What the $3.5 trillion budget package could mean for banks

September 14, 2021 9:00 PM

WASHINGTON — As Congress tries to advance a massive $3.5 trillion spending plan, lawmakers and other stakeholders are pushing provisions that are of intense interest to the financial services sector.

Banks are playing defense against possible tax-related provisions in the so-called reconciliation bill that could add to their compliance burden and hurt their bottom lines. Meanwhile, proposals related to small-business lending and affordable housing could also have an impact on the credit markets.

The package, which requires only a simple majority to pass, would enact a whole host of social policy goals outlined in President Biden’s American Families Plan.

The core of Biden’s domestic social policy agenda is to lower costs and create jobs for working Americans, funded by higher taxes on the wealthiest individuals and businesses. The plan would also lower housing and childcare costs, invest in teachers and schools, and cut taxes for working families and individuals.

While the legislative package could include provisions to help small businesses and promote affordable housing initiatives, banks are mostly focused on how Congress would pay for the plan.

Lawmakers have proposed an array of “pay-for” items primarily dealing with the federal tax code. They include a potential measure opposed by banks to dramatically expand how much financial institutions report to the Internal Revenue Service about their customers, a hike in the corporate tax rate and a new proposed tax on stock buybacks by publicly traded companies.

The legislative situation is still in flux. The House and Senate have released separate outlines with somewhat different approaches on how to pay for the bill. Here is a breakdown of possible measures affecting financial services.

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Expanded bank reporting to IRS

The banking industry is most heavily focused on stopping a proposal to expand financial institutions’ obligations to report customer account data to the Internal Revenue Service. A draft list compiled in the Senate of potential measures to help pay for the $3.5 trillion budget included requiring banks to report transaction data for any account with at least $600 of inflows and outflows annually.

The IRS reporting provision, first outlined last spring in the Biden administration’s rollout of the American Families Plan, is intended to crack down on tax evasion by wealthy Americans. Shedding light on underreported income is seen as helping to narrow the so-called tax gap between what certain taxpayers owe and what they actually pay, which was estimated to be $600 billion in 2019.

But banks and even some consumer advocates have countered that the proposal would be a compliance nightmare, contains a reporting threshold that is too low, and would harm the privacy of bank customers.

“This proposal will have real costs, not only for government, but also for financial institutions, small businesses, and individual taxpayers,” wrote eight bank and credit union trade groups in a joint letter to the Senate Finance Committee in May. “Strengthening IRS funding to facilitate targeted auditing of questionable tax returns is a much more efficient and effective approach to closing the tax gap.”

The Senate list of potential budget revenue sources also includes a plan to boost funding for the IRS by $80 billion over 10 years, as did a document published by the House Ways and Means Committee. While the initial House document excluded the IRS reporting provision, its legislative status remains in flux.

Meanwhile, Senate Republicans share some of the industry’s concerns about customer privacy. A countermeasure introduced by Sen. Mike Crapo, R-Idaho, and Rep. Kevin Brady, R-Texas, would require the IRS to rely on existing data and tools to determine which taxpayers to audit and for monitoring wealthy non-filers, among other provisions.

“In light of recent proposals to massively expand the IRS, with unprecedented amounts of mandatory funding, and the IRS’s continued abuses of taxpayer rights and privacy, any additional IRS funding and monitoring of Americans’ private finances must come with guardrails to help protect against abuses,” said Crapo in a press release Tuesday. “This legislation places important guardrails around IRS funding to protect taxpayers’ rights and privacy.”

New tax on stock buybacks

Senate Banking Committee Chairman Sherrod Brown, D-Ohio, and Sen. Ron Wyden, D-Ore., have proposed a 2% excise tax on stock buybacks by publicly-traded corporations to help pay for the budget package.

The measure, known as the Stock Buyback Accountability Act, would have a significant impact on several banks that announced stock repurchase plans after the Federal Reserve last year lifted a moratorium on buybacks by large financial institutions. JPMorgan Chase announced a $30 billion repurchase program just after the Fed ended the freeze, and Bank of America announced a $25 billion plan in April.

More than 170 banks have announced plans to buy back their stock through July of this year, according to data released last month by S&P Global Market Intelligence. Over 20 U.S. banks announced buyback plans in July, the largest of which were KeyCorp, Huntington Bancshares and Zions Bancorp, the report said. The buyback authority for the three banks that month were, respectively, $1.5 billion, $800 million and $125 million.

