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From Banking and Finance Law Daily, February 26, 2014

Tax reform would impose SIFI excise tax; limit deductibility of DIF assessments

By John M. Pachkowski, J.D.

House Ways and Means Committee Chairman Dave Camp (R-Mich) has released draft legislation that would “fix America’s broken tax code by lowering tax rates while making the code simpler and fairer for families and job creators.”

Section 7004 of the “Tax Reform Act of 2014” would impose a quarterly excise tax of 0.035 percent on systemically important financial institutions (SIFIs). The excise tax would be applied to a SIFI’s total consolidated assets in excess of $500 billion. The Joint Committee on Taxation (JCT) estimates that the excise tax would increase revenues by $86.4 billion over the time period of 2014–2023.

For purposes of the legislation, a SIFI would be any bank holding company with at least $50 billion in total consolidated assets, or any non-bank financial institution designated for SIFI treatment by the Financial Stability Oversight Council and subject to oversight by the Federal Reserve Board.

The excise tax would apply to calendar quarters beginning after 2014 and be due on the first day of the third month beginning after the close of each calendar quarter. The $500 billion threshold would be indexed for increases in the gross domestic product (GDP) after calendar year 2015. According to aJCT technical explanation, the indexing for 2016 would be calculated by multiplying by the ratio of the latest estimate of GDP for 2014 over the latest estimate of GDP for 2013.

Too big to fail. In a summary to the legislation, it was noted that “Many commentators and academic studies have suggested that policies such as Dodd-Frank’s SIFI designation actually contribute to the financial markets’ view that certain financial institutions are ‘too big to fail’ and may, therefore, be deserving of additional taxpayer bailouts in the future.” The summary continued that section 7004 “would address the significant implicit subsidy bestowed on big Wall Street banks and other financial institutions under Dodd-Frank” and added “[w]hile tax reform cannot undo Dodd-Frank, it can and should help recapture a portion of that implicit subsidy.” The summary concluded that the concept of the excise tax has “strong bipartisan, bicameral support” in light of a 2013 unanimous bipartisan amendment to the Senate budget resolution endorsing legislation to end subsidies and funding advantages received by “too big to fail” banks with total assets over $500 billion (see Banking and Finance Law Daily, March 26, 2013).

Deposit insurance premiums. Another provision of the tax reform legislation, section 3129, would limit the deductibility of deposit insurance assessments paid by insured depository institutions to the Federal Deposit Insurance Corporation to support the Deposit Insurance Fund (DIF). Currently, the Internal Revenue Code allows insured depository institutions to deduct their premiums as a trade or business expense. Section 3129 would make a percentage of deposit insurance assessments non-deductible for institutions with total consolidated assets in excess of $10 billion. The percentage of non-deductible assessments would be equal to the ratio that total consolidated assets in excess of $10 billion bears to $40 billion, so that assessments would be completely non-deductible for institutions with total consolidated assets in excess of $50 billion.

The legislation’s summary noted that section 3129 is intended to correct “for the fact that, when the FDIC determines the amount of assessments that are necessary to maintain an adequate balance in the DIF, it does so on a pre-tax basis and does not take into account the deductibility of the premium payments” which “diminish the General Fund and effectively result in a General Fund transfer to the DIF.”

The JCT estimates that the change in the deductibility of deposit insurance assessments would increase revenues by $12.2 billion over 2014-2023.

ABA strongly opposes. Following release of the draft legislation, Frank Keating, president and CEO of the American Bankers Association, issued a statement indicating that the banking industry “strongly opposes the bank tax included in Chairman Camp’s tax reform proposal.” The statement continued that “$86 billion a year wouldn’t be available for lending, with a real-world impact that’s far worse” by causing “investors to turn away from the banking industry, making it harder to meet the stringent capital standards demanded by regulators and dramatically reducing resources that underpin every loan.” Finally, the ABA found it “disgraceful that while a new tax is being proposed for banks, today’s proposal ignores a $1 trillion credit union industry that pays no taxes at all, costing the U.S. Treasury $2 billion annually” and called for that “indefensible tax-exempt status to come to an end.”

Backhanded attempt. Commenting on section 3129, James Chessen, the ABA’s chief economist,said, “Disallowing the deduction for FDIC premiums ends up hurting the very depositors that the insurance fund was designed to protect. Arbitrarily changing the deductibility of premiums paid is a backhanded attempt to generate more revenue, and subjects all other legitimate expenses to the same arbitrary manipulation. Such changes are anti-business and raise costs in a manner that inhibits the ability and willingness of businesses to hire workers.” He added, the DIF—“which is a dedicated insurance fund protecting hundreds of millions of depositors—should never be used for political purposes.”

Dangerous precedent. The Independent Community Bankers of America® thanked Rep. Camp for his efforts in proposing comprehensive reforms to the nation’s tax code. The ICBA added, “We look forward to continuing to work with Chairman Camp and others in Congress to provide much-needed tax relief to consumers, small businesses and the community banks that serve them.” The trade group expressed concern with proposals that could result in higher taxes on S corporations and a tax that exclusively targets financial institutions. The ICBA noted, “With more than 2,000 community banks organized under Subchapter S of the tax code, any reforms should not only preserve this model but help strengthen it. Further, while the proposed bank tax would apply to the largest financial institutions, targeting the financial industry sets a dangerous precedent that could inappropriately sweep in community banks and inhibit economic growth. Additionally, we oppose changing the existing tax treatment for the expense of FDIC insurance premiums since it is a genuine business expense for all FDIC-insured banks.”

Bad idea. Commenting on the bank tax, Tim Pawlenty, CEO of the Financial Services Roundtable,said, “The last thing entrepreneurs, small businesses and consumers need in this still tenuous economy is a tax on lending. Increasing the cost of access to investment capital is a bad idea. America should have more competitive business tax rates and our tax code should be fairer, flatter and more simple. Creating a new tax that adds costs on one critical part of the economy detracts from that goal.”

Companies: American Bankers Association; Financial Services Roundtable; Independent Community Bankers of America

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