The 1998 budget that President Clinton unveiled Thursday leans heavily on banks to defray the cost of middle-class tax breaks.

Banks would pay higher taxes and more fees and face greater competition from the government for mortgage and student loans. But the budget also would expand individual retirement accounts, a historically stable source of long-term deposits for banks.

"There are a few good provisions for bank customers," said Donna Fisher, director of tax and accounting at the American Bankers Association. "But there are a lot of bad provisions for corporations, including banks."

The $1.69 trillion budget would eliminate a tax break for trust- preferred securities, a popular new type of funding for Tier 1 capital.

To use the tax break, a bank must establish a trust company, which then issues preferred stock to investors. The trust company lends the proceeds to the bank, which then counts the cash as capital. The bank pays interest on the loan, which the trust company forwards to investors as dividends.

Because the bank pays interest-and not dividends-it may deduct the payments from its taxes, resulting in billions of dollars in savings.

The president's proposal, however, would make this type of capital more expensive by eliminating the interest deduction. Anticipating that the provision might be applied retroactively, banks have issued $21 billion of these securities since getting the go-ahead from regulators in October.

"Every bank has been looking at Feb. 6 as the date they need to get this done by," said John Works, a bank bond analyst at J.P. Morgan & Co. "Going forward there will be very little trust preferred issuances."

In more positive news for banks, the income cap to qualify for IRAs would be raised to $45,000 a year for individuals and $70,000 for married couples, up $20,000 in each case. Also, the annual $2,000-a-year limit on contributions would be indexed for inflation.

"We fully support the IRA provisions," Ms. Fisher said. "This will revitalize IRAs so they are appealing to bank customers."

For the fifth time, the administration proposed fees on state banks examined by the Federal Deposit Insurance Corp. and Federal Reserve Board. However, only state banks with more than $100 million of assets would be covered. The measure, which would raise $175 million, drew opposition from state regulators and banking groups.

"We are very upset that they have put the fees on state-chartered banks into the budget again this year," said Neil Milner, president of the Conference of State Bank Supervisors. "It is not only unnecessary but counterproductive ... It will destroy the state-chartered banking system."

Seeking to compensate for the elimination of capital gains taxes on most home sales, President Clinton proposed raising the limit on mortgages insured by the Federal Housing Administration to $214,600, which is the limit on loans that Fannie Mae and Freddie Mac may buy. This may be a nonstarter, in part because of anticipated opposition from the powerful secondary market agencies.

The idea also drew fire from thrifts, which charged that the government was encroaching on their turf.

"This is inconsistent with the FHA's role of serving borrowers not served by the conventional market," said Brian P. Smith, director of policy development at America's Community Bankers. "There is no indication that this chunk of the market is underserved."

The budget would make the student loan program less profitable for banks, reducing several fees and limiting interest rates while a student is in school. The changes could force lenders out of the market. "They are trying to kill the bank program from the back door," said ABA federal representative Kawika Daguio.

The administration also would make it significantly more expensive for banks to convert from Subchapter C to Subchapter S corporations by making them pay tax on their capital gains. More than 1,800 family-owned community banks were expected by 1998 to switch to the Subchapter S form, which passes profits to shareholders tax-free.

The budget, covering the fiscal year starting Oct. 1, is unlikely to be passed by Congress until late summer at the earliest. Other provisions include:

Doubling, to $30 per return ,the fine banks would pay if they are late in filing 1099's and other Internal Revenue Service forms containing tax information about their customers.

Providing $100 million in tax breaks for investments in low-income areas. The Community Development Financial Institution fund would administer the program.

Eliminating a tax break for banks that earn interest income by lending consumers money from their pension plans.

Limiting the ability of money-losing companies to receive refunds for taxes paid when they were profitable.

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