What the $3.5 trillion budget package could mean for banks

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.”

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.

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.