Most banks had suspended stock buybacks in 2020 amid the economic uncertainty spurred by the coronavirus pandemic. When they resumed, it was seen as a sign of improving confidence about the economic picture. But Democratic lawmakers argue that buybacks only benefit wealthy shareholders, and that large corporations should instead invest more of their capital in the real economy.

“Instead of spending billions buying back stocks and handing out CEO bonuses, it’s past time Wall Street paid its fair share and reinvested more of that capital into the workers and communities who make those profits possible,” Brown said last week.

In recent years, total stock buybacks by corporations have averaged about $500 billion a year, according to some estimates, meaning the proposed tax provision could easily raise billions of dollars of revenue for the Biden administration’s social programs.

Higher corporate tax rate

To raise revenue, lawmakers are also considering proposals that would fulfill a campaign promise by President Biden to raise the corporate tax rate.

The plan released by the House Ways and Means Committee would raise the tax rate to 26.5% — up from the 21% rate enacted through former President Donald Trump’s tax overhaul — for businesses with income of more than $5,000,000. For businesses with income below $400,000, the tax rate would drop to 18%. The rate for businesses in between would be unchanged at 21%.

Biden had campaigned on raising the corporate tax rate to 28%, alarming the banking sector, which is among the industries most sensitive to fluctuations in the corporate tax rate. But the administration later suggested he was open to a smaller increase to 25%.

Still, the banking industry is likely to oppose the corporate tax hike proposed in the House legislation. The Senate summary of potential revenue sources for the reconciliation bill includes raising the top corporate tax rate above 21%, but it does not specify a number.

Small Business Administration reforms

The House Small Business Committee last week approved several provisions to the $3.5 trillion budget plan, including funding to create a direct loan product through the Small Business Administration’s popular 7(a) lending program.

According to Sen. Ben Cardin, D-Md., who chairs the Senate Small Business Committee, the provisions would invest $25 billion in small businesses over the next 10 years.

Under the proposal, the budget would allocate $4.465 billion over 10 years to a direct loan program under the 7(a) umbrella, in addition to $9.5 billion to launch a venture within the existing Small Business Investment Company program in order to provide capital to certain underserved markets, such as infrastructure and manufacturing.

The House Small Business Committee is also calling for $2.746 billion to create a direct lending sub-program that would allow community development corporations to make loans to small contractors, small manufacturers and small businesses in “underrepresented markets.” The proposal also includes $1 billion to form a nationwide network of business incubators and $600 million to expand the Community Advantage loan program, which caters to small businesses in underserved markets.

Cardin said in a statement that the provisions would “directly address the historic and pervasive barriers that prevent women, minorities, veterans and other underserved entrepreneurs from starting and growing successful businesses.”

Affordable housing funding?

Several civil rights and housing policy groups — including the Center for Responsible Lending, National Community Reinvestment Coalition and the NAACP — are urging lawmakers to include proposals in the reconciliation bill to improve affordability and racial equity in the housing sphere.

In a letter to members of Congress last week, the groups urged congressional leaders to provide down payment assistance to first-generation homebuyers, expand funding for the National Housing Trust Fund and the Capital Magnet Fund, and devote more resources to fair lending enforcement.

“Communities of color, women and others facing systemic barriers have borne the brunt of carrying our nation toward economic recovery for far too long,” the groups wrote. “However, these groups have not benefited from public investments, leading to continued growth in housing insecurity and a growing wealth gap.”

The organizations also specifically encouraged lawmakers to look at including efforts in the reconciliation bill to “make more homes available” to low- and moderate-income families, citing the shortage of affordable homes currently available on the market.

They also called on Congress to allocate $1.005 billion to the Department of Housing and Urban Development’s Fair Housing Initiatives Program, which provides federal funding to nonprofit organizations to enforce fair housing in local communities.

It remains to be seen what housing provisions, if any, will end up in the final reconciliation package, although some lawmakers have indicated that they support dedicating more resources to affordable housing in the final bill.

Sen. Mark Warner, D-Va., indicated in a statement on Sunday that he might oppose the budget package if more money wasn’t included to fund housing assistance measures.

“As currently written, this proposal falls short,” Warner said in a statement to Axios. “I will be working in the Senate to make the American dream of homeownership and wealth creation more accessible to historically disadvantaged communities.”