WASHINGTON — A controversial plan to use bank account data to help fund Biden administration initiatives and the job security of Federal Reserve Chair Jerome Powell took priority as senators grilled Powell and Treasury Secretary Janet Yellen.
Members of the Senate Banking Committee questioned the two officials Tuesday as major economic policies hung in the balance. Congress is preparing to vote on a landmark infrastructure package as well as the administration's $3.5 trillion social policy plan, while lawmakers are also heading for a showdown over the federal debt limit.
The hearing was dominated in part by GOP criticism of a proposal requiring banks to report on customer account flows as means to collect more tax revenue to help pay for the $3.5 trillion plan. Financial services firms have staunchly opposed the idea, noting the compliance burden potential privacy risk facing account holders.
“There are obvious privacy concerns for all Americans here, and this represents a dramatic new regulatory burden for community banks and credit unions in Wyoming and elsewhere,” said Sen. Cynthia Lummis, R-Wyo.
But the hearing highlighted the competing priorities of the two parties, with Democrats arguing that the government should focus on helping Americans at the lower end of the economy.
“Americans do not have to settle for another Wall Street-first recovery,” Senate Banking Committee Chair Sherrod Brown, D-Ohio, said in opening remarks. “We have the tools to do things differently — the only question is whether we’re going to use them, for as long as it takes.”
The hearing — originally planned as an update on implementation of the Coronavirus Aid, Relief, and Economic Security Act — came as both Yellen and Powell are facing tests of their leadership.
Powell, for one, is waiting for a decision from President Biden on whether he will be afforded a second term as Fed chair. Yellen has been tasked with shepherding the administration’s proposed budget through a Congress with a razor-thin Democratic majority.
Here are key takeaways from the hearing:
Republicans are defending banks in fight over IRS reporting plan
Two Republican senators, including Lummis, pressed Yellen over the Biden administration proposal — first unveiled last spring — to use bank account data to combat tax evasion.
The measure is a key element of how the administration wants to pay for the $3.5 trillion
“Our banks will have to hire contractors to rat on their customers, implement new computer software [and] deploy resources better used elsewhere in order to collect data for the government,” said Lummis.
A Senate draft outline of revenue sources would require banks and credit unions to report on accounts with more than $600 of annual inflows or outflows to the Internal Revenue Service. However, lawmakers have shown willingness to raise that threshold, which banks say is too low. A House proposal would raise the cutoff to $10,000, and House lawmakers are also considering exempting certain payroll transactions, Bloomberg News reported.
But the industry says it plans to fight the plan regardless of the size of the reporting threshold.
Lummis theorized that the proposal might cause banks and credit unions to lose customers.
“Wyoming's people literally will find alternatives to traditional banks just to thwart IRS access to their personal information, not because they're trying to hide anything, but because they're not willing to share everything,” she said.
Sen. Mike Crapo, R-Idaho, and Rep. Kevin Brady, R-Texas, have floated a countermeasure requiring the IRS to rely on existing data and tools to determine which taxpayers to audit.
But Yellen defended the administration's plan, arguing that Lummis misunderstood the proposal.
“Banks already report directly to the IRS the interest that they pay on accounts when it exceeds $10, and this is not a proposal to provide detailed transaction-level data by banks to the IRS,” she said.
“It is a proposal to add two additional pieces of easily ascertained information onto the 1099-INT form that banks already file, namely the aggregate inflows into the account during the year and the aggregate outflows,” she added.
Yellen also stressed that the U.S. is currently missing out on tax revenue because of the difference between what wealthier Americans owe and what they actually pay.
“I think it's important to recognize that we have a tax gap that's estimated at $7 trillion over the next decade,” she said. “That is taxes that are due and are not being paid to the government that deprive us of resources we need to do critical investments to make America more productive and competitive.”
Sen. Bill Hagerty, R-Tenn., said a “greater concern” than the potential compliance burden is whether the IRS would be able to keep bank account information confidential. He cited a recent news report following an investigation of certain tax information tied to wealthy Americans.
“There's a huge concern and a deserved concern on the part of the American public that this information” will not be protected, Hagerty said.
Yellen replied that “protecting taxpayer information is the highest priority of the Internal Revenue Service.”
“We're talking about small amounts of information, not every transaction that's less than $600,” she said.
Powell’s regulatory record could be a dealbreaker for progressives
Sen. Elizabeth Warren, D-Mass., declared that she would not support Powell, if he is renominated, in light of his regulatory record.
