Tax Relief for Small Banks Becoming an Uphill Battle

Though a flurry of tax relief proposals for banks is emerging, lobbyists say that waning interest among lawmakers will make a hard sell even tougher this year.

"The momentum that we had at the beginning of the year certainly isn't there now," said Ronald K. Ence, legislative affairs director for the Independent Community Bankers of America. "Whether we can get that back I don't know."

Industry lobbyists are pushing hard for lower tax rates for community banks, simpler rules for financial institutions converting to so-called S corporations, and reductions of estate taxes.

Yet the high price tag of some of these proposals remains a formidable obstacle. And observers say that partisan politics and disputes over the size of the budget surplus have curbed enthusiasm for broad tax relief. Lawmakers, instead, are expected to adopt about $15 billion in limited cuts this year.

Rep. Pete Sessions-who introduced legislation March 25 that would reduce taxes on small banks that meet community service tests-predicted Congress would start smaller this year and widen tax relief as the federal surplus expands in the future.

The Texas Republican said lawmakers this year probably would raise the exemption on estate taxes to $1 million and next year would curb such taxes further and reform the S corporation laws. His small-bank proposal may not pass this year, he said, but would gain momentum next year because it would help small banks cope with agricultural and world economic crises.

The industry, aided by some key lawmakers, will make a full-court press nonetheless.

About 60 small bankers from Texas-who have taken the lead on this issue because their high-powered congressional delegation includes House Ways and Means Chairman Bill Archer-have planned a trip here next week to lobby House and Senate lawmakers to back tax relief for small banks.

"We know that this is a very difficult task," said Christopher L. Williston, president of the Independent Bankers Association of Texas, which is backing the Sessions plan to cut taxes for small banks that have a strong record of investing in their communities. "However, we really believe that a good, hard-hitting, grassroots effort nationwide can make this bill a reality."

Under the Sessions proposal, banks with less than $100 million of assets would qualify, provided they have "satisfactory" or better Community Reinvestment Act ratings, make at least 60% of their loans locally, and satisfy local ownership requirements. These banks would pay no taxes on their first $250,000 of earnings, be taxed at 15% on the next $750,000, and pay normal rates on earnings above $1 million.

"My bill helps community bankers compete in a market that is under stress," Rep. Sessions said.

Senate Banking Committee member Michael B. Enzi, R-Wyo., is drafting a similar bill.

Overcoming the bill's cost to the federal government-which Mr. Williston estimates to be between $500 million and $1 billion annually-will be a major task for industry lobbyists. They plan to play on lawmakers' desire to compensate small banks for voting against them on credit union and financial reform legislation.

Rep. Tom Campbell, who sponsored the same bill last year, declined to sign on this year because of a disagreement with Rep. Sessions over how to pay for it. A California Republican, Rep. Campbell plans to introduce an alternative by the end of April that would pay for the bill with a corporate-tax hike. Rep. Sessions prefers that lawmakers find spending cuts to pay for the plan.

Lobbyists are most optimistic about S corporation reform and estate tax relief.

"People are not throwing us out of their offices when we go talk to them about S corporation" revisions, said Donna J. Fisher, director of tax and accounting for the American Bankers Association. "That's a good sign."

Rep. Marge Roukema, R-N.J., has offered one of several bills that would double the number of S corporation shareholders, to 150. (S corporations pay no corporate taxes; profits pass directly to shareholders, who are individually taxed.) Her plan would provide special benefits for banks, including permitting investors to hold S corporation stock in individual retirement accounts.

Sen. Wayne Allard, R-Colo., plans to introduce a broader bill on April 13. Small-bank lobbyists particularly favor his proposal to let a company convert to an S corporation if 90% of shareholders vote in favor. Currently, a unanimous vote is required.

On estate taxes, bankers have "an excellent chance" of at least getting Congress to speed up planned reductions, Mr. Ence said. The exemption from these so-called "death taxes" was raised to $650,000 in 1997 and is set to climb to $1 million in 2006. Family-owned banks would like Congress to raise the exemption to $1 million right away, as Rep. Sessions favors, and abolish estate taxes in the long term.

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