Trying to pull off at least one victory in Congress this year, the banking industry is intensifying pressure on the Clinton Administration for tax breaks.
Bankers at the beginning of the year saw little chance of getting their wish list of tax cuts enacted, but Republican legislation passed by the House and Senate in early August included some limited relief and rekindled the hopes of industry officials. With negotiations over the financial reform bill threatening to spill into next year and prospects for bankruptcy reform and regulatory relief legislation uncertain, some targeted tax breaks may represent banks and thrifts' best chance for a legislative win in 1999.
President Clinton has promised to veto the 10-year, nearly $800 billion Republican tax package because, he says, it diverts money that should be spent on shoring up Medicare and Social Security. But the American Bankers Association and others have urged him to support provisions that would help small banks.
"Nonbank competitors, such as farm credit lending institutions and credit unions, continue to enjoy significant tax advantages that make it difficult for banks to compete in their local communities," ABA chief lobbyist Edward L. Yingling wrote to the President on Aug. 16. "These important provisions would help level the playing field."
Specifically, the ABA letter focused on two measures in the tax bill that would make it easier for banks to convert to tax-favored S corporations. Bank investment securities would be excluded from passive income limits on S corporations, and the bill would clarify that qualifying bank director stock does not represent a second class of stock.
Other provisions that would benefit the industry include a phasing out of estate and gift taxes, rollbacks of capital gains tax rates, as well as increases in caps on contributions to 401(k) plans, individual retirement accounts, and education IRAs.
Industry officials say the S corporation reforms have the best chance of surviving in any compromise between Republicans and the President. Paul G. Merski, chief economist and director of federal tax policy for the Independent Community Bankers of America, predicted that some smaller but still "significant" reductions in estate taxes and expansion of IRA and other savings accounts will be included.
Meanwhile, banking trade groups are turning up the heat on the Treasury Department to finish three overdue studies that could bolster the industry's case.
In the 1998 credit union law, Congress asked Treasury to recommend legislative and administrative ways to cut taxes for insured depository institutions with less than $1 billion of assets and banks with assets between $1 billion and $10 billion.
"The key factor here is that they release their report in a timely fashion so that it will have an impact on the current tax debate," Mr. Merski said. Congressional consideration could resume as early as mid-September.
The Credit Union Membership Access Act gave Treasury until Aug. 7 to complete three studies. In addition to the small bank tax breaks, Treasury was supposed to study the regulatory, tax, and other differences between credit unions and other federally insured institutions -- including the potential effect of applying federal tax laws to credit unions. The third study is to focus on the competitive impact of credit union business lending.
A Treasury spokesman said it is uncertain when any of the reports will be completed. He said Treasury missed the deadline because all three reports were due on the same date and because the agency has undergone many staff changes recently.
Weighing in last week, America's Community Bankers urged Treasury officials to recommend taxing large credit unions.
