By Naylor, Bartlett
American Banker , Vol. 151
Volcker Asks Conferees to Keep Deduction
Rostenkowski Apparently Unmoved by Request
Federal Reserve Board Chairman Paul A. Volcker is lobbying congressional tax writers to protect a provision giving banks a deduction for loan-loss reserves.
But in an interview Monday, Rep. Dan Rostenkowski, D-Ill., chairman of the Senate-House conference committee working out the final details of the sweeping tax reform initiative, said Mr. Volcker should take his plea to the President, who originally proposed ending the deduction.
"I talked to Mr. Volcker last Tuesday,' Mr. Rostenkowski said, referring to a telephone conversation last week initiated by Mr. Volcker. Mr. Rostenkowski confirmed that Mr. Volcker told him that the deduction is important for the "safety and soundness of the banking system.'
Fed representatives declined to specify other members of Congress Mr. Volcker has contacted. "He's talked to people,' said one Fed official.
At issue is a deduction for anticipated bad debts. Banks are permitted to keep the equivalent of 0.6% of the loans in a tax-deductible reserve. Bankers argue that the deduction is a form of depreciation, an acknowledgement that some of their loans are bad. But critics claim the deduction is a tax shelter, pointing out that loan losses can be deducted when they occur. Eliminating the deduction and paying out the reserves as income would cost the industry $4 billion to $8 billion over five years.
The President proposed eliminating the deduction for all banks in a comprehensive tax reform plan drawn up by the Treasury Department in May 1985. When the House approved its version of tax reform last fall, it eliminated the deduction for banks with more than $500 million in assets. But the Senate retained the deduction when it approved its version.
When the House and Senate conferees began negotiating a compromise plan, senators gave in to the House plan last week.
Ironically, Senate capitulation to the House bill came July 29, the same morning Mr. Volcker testified before the House Banking Committee in support of the deduction. The nation's central banker explained that because of problems with energy, farming, and developing country loans, it was important to encourage healthy reserves.
Subsequently, Mr. Volcker called Mr. Rostenkowski to urge him to reconsider the issue.
It is unusual for regulators to lobby tax issues. Mr. Volcker has repeatedly noted his lack of expertise in the area. But Mr. Volcker and Federal Deposit Insurance Corp. Chairman L. William Seidman have publicly campaigned for the tax provision.
Mr. Rostenkowski suggested he was unconvinced by Mr. Volcker's argument. "It's in the President's own plan,' he reiterated.
Asked if he would consider a new plan by the Treasury Department, Mr. Rostenkowski commented, "If the President brings it to me.'
The Treasury has developed an alternative to its own original proposal to eliminate the deduction. …