Tax tip

Northwestern Financial Review, Feb 6, 1999 by Bengtson, Tom

In its latest budget proposal, the Clinton Administration seeks a number of provisions that will make it more difficult for bankers to serve their customers. Several revenueraising ideas in the proposed federal budget directly attack the banking industry.

The president again has proposed levying examination fees on banks. This is an old idea that gets defeated every time it is raised. The president believes this will add $458 million to federal coffers over the next budget period; he does not, however, project the impact on lending activity and the ultimate cost to borrowers.

The president also is proposing changes to rules governing IRAs and 401(k) plans that would reduce the flexibility of these savings plans for some consumers. Excise taxes would be applied more liberally to these plans for select individuals seeking certain kinds of withdrawals. While the idea is to raise tax revenue, the real effect will only be to limit or reduce savings. United States citizens already hold a savings rate that is among the lowest in the developed world; why add tax restrictions that only further discourage savings?

The budget proposal also includes provisions to tax certain trade association activities, change the treatment of accrued interest on short-term obligations that would increase tax liabilities, modify treatment of ESOPs impacting S corporation shareholders, and change estate tax calculations in such a way as to increase the government's take.

MANY OF THE proposed changes are obscure in nature, buried under pages and pages of legalese that few people will ever bother to read. The administration is counting on the fact that few people will fight these proposals. Bankers, I am willing to bet, will prove these proposals just as hard to get through as any high-profile tax increase.

While a cynic might speculate that the president simply doesn't like the banking industry, the fact of the matter is the president thinks the banking industry is an easy source of the revenue he will need to offset increases in funding for pet projects. Balanced budget rules don't permit the addition of a new program without corresponding revenue-enhancers to keep the budget balanced. The only problem is that it is impossible to tax the banking industry by itself. Any new tax on the banking industry ultimately ends up being a tax on consumers. Consumers either end up paying the tax through higher fees or higher interest rates, or through reduced levels of service.

Bankers need to encourage the administration to move away from a taxing mentality that restricts market options and toward a market approach that frees businesses to offer more services at lower prices. A pro-growth philosophy ultimately results in far more additional tax revenue than sneaky tax hikes that discourage growth.