The good, bad and ugly for banks in GOP tax plan
November 6, 2017 8:16 PM
Andrew Harrer/Bloomberg
WASHINGTON — House GOP leaders have outlined an ambitious overhaul of tax policy that for the most part has been greeted warmly by the banking industry.
The plan would cut the corporate tax rate, simplify tax brackets and take other steps designed to both cut taxes and make the process simpler.
Though Republicans have begun a hard push to pass the plan by yearend, that remains a significant challenge. The last time the tax code was simplified was in the 1980s and it took four years to work its way through Congress. With a bill just introduced in late October, the administration is hoping to accomplish a major goal in just two months.
Though the bill could theoretically pass with just Republican support, many business groups have big problems with the proposal and have vowed to change it. Fiscal conservatives, meanwhile, are worried that the plan would add to the deficit without corresponding budget cuts.
For the most part, banks are pleased with the plan, and would likely benefit from it. Yet some provisions have triggered concern and uncertainty even among financial institutions. Many bankers have indicated they'd be willing to accept a similar deal anyway, arguing that the benefits outweigh the drawbacks. But there are some executives who fear certain provisions could end up hurting them further down the road, or that bankers are missing out on what is likely to be their only major chance to reshape the tax system by not lobbying for other measures.
Here is a rundown of specific aspects of the plan and its implications that are of particular interest to the financial industry:
The plan would cut the corporate tax rate, simplify tax brackets and take other steps designed to both cut taxes and make the process simpler.
Though Republicans have begun a hard push to pass the plan by yearend, that remains a significant challenge. The last time the tax code was simplified was in the 1980s and it took four years to work its way through Congress. With a bill just introduced in late October, the administration is hoping to accomplish a major goal in just two months.
Though the bill could theoretically pass with just Republican support, many business groups have big problems with the proposal and have vowed to change it. Fiscal conservatives, meanwhile, are worried that the plan would add to the deficit without corresponding budget cuts.
For the most part, banks are pleased with the plan, and would likely benefit from it. Yet some provisions have triggered concern and uncertainty even among financial institutions. Many bankers have indicated they'd be willing to accept a similar deal anyway, arguing that the benefits outweigh the drawbacks. But there are some executives who fear certain provisions could end up hurting them further down the road, or that bankers are missing out on what is likely to be their only major chance to reshape the tax system by not lobbying for other measures.
Here is a rundown of specific aspects of the plan and its implications that are of particular interest to the financial industry:
Corporate tax rate
By far the most significant change for banks — and all businesses in general — is a proposed reduction in tax rates to 20% from 35%.
Such a measure would be a boon to banks' bottom line —boosting per-share earnings for big banks by an average of roughly 10% next year, according to one projection.
Some banks, in particular, could get an even bigger lift, thanks to their particular business mixes. M&T Bank, for instance, could see an increase of more than 20% next year, according to RBC Capital Markets. Citizens Financial Group could see a roughly 15% increase, according to that analysis.
There is also another benefit. The lower corporate tax rate could provide an incentive for businesses other than banks to borrow more.
“I think this is just what the economy needs to buy a few more years of growth,” said Robert Mahoney, the president and CEO of the $2.5 billion-asset Belmont Savings Bank in Massachusetts. “I think it’s very positive.”
Related content:Big unknown for banks: Will tax plan boost growth enough?
Such a measure would be a boon to banks' bottom line —
Some banks, in particular, could get an even bigger lift, thanks to their particular business mixes. M&T Bank, for instance, could see an increase of more than 20% next year, according to RBC Capital Markets. Citizens Financial Group could see a roughly 15% increase, according to that analysis.
There is also another benefit. The lower corporate tax rate could provide an incentive for businesses other than banks to borrow more.
“I think this is just what the economy needs to buy a few more years of growth,” said Robert Mahoney, the president and CEO of the $2.5 billion-asset Belmont Savings Bank in Massachusetts. “I think it’s very positive.”
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Deduction on interest-related expenses
Banks can also take comfort in steps laid out in the proposal that ease any negative impact of other proposals.
For example, the proposed legislation would limit how much companies can deduct for interest-related costs. But the industry appears to have dodged a direct hit from that provision since the plan would only limit deductions for interest-related expenses for companies that make more interest payments than they receive.
For example, the proposed legislation would limit how much companies can deduct for interest-related costs. But the industry appears to have dodged a direct hit from that provision since the plan would only limit deductions for interest-related expenses for companies that make more interest payments than they receive.
Daniel Acker/Bloomberg
Mortgage interest deduction
But there was still plenty in the plan to give bankers heartburn.
One provision receiving attention that could have negative repercussions for lenders is a $500,000 cap on loan amounts qualifying for themortgage interest deduction , cutting the loan limit in half. In a double-whammy, the proposed doubling of the standard deduction likely lessens the appeal of itemized deductions, further reducing the appeal of taking out a mortgage.
