Senate Tax Overhaul Bill Has Many Implications for Banks

Tax overhaul legislation approved by the Senate Finance Committee portends profound changes for corporate America, including banks, in the view of financial experts.

While expressing support for a new corporate tax maximum of 33%, banking experts said the bill that the panel clearned for floor action early Wednesday morning would have major implications for banks even though-- unlike the bill passed by the House last December--it does not single them out for major new taxes.

Finance Committee chairman Bob Packwood, R-Ore., author of the Senate version, said Wednesday he would not press for new bank taxes on the Senate floor, where the bill is expected to be considered in June, or in the subsequent compromise conference with the House.

"I'm not going to ask for changes,' he said.

Here are the major provisions affecting banks in the Senate Finance Committee bill, along with comparable proposals in the House-approved bill:

In both bills, accrual accounting would be mandated for financial institutions.

Current law permitting a loan-loss reserve deduction amounting to 0.6% of loans would not be changed in the Senate committee bill; the House bill would take this deduction away from banks with more than $500 million in assets.

Current preferential treatment for thrift takeovers is retained in the Senate bill; the preference is limited in the House bill.

Thrift benefits from tax losses are protected in the Senate bill; the House bill sharply curtails the benefits.

Thrifts' bad-debt reserves would be limited to 25% of income in the Senate bill, less than the 40% permitted under current law; the House bill reduces it to 5%.

The Senate's minimum tax provision would levy about a 10% assessment on municipal bond income if a bank pays less than 20% of its income in taxes; the House bill leaves municipal bond income untaxed.

The Senate bill would eliminate the $2,000 deduction for individual retirement accounts, or IRAs, of persons covered by a private pension plan; the House bill retains current law.

The top corporate tax rate is reduced from the current 46% to 33% in the Senate bill; in the House bill, the top rate is 36%;

Preferential tax treatment for capital gains is eliminated in the Senate bill; the House bill would raise the tax to a maximum of 22% from the present 20%.

The Senate bill would allow no deduction for consumer interest, such as a car loan. For each $1 in investment interest, $1 of investment income could be deducted. House limits are sharply higher--$20,000 for joint returns and $10,000 for a single person.

Even though it does not contain the new taxes on banks in the House bill, the Senate measure holds major implications for the banking industry. For example, elimination of the capital gains preference for stock investments may make certificates of deposit more attractive, said Charles Wheeler, tax expert with the American Bankers Association.

On the other hand, Mr. Wheeler and the bankers who were surveyed expressed concern about limits on IRA deductions. Frank Buhl, president of First NH Banks, Manchester, N.H., called the proposed change "disconcerting.'

R. Bruce Valley, chief financial officer of Piedmont Bank Group Inc. …