In particular, Warren took issue with the Fed’s revisions to its stress-testing regime under Powell. Under his leadership, the Fed opted to limit the use of the “qualitative objection” in stress tests, a move that made it harder for banks to fail the assessment because of operational or risk management issues.
The central bank also implemented a “stress capital buffer” meant to simplify the agency’s capital regime but that progressives worried would lower overall capital requirements for some banks.
“We now know from the Fed’s own research that when the economy hit choppy waters last year, those banks needed stimulus from the taxpayers, and without this taxpayer help, they would have faced up to $300 billion in losses, meaning that they were in a sharply weakened position to withstand stress,” Warren said, citing research from the Federal Reserve Bank of Minneapolis.
Powell replied that banks would have been able to absorb those losses “without difficulty” and that capital levels at the largest banks is at “multidecade highs.” He also said that “anything we did” on stress tests “is fair game to look at again.”
Yet Warren remained unconvinced, arguing that Powell’s record makes him “a dangerous man to head up the Fed.”
“Renominating you means gambling that for the next five years, a Republican majority of the Federal Reserve with a Republican chair who has regularly voted to deregulate Wall Street won't drive this economy over a financial cliff again,” Warren said to Powell. “And with so many qualified candidates for this job, I just don't think that's a risk worth taking.”
She is the only senator to come out against Powell's reappointment, but her position could be an indication of where other progressives might stand.
Brown also expressed concern that the Fed was considering backing off of its bond purchases too early. Last week during a press conference, Powell had said that the Fed’s test for maximum employment is “all but met,” and that the central bank could soon begin tapering its purchases.
“Tell that to the working mother who was forced to quit her job because she couldn’t afford child care, or even find childcare,” Brown said. “Tell that to the server who worked for decades at a major hotel chain, only to lose her job during the pandemic, and then be offered the same job by a contractor paying half the wages with no benefits.”
“Now is not the time to declare victory,” he continued.
Yellen warns of damage to financial markets if debt limit is not raised
Much of Tuesday’s hearing was devoted to the impasse Congress is currently facing over raising the debt ceiling on what the federal government borrows to pay its bills.
Yellen told lawmakers Tuesday that the Treasury Department will run out of options to finance the government by Oct. 18 if Congress does not move to either suspend or raise the debt ceiling. That would cause the U.S. to default on its debt, which would be “disastrous for the American economy,” Yellen said.
Suspending the debt limit historically has been done on a bipartisan basis, but Republicans are arguing that because Democrats have the majority in Congress, they should be responsible for passing a bill to raise the ceiling. Republicans want Democrats to include a suspension of the debt limit in their $3.5 trillion reconciliation bill, which can pass the Senate with a simple majority. Democrats, meanwhile, have argued that Republicans are shirking their duty by refusing to join with them to raise the limit.
“The partisan game is pretty transparent. We need to pay our bills on time, and we’ve always done it together,” said Brown. “We can’t play politics with the full faith and credit of the United States.”
Yellen also warned that even waiting too long to raise the debt limit could have serious consequences.
“As we saw in 2011, even coming very close to the deadline without raising the debt ceiling can undermine the confidence of financial markets in the credit worthiness of the United States,” which could lead to “soaring interest rates, which ends up raising payments on mortgages, auto loans and credit cards,” Yellen said.
In addition to raising the cost of borrowing for many consumers, failing to raise the debt limit could also mean that the value of Treasury securities might plummet, which would be particularly disruptive for banks, since many own a large volume of Treasurys and are encouraged to do so under the Fed’s capital requirements.
Some have even speculated that financial institutions could tighten lending standards due to uncertainty about the path of the economy if the battle over the debt limit were to be drawn out.
But several Republican senators, including Sen. John Kennedy, R-La., questioned why Democrats wouldn’t just hike the debt limit themselves, if it was so important to the U.S. economy.
“Why do you insist on doing it the hard way?” he asked Yellen. “There's a real simple solution. Why don't you all just amend the budget resolution? It just takes 50 votes by my Democratic friends and the vice president.”
Yellen noted that the U.S. needs to raise the debt limit in part to pay for previously enacted legislation, such as the bipartisan CARES Act and the 2017 tax reform legislation that was enacted under former President Donald Trump.
“I equally believe that deficits have been run under both Democratic and Republican administrations,” she said. “It's important to recognize that, and that means that paying the bills for those deficits is a shared responsibility.”