This is a significant issue in the debate over tax reform. While some banks may be inclined to accept it because of other benefits in the package, the housing industry is not. Both the National Association of Realtors and the National Association of Home Builders have voiced grave doubts about this provision, indicating they intend to fight it. That battle could be tough, as both groups have significant sway over members from both political parties.
One provision receiving attention that could have negative repercussions for lenders is a $500,000 cap on loan amounts qualifying for the
This is a significant issue in the debate over tax reform. While some banks may be inclined to accept it because of other benefits in the package, the housing industry is not. Both the National Association of Realtors and the National Association of Home Builders have voiced grave doubts about this provision, indicating they intend to fight it. That battle could be tough, as both groups have significant sway over members from both political parties.
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Effects on economic growth
Bank CEOs largely praised the overall plan, but some analysts questioned whether the plan complements tax cuts with enough catalysts to motivate long-term economic growth . And some companies were seen as being left behind.
In a blow to small-business customers and family-owned banks, the bill would curb benefits for pass-through businesses, or S-corporations. Passive owners in such businesses would receive the 25% rate that Republicans had reportedly promised, but some of those with a more active role could face an effective rate over 30%.
In a blow to small-business customers and family-owned banks, the bill would curb benefits for pass-through businesses, or S-corporations. Passive owners in such businesses would receive the 25% rate that Republicans had reportedly promised, but some of those with a more active role could face an effective rate over 30%.
Deduction for FDIC premiums
Banking industry groups have reacted negatively to a provision in the plan to restrict deductions by banks for Federal Deposit Insurance Corp. premiums, including eliminating the deduction for banks over $50 billion in assets.
Banks between $10 billion and $50 billion in assets would see a gradual decrease in what they could deduct, while the plan would not affect the deduction for banks with less than $10 billion.
"The just-introduced tax reform legislation can be fairly characterized as the ‘screw the big banks, again’ provision,” said Bert Ely, a bank consultant in Alexandria, Va.
The GOP plan estimated that restricting the FDIC-related deduction would result in $13.7 billion in revenue for federal coffers from 2018 through 2027.
Related content:Tax plan could mean bigger hit from FDIC premiums
Banks between $10 billion and $50 billion in assets would see a gradual decrease in what they could deduct, while the plan would not affect the deduction for banks with less than $10 billion.
"The just-introduced tax reform legislation can be fairly characterized as the ‘screw the big banks, again’ provision,” said Bert Ely, a bank consultant in Alexandria, Va.
The GOP plan estimated that restricting the FDIC-related deduction would result in $13.7 billion in revenue for federal coffers from 2018 through 2027.
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Credit union tax exemption
Banks are also criticizing something that did not make the tax plan that they have long sought — removal of the tax exemption for credit unions.
Despite bankers’ hope that a tax overhaul would spur a reexamination of credit unions’ tax-exempt status, that status appeared untouched in the proposal.
While some bank trade groups have accepted that without public comment, others are fighting back.
"We are disappointed that H.R. 1 does not eliminate or curtail the generous taxpayer subsidies given to credit unions and Farm Credit System lenders," wrote Cam Fine, president of the Independent Community Bankers of America,in a lette r to GOP lawmakers. "We will note that many of today’s credit unions and FCS lenders are multi-billion-dollar entities that compete against much smaller taxpaying community banks. They are the equivalent of banks and should be taxed equivalently. We hope you will revisit this issue as the process moves forward."
Despite bankers’ hope that a tax overhaul would spur a reexamination of credit unions’ tax-exempt status, that status appeared untouched in the proposal.
While some bank trade groups have accepted that without public comment, others are fighting back.
"We are disappointed that H.R. 1 does not eliminate or curtail the generous taxpayer subsidies given to credit unions and Farm Credit System lenders," wrote Cam Fine, president of the Independent Community Bankers of America,
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New markets tax credit
The House bill would also eliminate the new markets tax credit, which is designed to incentivize investment in low- and moderate-income communities.
Between 2003 and 2015, $42 billion in financing from the tax credit leveraged more than $80 billion in total project investments and created nearly 750,000 jobs, according to the ICBA.
The community bank trade group has urged the tax credit to be restored.
"The NMTC is the most flexible, cost-efficient way to ensure these struggling communities have access to private sector capital," Fine wrote in the letter to House GOP leaders.
Between 2003 and 2015, $42 billion in financing from the tax credit leveraged more than $80 billion in total project investments and created nearly 750,000 jobs, according to the ICBA.
The community bank trade group has urged the tax credit to be restored.
"The NMTC is the most flexible, cost-efficient way to ensure these struggling communities have access to private sector capital," Fine wrote in the letter to House GOP leaders.
