What Congress giveth on the one hand it sometimes taketh with the other. That may be the case for large banks this year, for the benefits of regulatory relief that Congress may enact for large banks could be partially or fully offset by the pending tax reform legislation.
A provision in the House version of the tax legislation would substantially reduce the tax deductibility of deposit insurance premiums banks pay to the Federal Deposit Insurance Corporation. The companion Senate tax bill will likely include similar language.
{mosads}Reducing the deductibility of deposit-insurance premiums could produce as much as $15 billion of additional tax revenue over the next 10 years. That is not a large amount relative to the magnitude of the tax cuts Congress is considering, but every billion counts.
Any reduction in deductibility would cancel out some or perhaps much of the benefit of regulatory relief that pending legislation would provide to the banking industry, a topic I addressed Tuesday in The Hill.
The actual legislative language for the Senate version of the tax-cut bill has not yet been released, but it will largely track the House version. Briefly, the House version maintains full premium deductibility for individual banks or affiliated groups of banks (such as all the banks owned by a holding company) if the bank or affiliated banks have total consolidated assets of $10 billion or less.
For individual banks or an affiliated group of banks with total assets of $10 billion to $50 billion, there will be a proportional phase-out of premium deductibility for assets exceeding $10 billion. For example, a bank with $40 billion of assets would only the able to deduct 25 percent of its FDIC premium payment.
For banks or an affiliated group of banks with more than $50 billion of assets, there will be zero deductibility. There is, of course, no more justification for limiting or barring the deductibility of deposit-insurance premiums than for any other type of insurance that a bank may purchase.
The effect of limiting or eliminating deposit-insurance premium deductibility will have the effect of raising the after-tax cost to banks of their FDIC premiums. Assuming Congress enacts a 20-percent corporate tax rate, eliminating the premium deductibility for large banks would increase the after-tax cost of their deposit insurance by 25 percent.
Limiting premium deductibility can be fairly characterized as another attack on big banks. Just two years ago, Congress passed a transportation funding measure called the FAST Act, it included a provision that substantially reduced the dividend rate on owned stock in a Federal Reserve bank for banks with more than $10 billion in assets.
The amount by which those dividends were cut – $1.1 billion in 2016 – went into the U.S. Treasury to help pay for transportation projects that have nothing to do with banking.
Limiting FDIC premium deductibility could be even more lucrative for the Treasury. Although these estimates may be on the high side, the House version of this tax-bill provision is projected to produce $13.7 billion in additional tax revenues over the 2018-27 period. A Senate estimate projects slightly more — $14.5 billion over that same period.
Rumors abound that in its pursuit of additional revenues to pay for massive tax cuts, Congress could reduce premium deductibility for smaller banks, specifically those with less than $10 billion of assets. Perhaps deductibility would be eliminated for even the smallest bank.
There also have been suggestions of levying a tax on bank assets to raise additional billions for tax cuts. However, according to the American Banker newspaper, Senate Banking Committee Chairman Mike Crapo (R-Idaho) has stated that he has “consistently opposed applying new taxes, frankly, across industry and in particular to the banking industry.”
The senator should make that opposition more specific by opposing any reduction or elimination of the tax deductibility of FDIC insurance premiums.
Bert Ely is a principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system and the growing federalization of credit risk.