A tax fight is looming in Washington, and its outcome will have huge consequences for bankers.
Banks fared generally well in the 2017 tax package passed during President Donald Trump's first term. They benefited from a lower corporate tax rate and a number of other in-the-weeds provisions like better tax treatment for pass-through companies.
Lawmakers are heading back to the negotiating table in 2025 as many key provisions are expiring at the end of the year. It'll be a long battle, and while experts mostly anticipate that it'll be another boon for financial companies and their workers, it's a tougher fight this time.
Where banks could be losers
Razor-thin margins in the House and growing populist sentiment within the Republican Party all the way up to Vice President JD Vance could mean that some lawmakers, at least, will be harder to persuade to pass provisions that would benefit the largest banks in particular.
Extending the 2017 Tax Cuts and Jobs Act will be expensive, with the Congressional Budget Office expecting its renewal to add $3.7 trillion to the national debt over the next decade. The GOP, which now controls the White House, the Senate and, very narrowly, the House, will have to find so-called pay-fors that can offset the cost.
This is coming at a time when many Republican lawmakers ran their campaigns off promises of bringing the budget under control, and although Trump has promised that tariffs will bring in some funds, there will still be a rush to find other sources of revenue.
That means that some of the 2017 tax package's central provisions — a lower corporate tax rate — could be on the chopping block.
"Now, Donald Trump isn't going to stand for raising the corporate tax rate, but it's going to be under some pressure," said Peter Roskam, a former Republican representative from Illinois and currently a partner at Baker Hostetler.
Other taxes that would disproportionately affect bankers are on the table as well. There could be some renewed interest in raising taxes on stock buybacks, depending on how negotiations go on the Ways and Means Committee, the main tax-writing panel in the House, Roskam said.
"I wouldn't assume that it's a fait accompli that the committee won't look at that because of close margins in the House," he said. "Every single member in the majority matters, and you can imagine a handful of members telling the chairman that unless there's some limitation on stock buybacks, I'm not going to vote for your bill. It changes the whole dynamic, so it's consequential, and I would say it's on the table."
Ed Perlmutter, formerly a representative from Colorado who served on the House Financial Services Committee and who currently works as a partner at Holland & Knight, also said a corporate buyback tax might be thrown into the discussion.
There's also potential for other pay-fors to enter into the discussion, given the range of views within the Republican Party and the thin margins, Perlmutter said.
"One person in the House goes the other way, and unless you get Democrats to come across the aisle and support some stuff, you've got a tie vote," he said. "There are guys on the Republican side that are just not going to raise taxes, plus they don't like raising debt ceilings, so there's going to be some interesting political maneuvering on the Republican side to get a majority in the House."
These pay-fors could affect not just banks, but the wider economy and the businesses that banks serve, Roskam said.
"Lawmakers start looking around and start to say maybe we've got to adjust this rate, maybe we've got to take away this ability to write off this capital expense and a whole host of other things," he said. "So banks are not only interested because of their own bottom line, they're also inextricably linked to and a lifeline to so many other businesses."
The corporate tax rate is subject to similar logic. It could feasibly go up, although it's not expected to.
"We're not expecting an increase in the corporate tax rate, but we certainly can't rule one out," said James Lucier, a partner at Capital Alpha. "After that, I think it is a largely holistic question of what is good for the economy overall and what is good for banking customers. Individual banks may have technical issues depending on the line of business they are in."
Trump will want the corporate tax rate lower, but it would be tough to accomplish with the price tag of the other tax cuts he wants to extend.
"Could we see a populist push to increase the corporate rate or remove other exemptions to offset the costs?" said Isaac Boltansky, a managing director and director of policy at BTIG. "It is possible, even if it isn't probable."
Investment banks probably have more to worry about than commercial banks, Lucier said. Removing certain kinds of deductions or adding taxes to some kinds of trades could cut severely into these banks' bottom lines.
"Anything pertaining to securities issuance would be a concern for investment banks," he said.
Plus banks that have a significant tax equity businesses or which monetize transferable Inflation Reduction Act tax credits might need to worry because those are likely to be cut to a significant degree, and transferability could be eliminated, Lucier said. And banks with large international businesses, or foreign banks doing business in the United States, could be impacted by the Base Erosion and Anti-abuse Tax, and any international tax provisions, he added.
Banks should also look out for what types of interest is deductible going forward, said Aaron Klein, a senior fellow at the Brookings Institution.
"This impacts loan categorization, such as when car loan interest became nondeductible in the '80s, spurring greater cash out mortgage refinances to purchase cars," he said.
There's also opportunity — as well as risk — with deductions and other small changes in tax policy that might affect deductions or tax credits.
"Banks can often benefit from tax loopholes, existing and new, as advisors to structure deals take advantage of them or as long-horizon taxpayers who can benefit from buying tradable credits or deductions," Klein said.
Where banks could win
There's a number of tax battles on the horizon where bankers could benefit.
The American Bankers Association is pushing for a number of measures, said Joey Connor, vice president of tax policy at the trade group. The group wants to extend Section 199(a) provisions, which allows owners of pass-through entities to deduct up to 20% of their taxable income from those entities, to extend to Subchapter S banks.
Subchapter S banks are those with fewer than 75 shareholders.
"It's extremely important because it's generally keeping their tax rate in line with the corporate tax rate," Connor said. "It keeps things equal. These banks would be able to expand, to invest more in their businesses, to create new technology and invest in new projects."
That idea might be politically feasible given recent support for Subchapter S banks. Rep. French Hill, R-Ark., the chairman of the House Financial Services Committee, recently argued for widening the scope of banks that could qualify for Subchapter S by increasing the maximum number of allowed shareholders.
Connor also said that Congress should consider how to tax credit unions, especially given a growing trend of credit unions acquiring small banks and removing them from the tax base.
"For us, the reality is we have community banks that are competing against these tax-exempt credit unions," he said.
Perlmutter said Congress might consider the privatization of Fannie Mae and Freddie Mac, which has held a longtime spot on the wishlists of bank lobbying groups, as a pay-for.
"They've been in conservatorship now for 17 years, so that's kind of an interesting situation," Perlmutter said. "I see the Republicans and the incoming Trump administration looking at whether that's an asset that could be privatized and sold to help pay for the tax cuts because it is an asset, and it has a cash flow as long as they don't get upside down and start making crazy loans."
"Maybe there's some big company that wants to buy it, or some group of companies would like to take them over," Perlmutter said.
The personnel makeup of the current Congress likely means that the interest of banks — particularly community ones — will be well-looked after, Roskam said. The Republican leads on banking committees, Sen. Tim Scott, R-S.C., and Hill are both sympathetic to the industry, he said.
"I think an interesting person to keep an eye on is Tim Scott because he chairs the banking committee and also serves on the Senate Finance Committee, and that's the tax writing panel," Roskam said. "He's leading one committee and playing a role on the other at a pivotal time, so I think he becomes a significant person."
Roskam also said that Hill, who previously worked as a banker, would be a key player.
"He knows the industry deeply, and he's got deep experience," Roskam said. "And in light of that, I think a lot of members are going to be looking to him for leadership."
Boltansky said that some tax credits could be extended or made more generous, such as the Child Tax Credit, if the more populist elements in the Republican caucus pushes.
"[Rep.] Blake Moore [R-Utah] just filed a bill on this point, so it's worth tracking. That would be positive for credit on the lower end of the spectrum."
He also said that he expects to see the low-income housing tax credit extended, to similar effect, and that the State and Local Tax deduction cap will be doubled, which would be positive for those on the upper-income level.
"It is broadly bipartisan and undeniably successful, so that feels like a safe bet," he said.
