Congressional tax authorities have made a decision, purportedly in the interest of competition, that in fact would benefit no more than a dozen of the nation's very largest banks.

The measure, allowing for the tax-free conversion of common trust funds to mutual funds, would give only those few banking giants a complete range of investment options to meet the diverse needs of their customers. Americans who bank with the disadvantaged class of smaller institutions would be denied equal investment opportunities.

Regrettably, there is no easy route of appeal of measures like this that have passed the Joint Tax Committee of Congress.

Critical Mass

As the tax bill stands after a House Ways and Means Committee vote on Nov. 3, small banks would find it impossible to enter the mutual fund market with the requisite family of funds that clients look for.

Inasmuch as it takes about $100 million, by most estimates, to create a single breakeven mutual fund, small banks would not have the "critical mass" to compete for the fund business of trust clients.

Earlier discussions on the need to amend the bill's reference to common trust funds showed indications of support from House and Senate leaders. They agreed that an amendment would level the playing field for all trust departments, regardless of bank size.

Tax Revenue Loss Projected

While Congress has supported the necessary change in the last couple of years, presidential vetoes aimed at general tax policy killed the attempts.

The objection to an amendment now appears to rest mostly on the contention of Joint Tax Committee staffers that to include small banks would constitute a "material," as opposed to a mere "technical," change in existing law. The staff also projected a loss in tax revenue if the conversions were allowed.

Many in Congress feel a strong argument can be made that the bill would result in a revenue gain. But committee decision-makers remained unmoved.

Under present law, there is often an understandable reluctance to trade or transfer common trust funds because of tax implications. Such is not the case with mutual funds. A reluctance to trade often results in a loss of earning potential, which definitely would translate into lower tax revenues.

Twenty-six state community banking associations, representing more than 6,000 banks, have already let Congress know their feelings on this attempt to tilt the competitive scales in favor of large banks. If the 1993 legislation is not changed to guarantee fairness, the deed must be done in 1994.

Mr. McCrady heads McCrady/Midwest, a business and trade consulting firm. From 1976 to 1988 he was executive vice president of the Independent Bankers of Minnesota.

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