Tax Policy

Position

  • Tax laws should promote robust economic activity and a vibrant community banking sector and foster saving and investment.
  • ICBA is actively engaged in the current tax reform debate in order to protect community banks and small businesses and secure needed tax relief. Any tax reform must provide significant rate relief for individuals, businesses, and corporations, preserve the pass-through option, including the Subchapter S corporation, and preserve the ability of business borrowers and mortgage borrowers to deduct interest without further limitation.
  • ICBA will oppose new bank-specific fees, punitive new tax levies, transaction taxes, limitations on the deductibility of FDIC premiums or other proposals specifically targeting the financial services sector. Additionally, ICBA will continue to oppose any legislation – tax or non-tax – that requires revenue offsets or “pay fors” that may target the banking industry.
  • Public policy should support community banks’ ability to raise capital including allowing S corporation banks to issue preferred stock, increasing their shareholder limits, and allowing new IRA shareholder investments. ICBA supports legislation to allow banks to organize as limited liability companies (LLCs).
  • The tax-exempt status of interest paid on municipal finance for all recipients is critical to municipalities and should be preserved.
  • ICBA supports the creation of tax incentives for community bank lending to low-to-middle income people, small businesses, and small farms.
  • The tax code should create parity among all providers of financial services. Credit unions, Farm Credit System lenders, and community banks offer similar products and services and should be taxed equivalently.
  • Banks in compliance with the Bank Secrecy Act are performing a government function and should receive a tax credit equal to the cost of compliance. See discussion under Bank Secrecy Act resolution.
  • ICBA supports full repeal of the estate tax which jeopardizes the inter-generational transfer of many community banks.
  • ICBA supports a permanent increase in the bank qualified bond issuer limitation to $50 million to be indexed prospectively.

Background

Tax Policy and Community Banks. ICBA continues to promote tax and budget policies that foster economic growth and support the community bank sector by providing direct tax relief and encouraging private savings and small business investment. A fair and unbiased tax code will enhance the viability of community banks and the vital role they serve in the U.S. economy as a critical source of lending for consumers, small businesses and farms. Any proposed tax reforms must consider the various community bank taxpaying structures including C- and S-Corporations as well as mutual savings banks and thrifts. It is critical, moreover, that policy makers get the details of tax reform right. While tax reform is an opportunity to restructure, modernize and simplify our complex and inefficient tax code, the wrong changes could be disruptive and hinder economic growth.

Deduction for Interest Paid by Business Borrowers. Debt financing plays a critical role in economic growth and job creation. ICBA will vigorously oppose any proposals to curtail the ability of business borrowers, including banks, to deduct interest expense. Such proposals have the potential to stunt the formation and expansion of small businesses that are vital to the American economy. The preferred way to create parity between debt and equity financing of investments is by creating a tax exemption for dividends paid by corporations.

New Capital Options for Subchapter S Banks. Any reforms to the tax code should not only preserve the Subchapter S model but strengthen it as well. In particular, Subchapter S banks need new options to satisfy higher demands for capital from their regulators. These include allowing S corporation banks to issue preferred stock, increasing their shareholder limits, and allowing new IRA shareholder investments. Allowing banks to organize as limited liability companies (LLCs) would provide additional flexibility.

Tax Incentives for Targeted Community Bank Lending. Carefully designed tax incentives for community bank lending would lower credit costs for targeted borrowers and help community banks diversify their loan portfolios and comply with the Community Reinvestment Act. ICBA believes tax incentives should support community bank lending to low-to-middle income individuals, small businesses, and small farms.

Parity in Taxation of Financial Services Providers. Many of today’s tax-exempt credit unions and Farm Credit System (FCS) lenders are multi-billion dollar entities. New rules from the National Credit Union Administration (NCUA) will further blur the distinction between credit unions and community banks. Many community banks that serve urban and suburban areas have already been squeezed out of consumer lending by tax-subsidized credit unions. Now, community bank commercial lending is also under threat. FCS lenders pose a similar threat to agricultural community banks. Credit unions and FCS lenders are becoming the equivalent of banks and should be taxed equivalently.

Estate Tax. The estate tax jeopardizes the succession of community banks from generation to generation. A family estate should never be forced to sell its interest in a community bank to pay a transfer tax. Forced sales of once family-owned community banks to other community banks or, frequently, to larger regional or national banks, coupled with a recent surge in regulatory burden, accelerate the current trend toward consolidation in the banking sector. Consolidation reduces competition and results in fewer product offerings, lower rates on deposits, higher rates on loans and higher fees.

Bank-Specific Revenue Raisers. ICBA is strongly opposed to any bank or finance-specific revenue raisers whether they be taxes intended to offset the costs of the financial rescue or reduce the trading of financial assets or offset the cost of tax cuts. Moreover, in recent years, Congress and the Administration have increasingly turned to the banking sector as a source of revenue, or “pay fors,” to offset the cost of new spending wholly unrelated to the sector. These have taken the form of taxes, fees, revenue cuts, and tax compliance measures administered by banks. The banking sector must not serve as a revenue source for unrelated spending. ICBA will oppose such measures even when they exempt community banks.

Update Bank Qualified Bond Issuer Limitation. Since 1986, the tax code has provided a special incentive for banks to purchase bonds issued by municipalities, school districts, sanitation districts, and other public entities, provided the issuer expects to issue no more than $10 million of bonds annually. These are known as “bank qualified bonds.” Because the $10 million limitation has been severely eroded by inflation, today only a small number of issuers are eligible to take advantage of lower interest rates by issuing bank qualified bonds. The limitation was temporarily increased to $30 million by the American Recovery and Reinvestment Act of 2009. ICBA supports a permanent increase in the limitation to $50 million to be indexed prospectively. A higher limitation would allow local bank deposits to support needed, local public infrastructure investments at a lower interest rate, as originally intended by the 1986 Tax Reform Act.

Staff Contacts: John Hand and Alan Keller