Economists continue to debate the merits of across-the-board tax cuts. Community bankers don't. They're expecting to reap benefits if President-elect Donald Trump is able to push his tax agenda through Congress in coming years.
In one of his most important policy addresses, an
According to Federal Deposit Insurance Corp. statistics, banks paid $37.5 billion in taxes on pretax earnings of $118.2 billion through June 30, a 32% rate. For all of 2015, the tax bill amounted to $70.6 billion on pretax earnings of $231 billion, which works out to a rate of 31%.
Apply Trump's 15% rate to the June 30 figures and a quick, back-of-the-envelope calculation indicates banks would have held on to an extra $20 billion. Last year the savings would have totaled $36 billion.
Granted, those are rough estimates that cannot account for the special situations at each bank or other changes that might be made to the tax code, such as new limits on deductions, but they give a sense of the magnitude of the potential impact.
It is all music to the ears of bankers like McCall Wilson, president and chief executive officer of the $443 million-asset Bank of Fayette County in Piperton, Tenn.
"Our little bank pays 40% in income tax," Wilson said. "Four dollars out of every 10 we make goes back to the government. You reduce that that to three out of 10 or two and one-half out of 10, and you know what I'm going to do with that money? I'm either going to build a new branch and hire seven people to run it, or pay a dividend to the shareholders, and they'll spend it on something like a new house, new car or new furniture."
In his Detroit address, Trump also proposed extending the 15% rate to S corporations, which are currently taxed at the highest personal rate, 39.6%. In subsequent comments, however, Trump appears to have rethought that position following sharp criticism that slashing taxes on pass-through income amounted to a tax break for the wealthy.
Even if Trump does back away from the aggressive pass-through income treatment he outlined in Detroit, S corporation investors would still receive some modest relief since individual rates are set to receive a haircut along with those for business.
More than 2,000 banks are organized as S corporations.
To be sure, it is too soon to know how the Trump tax plan — once formally introduced — would fare in Congress. Though Republicans will control both chambers in the new Congress, Democrats have enough seats to stop a bill like this if they see it as a bank giveaway.
Industry lobbyists are still formulating their positions. The American Bankers Association and the Independent Community Bankers of America are vetting the details that are known of the Trump plan.
Nevertheless, Patricia A. Husic, president and CEO of the $464 million-asset Centric Bank in Harrisburg, Pa., is very optimistic.
"I firmly believe scaling back taxes is a way to incent businesses to grow and expand," she said. "I mean we saw it done in the 1980s with Ronald Reagan and back in the 1960s with Kennedy. It's a policy that is successful and a policy that works."
Trump's plan is not without its trade-offs.
As part of a drive to simplify the mammoth tax code, the president-elect is proposing to eliminate virtually all business deductions, with the exception of the one for research and development and perhaps some others. Trump's economic team has not provided a detailed list of which deductions face elimination. The prospect may create some tough choices for bankers since there are a number of deductions that they would hate to see go, such as the one for business-interest expenses that benefits many customers.
The business-interest deduction "is a huge thing to watch out for," according to Paul Merski, the ICBA's group executive vice president of congressional relations and strategy. "It's very important because the overwhelming majority of small businesses go to banks to get [loans]."
The plan Trump has released so far is "very high-level," Merski said. "The devil is always in the details … but the overall gist of the Trump tax plan would be beneficial to the financial sector."
Another expert agreed with that assessment.
"Certainly community banks would like to see both personal and corporate tax rates reduced, as it is good for business and ultimately puts more money in their shareholders' pockets," said Bruce Toppin, who leads the financial institutions practice at Rosenthal Pauerstein Sandoloski Agather LLP in San Antonio.
Allison Prang and Alan Kline contributed to this article.
