A Fresh Start in Congress

Led by ICBA’s legislative experts, community banking’s agenda in the 113th Congress will zero in on regulatory and tax relief

By John Hand and Alan Keller

With the start of the 113th Congress under way, there is no shortage of issues for debate in Washington. While tax and spending issues have dominated the headlines in recent months, there is also an opportunity for community banks to advance a regulatory relief agenda. The ICBA Congressional Relations team is eager to work with legislators of both parties to advance these key community banking initiatives.

Regulatory wrangling

ICBA made significant gains on regulatory relief for community banks in 2012—notably raising the Securities and Exchange Commission shareholder registration threshold from 500 to 2,000—and we intend to carry that momentum into 2013, leveraging our strong relationships with key members on both sides of the aisle. Specific opportunities for regulatory relief in 2013 have not yet come into focus due in large part to the significant change in the makeup of the banking committees.

Senate Banking Committee Chairman Tim Johnson (D-S.D.) will remain chairman. ICBA has worked well with him on community bank priorities over the years. This year Johnson will be leading the committee with new ranking Republican Mike Crapo of Idaho, who has a strong record of championing regulatory relief and free market solutions. The committee’s agenda will likely be dominated by oversight of the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the proposed Basel III capital guidelines, the conservatorship of Fannie Mae and Freddie Mac, and mortgage lending reform. While Johnson has generally been reluctant to consider legislation to amend the Wall Street reform law, ICBA will seek opportunities to work with both committee leaders on regulatory-relief measures.

The incoming chairman of the House Financial Services Committee, Rep. Jeb Hensarling (R-Texas), is a strong champion of regulatory relief and ICBA looks forward to working with him on his agenda (see page 31 for more). Possibilities include legislation to improve the examination environment by improving the appeals process and legislation to exempt community banks from the new municipal registration requirement of the Wall Street financial reform act.

One promising legislative priority for ICBA is a Communities First Act provision that would relieve banks from the annual privacy notice requirement when their privacy policies have not changed. This provision was embodied in a bill that passed the House in December and was nearly taken up in the Senate at the end of the session. ICBA will push to have this bill enacted in 2013. As in past years, we expect a number of bills to pass the House, including legislation to reform the Consumer Financial Protection Bureau and other Wall Street reform act provisions. However, they will likely not be taken up in the Senate due to differences in party control in each chamber, as well as procedural rules.

The banking regulators have not yet released the final implementing rule for the risk-based Basel III capital standards. If the final rule does not provide adequate relief for community banks, preferably a full exemption, ICBA believes that community bankers have strong support in Congress, from both parties, for legislative relief. ICBA stands ready to appeal to Congress if need be—not only on Basel III, but also on the qualified mortgage and qualified residential mortgage rules under the Wall Street financial reform law—though moving legislation always involves a great deal of uncertainty.

A taxing year

Fueled by a $16 trillion federal debt and less-than-stellar economic growth, lawmakers in Washington continue to lay the groundwork for a fundamental overhaul of the nation’s tax code. Tax reform earned much attention on the campaign trail this past fall, and President Obama announced it was a second-term priority the night he was re-elected.

There is a consensus in Congress that the tax code has become overly complex, and both Republicans and Democrats would like to simplify it for individuals and businesses alike. Both House Ways and Means Chairman Dave Camp (R-Mich.) and his Senate counterpart, Finance Committee Chairman Max Baucus (D-Mont.), retain their gavels and will lead the tax-writing committees in 2013.

However, while both parties support tax reform in principle, Republicans and Democrats remain divided on the details of such a plan, particularly with respect to individual rates, where Democrats have shown a greater appetite for higher taxes on high-income earners. And while there is talk of eliminating deductions in the spirit of deficit reduction, doing so would entail making some politically difficult decisions. The most popular personal deductions are also some of the costliest to the federal government. These include deductions for charitable contributions, state and local taxes, and the mortgage-interest deduction.

There may be more bipartisan agreement on the need to lower the corporate rate because the United States has the highest corporate rate in the industrialized world, threatening America’s competitiveness in the global economy. However, any effort to lower the corporate rate would likely require the elimination of popular business deductions.

ICBA will continue to lead on tax issues and will build off its momentum from last year, when it helped fund a key Ernst & Young study that analyzed the macroeconomic impact of tax increases on pass-through entities such as Subchapter S corporations. The study, which was quoted by dozens of members of Congress and countless media outlets, illustrated the negative economic impact tax increases would have on small businesses. Released last summer, this study has helped frame the debate in Washington.

ICBA will continue to fight for low tax rates that encourage economic growth, savings and investment. ICBA also advocates a process that reforms the corporate and individual tax codes together, rather than separately. Despite a preference by some in Washington to reform the corporate tax code as a first step, ICBA believes this would be dangerous to the pass-through community and the nation’s 2,300 Subchapter S corporation community banks. It is also vital that tax writers understand the importance of interest deductibility for business borrowers and its significance to the community banking industry.

ICBA will continue to oppose any bank or financial transaction tax proposals that could originate in deficit-reduction debates.

Whether Congress and the administration can find a way to work together on tax issues in the coming year remains to be seen. Regardless, tax reform will remain a hot-button issue in 2013. It will be critical that we as an industry engage in the tax-reform discussion to make our voice heard loud and clear. endmark

John Hand is ICBA vice president of congressional relations, and Alan Keller is ICBA vice president of legislative policy.