Election 2020: Biden tax plan could dent banks' bottom lines

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WASHINGTON — Banking policy has kept a low profile in the 2020 presidential campaign, but one visible issue with clear implications for banks' bottom lines is corporate taxes.

After the 2017 tax reform law signed by President Trump slashed the corporate tax rate from 35% to 21%, bankers are sounding the alarm that proposed tax increases by Democratic presidential nominee Joe Biden could force them to curtail lending, workforce management and investment.

“To sit there and say it wouldn’t have an impact on how businesses run their operations would be mind-boggling,” said Ira Robbins, CEO of the $41.7 billion-asset Valley National Bank in Passaic, N.J.

Valley National had announced a $48 million capital investment in technology over three years on the heels of the Trump tax cuts, but Robbins said any increase in taxes would decrease lending to its communities. “I think there is going to be a direct impact when it comes to [capital expenditures], and a direct impact when it comes to hiring,” he said.

Biden, whom polls favor a little less than a month before the election, has proposed raising the corporate tax rate to 28%, establishing a minimum tax on the income that corporations publicly report to shareholders, and implementing a financial crisis responsibility fee on firms with assets over $50 billion. He has also sounded support for a financial transactions tax.

The former vice president argues hiking taxes for corporations will help taxpayers at the lower end of the wealth ladder.

“We need to build an economy that in fact rewards work, not just wealth — reflects our values,” Biden said in a 2019 speech. “I’m going to start by reversing the Trump tax cuts for the super wealthy and corporations.”

But bankers warn that reversing the Trump tax cuts would challenge the financial industry's ability to support small businesses and other areas of the economy hurt by the coronavirus pandemic.

Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America, said the Tax Cuts and Jobs Act of 2017 has helped banks play such an important role during the COVID-19 crisis.

“One of the reasons why community banks and the banking sector was in strong solid shape going into this pandemic and the economic downturn was that there were significant tax cuts in place,” Merski said.

Merski added that if a Biden presidency along with a Democratic-controlled Congress go in another direction, “I think the timing of tax increases couldn’t be worse for both individuals and businesses because of where we are with the economic cycle with the pandemic."

"The beginning of next year is going to be a real struggle for many businesses,” he said.

Especially if the Democrats seize power in the Senate, Biden is widely expected should he win to attempt to change the tax structure.

“When you look at the Biden campaign’s tax policy plans and a lot of the discussions that other Democratic presidential candidates had, I think it’s pretty clear that there’s a lot of unhappiness about the 2017 Republican tax cut plan, particularly the lowering of the corporate rate as low as they did,” said a former Democratic congressional staffer. “I believe that it is very likely that you will see an increase in the corporate rate under Democratic control.”

Yet some observers suggested that any tax hit for banks from the election would not be immediate and could ultimately be less severe.

A Biden administration might be hesitant to enact any immediate changes to the tax framework given the current economic conditions as a result of the coronavirus pandemic, said Karen Petrou, managing partner at Federal Financial Analytics.

“They are not going to kick the country nor the banking industry when it’s down in the first, second or third quarter of next year,” Petrou said.

After enactment of the Trump tax plan, banks immediately rewarded employees with wage boosts and bonuses, although a number of large institutions took a temporary hit from the devaluing of tax-deferred assets.

But in the first quarter of 2018 alone, five large banks reported effective tax savings totaling over $2.6 billion, according to the Institute on Taxation and Economic Policy. The institute's analysis said Bank of America reported savings of $801 million, followed by Wells Fargo ($662 million), JPMorgan Chase ($470 million), Citigroup ($456 million), and Morgan Stanley ($279 million.)

The savings associated with the overhaul accelerated this year, totaling an estimated $32 billion for the top six U.S. banks.

Banks also increased payouts to shareholders through stock buybacks and dividends because of the lower tax rate. At the end of 2018, dividends and stock buybacks at the 23 largest U.S. banks increased by $28 billion from the year earlier.

