WASHINGTON -- The Federal Reserve dropped its controversial bid for a government contract to process corporate tax payments electronically.

Formal responses to the Treasury's "invitation for expressions of interest" are due today. While the central bank had not submitted a written proposal, it had indicated that it planned to do so.

The central bank's gambit had generated heated protests among private-sector firms that wanted the contract. Several complained that it was inappropriate for the Fed to bid, because government agencies enjoy competitive advantages over private companies.

Conflict of Interest Seen

Others argued that the Fed's bid represented a conflict of interest because the agency worked with the Department of Treasury to define the project's requirements.

"There was always a concern that the Fed, if it won the contract, would develop its own standards, its own rules, and its own software," said Eliot McEntee, president of the National Automated Clearing House Association.

The danger, Mr. McEntee said, is that the Fed's system might be incomsistent with the standards used by the 40 states that collect taxes electronically.

"We have said all along that there is a need to have standards consistent with the states," Mr. McEntee said, arguing that two separate sets of rules would present difficulties for banks that collect payments on behalf of corporate clients.

The states use the automated clearinghouse, which processes repetitive payments such as direct deposit of payroll, to handle tax payments. Mr. McEntee's organization sets the standards for the ACH network.

As many as 20 financial institutions, some working in partnership, have made presentations to Treasury, Mr. McEntee said.

Backing from Lawmakers

The private-sector organizations, including the National Automated Clearing House Association, were backed by a handful of key lawmakers, including House Banking Committee Chairman Henry B. Gonzalez, D-Tex., and Sen. Connie Mack, R-Fla.

In a brief statement issued Tuesday, the Fed said it "has determined that the responsibilities for the development and operation of the new Electronic Federal Tax Payment System do not represent the best role for the central bank."

As a result, the Fed added, it would not submit a formal bid.

The Fed said the reserve banks would continue to work with the Treasury to support the implementation of the new system.

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