandfather started City National in 1930. "This would certainly be a positive for my kids to be able to get involved in this business in the future."

Banks also should benefit from a cut to 20% from 28% in the individual capital gains tax rate; for investments purchased after 2001 and held for five years the top rate would be 18%.

The legislation would create a new type of IRA by reversing traditional rules and allowing people to withdraw earnings tax-free. Contributions, however, would be taxed.

Income eligibility limits for the new "back-ended IRAs" are still being worked out. Penalty-free withdrawals would be permitted five years after an account is opened if the investor is 59-and-a-half-years old or uses the money for a first-time home purchase or education expenses.

For traditional IRAs, budget negotiators agreed to double the income limits for tax-deductible contributions. Also, homemakers would be allowed to contribute up to $2,000 tax-free, even if a spouse participates in an employer-sponsored retirement plan.

Industry lobbyists said some bankers will be hit hard by the tax provisions. One requiring businesses to write off operating losses faster could reduce some banks' capital.

Under current law, a business that loses money in a given year may use the loss to offset taxes paid in the previous three years. Banks are allowed to include any unused portion of the offset in regulatory capital as a "deferred tax asset."

The new proposal would cut to two years the period for which a company may receive a refund on previously paid taxes.

"Institutions carrying significant deferred assets may be surprised when they suffer a reduction in capital," said James O'Connor, tax counsel for America's Community Bankers.

Industry officials complained that the tax, which would be levied on all mileage points awarded by card issuers, would cost up to $100 million a year.

"We very strongly oppose an excise tax on awards programs," said William Binzel, lobbyist for MasterCard International. "It sets a very dangerous precedent."

To blunt the damage, industry lobbyists had tried to limit the tax to mileage redeemed.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.