Biden's tax plan is not as most extreme as ideas offered by more progressive Democrats; his proposed 28% corporate tax rate is 7 percentage points higher than the current corporate tax rate, but lower than the 35% rate that was in place before the Trump tax cuts.

But according to a recent analysis by S&P Global Market Intelligence, Biden's proposed higher rate would reduce net income for the 10 largest banks by $7 billion a year.

A bank lobbyist who spoke on the condition of anonymity acknowledged that the industry saw an earnings boost from the Trump tax cuts, but noted that other industries benefited as well.

“There was definitely an equity lift, and this wasn’t unique to banks, in high-tax-paying sectors when the corporate tax rate went through,” the lobbyist said. “I think shareholders were expecting benefits from that, whether it’s in increased dividends or stock buybacks. I really don’t think that’s specific to banks.”

Biden has also suggested he would impose a financial crisis responsibility fee, which is specifically targeted at banks with assets over $50 billion. His plan would also set a minimum effective 15% tax rate associated with book income.

A financial transactions tax is another proposal championed by progressive Democrats. Biden has said he supports the idea, but he has not indicated an amount, according to an August research note by Capital Alpha Partners analyst Ian Katz.

"We think an FTT would face a battle to get through Congress, even if it only needs 50 votes," Katz said in the note. "Some of the more moderate Senate Democrats would be reluctant to adopt it, so an FTT has a better chance if it gets watered down from the 0.1% that several other Dems have proposed."

Banks have said that any taxes specifically targeting the industry are inappropriate.

“I don’t understand the fascination with incrementally identifying banks and saying there needs to be separate taxes ascribed to them,” Robbins said. “Obviously, we’ve performed very well in this current recession. We haven’t asked for government assistance. Last time the government provided assistance to us, the government ended up making money out on it. And we self-fund the FDIC, so I think it’s a misguided focus there.”

Merski added that any tax increases would make it more difficult for community banks to compete with tax-exempt credit unions.

“It is something of concern for our community banks particularly since they compete against tax-exempt entities, so the competitive balance for every percentage that their taxes go up, that competitive balance becomes more challenging for them when they are competing against the tax-exempt credit union sector and the Farm Credit System that have tremendous tax advantages,” Merski said.

Some industry representatives say progressives looking to target financial institutions with a transactions tax may be disappointed by the result, since it would likely hurt investors more than banks.

“I know there’s been discussion about using an FTT particularly to pay for an infrastructure package,” the bank lobbyist said. “The real problem with the FTT is it is not a tax on financial institutions, it is a tax on trading and it is a tax very, very easily passed on to clients.”

But Petrou said banks could still take a hit from a financial transactions tax if it results in fewer trades.

“Banks are in trading revenue in two ways,” Petrou said. “One by their own trades ... but the other comes by a number of trades they conduct for people.”

Meanwhile, some aspects of Biden's tax plan could be viewed favorably by banks.

For example, banks already pay a sizable tax on book profits relative to other industries. Robbins said establishing a minimum 15% tax rate on book income could level the playing field, and suggested the minimum rate could be higher.

“If you look at the Biden plan, he has a 15% minimum tax on book profits. To me that makes a lot of sense. Why it’s only 15%, I don’t understand," he said. "If you look at most banks’ expected tax rates, they are at where the corporate tax rate is today. If you look at other industries, they are not at where the corporate tax rates are. They are the ones that are getting the benefits from tax structures and other programs that they’ve put in place to reduce their overall effective tax rate.”

The bank lobbyist said that if Democrats and a Biden administration were to formally propose changes to the Trump tax plan, the industry could be cautious about opposing it.

“I think the banks have enjoyed the benefits of corporate tax reform and the rate cut like everyone else,” the lobbyist said. “But we’re not going to be out in front lobbying against this thing. … With any of the CFOs of these big institutions, if you talk to them, they would say, ‘We are certainly not struggling particularly in the COVID environment, relative to a lot of other industries.’ ”

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