Righting the ship

ICBA outlines its recommendations for a modernized tax policy.

By John Hand and Alan Keller

As Congress takes up a generational challenge—to restructure, modernize and simplify a complex, inefficient and distorted tax code—ICBA is weighing in with thoughtful recommendations. Based on input from its member banks, ICBA’s recommendations provide a road map for effective reform measures with the power to strengthen communities, promote local economic growth and spur job creation. After all, there’s more at stake than the collection of revenue. Ultimately, tax reform, in tandem with regulatory reform, will shape the direction of American economic life for future generations.

ICBA’s bold principles for tax reform, as outlined below, center on strengthening the community bank-small-business partnership: the foundation of local economic growth and prosperity. Our proposals also look to eliminate undesirable and outdated provisions that hinder competitiveness and limit choice.

Preserving the business interest deduction
Since the beginning of the modern income tax nearly 100 years ago, the tax code has allowed businesses to fully deduct interest expense as an ordinary and necessary cost of doing business. Preserving the deduction for business interest would uphold a long-standing principle of our tax system and avoid any arbitrary increase in the taxable income of thousands of businesses nationwide.

Lowering marginal tax rates
ICBA strongly believes that tax reform must result in significant rate relief for individuals, corporations and businesses to make the tax code more neutral and equitable and help avoid another recession by stimulating business investment, hiring and consumer purchasing.

Lowering marginal rates will resolve or mitigate several untenable features of the current tax code as well. Reducing the corporate marginal rate from 35 percent to 20 percent, for example, would reduce the value of all deductions by more than 40 percent.

Strengthening the Subchapter S business model
The Subchapter S model has served community banks and small businesses well but must be modernized to serve the next generation of businesses. Subchapter S banks need new options to satisfy regulators’ higher capital demands. This includes higher shareholder limits and authority to issue preferred shares and IRA investments in Subchapter S corporations.

Expanding credit access with targeted incentives
Tax incentives for community bank lending would lower credit costs for targeted borrowers and help community banks diversify their loan portfolios and comply with the Community Reinvestment Act.

ICBA supports the Enhancing Credit Opportunities in Rural America Act of 2017 (H.R. 2205), introduced by Rep. Lynn Jenkins (R-Kan.), which would make interest earned on loans secured by agricultural real estate tax exempt. This exemption would also apply to interest earned on mortgages secured by a single-family home that is the principal residence of the borrower located in a rural area with a population of 2,500 or less. ICBA believes a similar tax incentive should be extended to other types of community bank lending, including loans to low- to middle-income individuals and small businesses.

Promoting tax parity among providers
The National Credit Union Administration has enabled many credit unions to grow their membership and their markets, including expanded business lending, well beyond their statutory mission. Farm Credit System (FCS) lenders pose a similar threat to agricultural community banks, leveraging their significant tax and funding advantages as a government-sponsored enterprise to siphon the best loans from community banks. Tax reform presents a unique opportunity to correct this historic injustice. Credit unions and FCS lenders are becoming the equivalent of banks and should be taxed similarly.

Repealing the estate tax
ICBA supports full, permanent repeal of the estate tax. It is a threat to the intergenerational transfer of many community banks and small businesses. The loss of widely used valuation discounts for minority interests in a business and for lack of marketability would only increase estate tax liability and exacerbate consolidation. In this regard, ICBA urges the Treasury Department to formally withdraw proposed regulations under Section 2704 of the tax code, which would effectively end the use of such discounts.

Preserving mortgage interest deduction
ICBA urges Congress to preserve the mortgage interest deduction. The mortgage interest deduction puts homeownership within reach of many of the families served by community banks by creating a critical purchase incentive. Any change to the deduction could abruptly reduce home values and a collateral devaluation borne disproportionately by community banks.

Community banks must have stable collateral values to make the portfolio lending model work. A significant devaluation would expose many community banks to financial distress and jeopardize the critical role they play in the housing market.

Preserving the municipal bond interest exemption
ICBA encourages Congress to preserve the current tax exemption for interest earned on municipal debt. The loss or curtailment of this important exemption would depress municipal bond pricing for all investors, raise borrowing costs for state and local governments, and reduce resources for vital public services and infrastructure.

Opposing new commercial bank taxes
Finally, ICBA continues to oppose new taxes or fees that specifically target the commercial banking sector or its customers. In recent years, Congress has considered proposals for asset-based taxes, curbing the deductibility of federal deposit insurance premiums and transaction-based taxes, among others. In our view, the tax code should never be used to punish a specific industry sector; this distorts the market and creates counterproductive outcomes.

Tax reform requires bold thinking, shrewd, calculated trade-offs and careful analysis. The US tax code has not undergone comprehensive reform since 1986. A revamped tax code could very well be in place for another 30 years and set the framework for our national economic life.

ICBA will continue to sound the bell for meaningful tax reform to promote an environment where community banks flourish—today and for future generations.

John Hand (john.hand@icba.org) is ICBA’s first vice president of congressional relations.

Alan Keller (alan.keller@icba.org) is ICBA’s first vice president of legislative policy.