WASHINGTON - Financial services companies stand to benefit in several ways from today's debate as the powerful House tax-writing committee takes up a multibillion-dollar economic stimulus package.
President Bush has proposed repealing the corporate alternative minimum tax, accelerating individual rate cuts that had been scheduled to begin in 2004 and 2006, and letting businesses deduct the cost of new equipment immediately after the purchase - $90 billion-$120 billion worth of broad-based provisions from which financial firms would profit.
At the same time, lawmakers have left the door open to other ideas that would provide a direct economic stimulus. "There's nothing on the table or off the table," House Ways and Means Committee Chairman Bill Thomas, R-Calif., said Wednesday as he was crafting the bill his panel will debate today.
In addition to the provisions President Bush has proposed, Rep. Thomas' bill includes a reduction in capital gains taxes and at least one provision that multinational financial firms have been seeking, sources close to the committee said Thursday.
So if firms can make the case that their pet tax cuts would provide a direct stimulus, chances are good that their arguments will be heeded as the debate moves through Congress. However, anything with less than a direct, obvious benefit - like allowing banks to pay interest on corporate checking accounts, or expanding the number of S corporations - is not welcome, congressional leaders say.
"Our objective is to stay focused on tax policy that is broadly applicable and achieves our purpose of getting the country back to work," Republican Policy Committee Chairman Christopher Cox, R-Calif., said Thursday. "The concern that the bill not become a Christmas tree is shared by the Democratic and Republican leadership."
One bank-backed tax cut thought to have a fair chance of passage is an elimination of taxes on interest income under $400.
"It's one way to get more cash into the hands of the consumer, where they could spend, save, or invest it to help stimulate the economy," said Paul Merski, the chief economist and the director of federal tax policy for the Independent Community Bankers of America.
Such a move also would save banks compliance costs, because they would not have to send customers tax-filing forms on that interest, Mr. Merski said.
Multinational banks would like a tax code provision that exempts financial institutions from paying U.S. taxes on overseas earnings taxed by foreign governments at least extended, and preferably made permanent. Bankers say that without a permanent extension, it would be difficult for U.S. banks to price long-term deals.
Rep. Thomas included the provision in his bill.
The outlook is not as good for expanding the number of banks eligible to become S corporations, which pay no corporate taxes and pass their profits directly to shareholders, whose income is taxed. Supporters had hoped that legislation to increase the minimum wage - which now looks unlikely to move - could carry provisions to expand S corporations and to allow interest to be paid on business checking accounts.
However, because their earnings are taxed at the shareholders' individual rates, S corporations would directly benefit from the proposed acceleration in personal rate reductions.
The prospects also are not good for the industry's desire to make certain provisions in the $1.35 trillion tax bill enacted this spring permanent. The items that most directly benefit financial services companies - a repeal of estate taxes and an expansion of tax-deferred retirement savings accounts - take years to phase-in and expire in 2010.
Making these provisions permanent "does eliminate the uncertainty in financial transactions right now, but it's really not a powerful stimulus," Mr. Merski said.
As a result, the Bush administration is not pushing to make the provisions permanent. "The sunset provisions have not been part of the discussion in the administration with regard to this particular stimulus package," Deputy Treasury Secretary Kenneth Dam told reporters on Thursday.
The battle also is uphill for such industry-specific provisions as allowing financial firms to file consolidated tax returns for their life insurance affiliates. Financial companies would like to be able to reduce their taxes by offsetting the expected losses from their life insurance arms with results from their banking or securities affiliates.
The same is true for repealing the rule that mutual companies must pay taxes based on the average company's income over the last three years. Under the current tax structure, most insurers will likely write down losses this year, while mutual companies could be taxed on gains that were made in previous years.
If such provisions are not included in a stimulus package, supporters plan to try to attach them to a bill to establish a government-backed reinsurance pool to insure against terrorism. Sen. Christopher Dodd, D-Conn., is drafting legislation that would create such a pool.
The Treasury Department is "finalizing our position" on the issue and plans to unveil it in the coming days, Mr. Dam said. The administration is not considering including tax provisions specific to the insurance industry in the stimulus package, he said.
