The banking industry would benefit under the huge tax bill expected to be enacted this summer, but some provisions would increase costs for individual banks-particularly credit card issuers.
"There are some very good things for banks being considered, but for some individual banks there are terrible things," said Donna Fisher, director of tax and accounting at the American Bankers Association.
The package would force banks to write off operating losses faster and impose new taxes on credit card issuers. But banks would benefit from reductions in estate and capital gains taxes and sweeping changes to individual retirement accounts.
The House and Senate approved separate tax bills two weeks ago and this week began negotiating their differences. The White House offered its compromise tax plan on Monday. Congress is expected to send a bill to President Clinton before its August recess.
Under current law, a business that loses money in a given year may use the loss to offset taxes paid in the previous three years. Banks are allowed to include any unused portion of the offset in regulatory capital as a "deferred tax asset."
The White House has proposed cutting to one year the period for which a company may receive a refund on previously paid taxes.
The Clinton administration estimates the total cost of its plan would be $3.5 billion over five years; the banking industry's cost has not been broken out. But the Federal Deposit Insurance Corp. estimates that 5,800 institutions would lose a portion of their capital if the plan is finally adopted. Only 150 banks, however, would suffer a drop big enough to reduce their capital ratings.
A compromise approved by the House and Senate would allow an operating loss to offset taxes paid in the two preceding years. Administration officials have balked at the compromise, however. Bank industry lobbyists said it's too early to predict which side will prevail.
The change would have a more damaging impact in the future. "When times aren't so good this will accelerate capital problems," Henry C. Ruempler, national director of banking tax services for Ernst & Young.
The tax bill also would levy $150 million a year in new taxes on credit card issuers that offer frequent-flier miles to their customers.
Both the House and Senate have approved legislation that would force credit card issuers to pay excise taxes when they buy mileage points from airlines.
"This is a uniquely unfair burden," said Kelly Presta, a spokesman for Visa USA. "It's unclear whether these programs, which have been amazingly popular, will continue."
The House plan would make credit card issuers pay a 7.5% tax on mileage bought from airlines. The Senate's plan would impose a 10% tax.
Ms. Fisher said the tax would be unfair because many mileage points are not redeemed. "Issuing frequent-flier miles is not same as issuing a ticket."
She said the ABA is still lobbying to delay collection of the tax until frequent-flier miles are redeemed for a ticket. The ABA has proposed alternatives including making passengers pay the tax when they get frequent-flier tickets.
Several other provisions would cut industry expenses, including:
- The Senate bill would reduce the maximum corporate capital gains tax rate to 30% from 35%. Bank stockholders and individuals who own small banks would benefit from a eight-point cut in the maximum individual rate to 20%, which is included in both the Senate and House bills.
"This is especially big for guys who are going to sell their institutions in the next few years," said John Ziegelbauer, tax partner at the Washington office of Grant Thornton.
The administration plan would allow these individuals to exclude 30% of their gains from tax. The remaining 70% would be taxed at the current 28% rate.
All three plans would allow a homeowner to exclude from taxes up to $250,000, or $500,000 for a couple, of a gain on the sale of a principle residence.
- Both the Senate and administration support breaks on estate taxes for family members who inherit a business or farm. The Senate plan would give a $1 million exemption, while the White House has endorsed a $900,000 exemption.
"It's extremely important that this bill help families pass their businesses to the next generation," said Herb Spira, tax counsel for the Independent Bankers Association of America.
The House has made no special provision for family-owned business or farms, but like the Senate, voted to increase the standard inheritance exemption from $600,000 to $1 million.
- Both the Senate and the House would create a new type of individual retirement account by reversing traditional account rules and allowing people to withdraw earnings tax-free. Contributions, however, would be taxed.
The new "back-ended IRAs" would have no income eligibility limit. Penalty-free withdrawals would be permitted five years after an account is opened if the investor is 59 and a half years old or uses the money for a first-time home purchase or education expenses.
The Senate also would allow penalty-free withdrawals by unemployed people. That plan would double the income limits for tax-deductible contributions to traditional IRAs. Also, homemakers would be allowed to contribute up to $2,000 tax-free, even if a spouse participates in an employer-sponsored retirement plan.
Industry lobbyists seem to have fought off an administration plan to tax all bad-debt reserves immediately after a thrift becomes a S Corporation, which allows companies to avoid corporate taxes by passing earnings directly to shareholders.
For the fifth straight year lawmakers also rejected an administration plan to impose exam fees on state banks. Congress also refused to go along with an administration plan to eliminate a tax break for trust-preferred securities, a popular type of funding for Tier 1 capital.
