After months of bemoaning the logjam on business-friendly legislation in Congress, bankers on Thursday got their first taste of what’s to come when Republicans start carving up the tax code.
They were encouraged by some of the central features of the 429-page GOP tax bill, praising the proposed reduction in corporate rates — to 20% from 35% — as having the potential to meaningfully boost economic growth.
In order to make up for the lost revenue, however, policymakers would sacrifice certain benefits for key constituencies of retail banks. Among them were homeowners, through the scaling back of the mortgage interest deduction, and small-business owners, some of whom would face higher tax rates on pass-through ownership structures than they had hoped for.
A big question facing bankers as Congress moves forward on the legislation is how much those trade-offs could dampen growth prospects.
“In some respects, it makes the tax code more simple but also more complicated,” said Gus Faucher, chief economist at PNC Financial Services Group. “It seems to be more of a tax cut than tax reform, and because of that it could add a near-term boost. But since it’s not making the tax code simpler, it will do little for long-term economic growth.”
Still, big-bank executives praised the bill unveiled by House leaders as an important first step.
"If we are serious about growing the economy, creating jobs, and increasing wages for all Americans, the country needs a modernized tax code,” said Jamie Dimon, the chairman and CEO of JPMorgan Chase.
“While the tax bill released today deserves close analysis, it is significant progress toward achieving these goals,” Dimon said in a news release by the Business Roundtable, an influential corporate lobbying group of which he is chairman.
Kelly King, chairman and CEO of BB&T in Winston-Salem, N.C., struck a similar tone.
“I have always been in favor of meaningful tax reform and support any initiative that moves us in a direction of stronger economic growth,” King said in an email.
As the industry pores over the legislative details, this much is clear: The Republican tax would most likely be a boon to banks’ bottom lines.
A reduction in the corporate tax rate to 20% would boost per-share earnings for big banks by an average of about 10% in 2018, according to an Oct. 26 research note from RBC Capital Markets.
Some banks, in particular, could get an even bigger lift, thanks to their particular business mixes. M&T Bank, for instance, could see an increase of more than 20% next year, according to RBC. Citizens Financial Group could see a roughly 15% increase.
The move to slash corporate rates could also provide a much-needed incentive for businesses to borrow more. Commercial lending has lagged across the industry over the past year. One of the key reasons why is that companies have been waiting for more details about potential tax changes following the Republican sweep in Washington.
“I think this is just what the economy needs to buy a few more years of growth,” said Robert Mahoney, the president and CEO of the $2.5 billion-asset Belmont Savings Bank in Massachusetts. “I think it’s very positive.”
In addition to the reduction in corporate rates, the tax overhaul would make a number of other changes that banks will be watching closely.
It collapses the tax brackets for low- and middle-income earnings, but it leaves in place the top marginal income tax rate of 39.6% for individuals who earn above $500,000 and couples who earn above $1 million. How much that might boost consumer spending, or bank's retail business, is unclear.
It also scales back the popular mortgage interest deduction, capping it at $500,000 for all first-time home sales, well below the current cap of $1 million for couples who file jointly. Industry associations — including the National Association of Home Builders and the National Association of Realtors — criticized the change.
In a blow to small-business customers and family-owned banks, the bill would curb benefits for pass-through businesses, or S-corporations. Passive owners in such businesses would receive the 25% rate that Republicans had reportedly promised, but some of those with a more active role could face an effective rate in the 30s, according to media reports.
That provision attracted blowback from an influential small-business lobbying group, the National Federation of Independent Business, which said it opposed the bill in its current form.
“This bill leaves too many small busineses behind,” the NFIB said in a press release. “We are concerned that the pass-through provision does not help most small businesses.”
The Independent Community Bankers of America said in a press release that it was "strongly encouraged" by the tax bill but will remain focused on a number of provisions in the weeks ahead, including the tax changes for pass-through businesses.
"ICBA and the nation’s community bankers remain focused on ... strengthening the ‘pass-through’ model for Subchapter S institutions, preserving the business interest deduction, and promoting tax parity among all financial services providers, including tax-subsidized credit unions and Farm Credit System entities," the group said.
Republican leaders kept in place the tax exemption for credit unions. The Credit Union National Association cheered the move and praised House tax writers.
“We thank the House for taking this first step in needed tax reform,” CUNA said in a press release, noting that, like other industry groups, it is “committed to building and supporting a strong middle class in this country.”
Robert Fraser, president and CEO of the $874 million-asset MountainOne Bank in North Adams, Mass., raised concerns that some elements of the tax plan could hurt local real estate market. Take the cap on the mortgage interest deduction, for starters.
“It’s not an apples-to-apples comparison to look at a home in middle America versus Boston — there are real differences there,” he said. “We’ve enjoyed a very robust real estate market in Massachusetts, especially eastern Massachusetts, and that may have a little bit of an effect on us. It’s short term, but it could have an effect on us.”
And though MountainOne is a mutual bank, and not an S-corporation, Fraser said that some of his bank’s business customers could be affected by the pass-through tax rate provisions.
“It kind of ignores the amount of money that needs to be left in the company for retention of earnings to support the growth of an entity that potentially is being taxed at a higher rate,” he said. “That’s going to create a real field day, I think, for accountants to dig into that and allocate costs across labor and wages.”
Yet Fraser was optimistic that a lower corporate tax rate could spur growth and that the bill could represent some semblance of a compromise.
“I’m just pleased that it’s finally out there and we can begin discussions on it and ultimately move a tax cut forward,” he said. “At the end of the day, if everybody’s unhappy with it or has some issue with it, it’s probably a decent bill, as opposed to one side being incredibly happy and the other side being incredibly unhappy.”