The Treasury yesterday revised some of the rules governing withholding for taxes on interest and dividends--the target of a massive lobbying campaign by the financial industry--but stood firm in its intention to start the withholding program as planned this summer.
The primary modifications delay for six months the start of reporting and withholding on income on Treasury bills and other investments sold on a discount basis, and allow banks and thrift institutions to wait until year-end to withhold interest on saving and checking accounts, including the new Money Market Deposit Accounts and Super NOW Accounts.
After meeting with the leadership of both houses of Congress, Treasury Secretary Donald Regan issued a statement that the announced changes "respond to legitimate concerns raised by the financial industry and individuals." He pledged to continue working with industry but added, "We will not back off from withholding. It is the most effective means of collecting taxes owed but not being paid."
But spokesmen for the banking and thrift industry said they would continue to fight for repeal of withholding despite the revisions.
The withholding provision was passed last year by Congress in an effort to recapture some of the $20 billion in interest that, it's estimated, would have gone unreported on tax returns during the next five years. Most elderly and poor taxpayers can be exempted, but everyone else would have 10 percent of interest and dividend payments withheld by the payor.
A letter-writing campaign organized by banks, savings and loans and credit unions has resulted in more than a million messages to Congress. Half of the House members and more than a third of the senators now support repeal legislation despite the opposition of the administration and Hill leadership.
During the Capitol Hill meeting, House Majority Leader Dan Rostenkowski (D-Ill.) promised Regan that he would block legislation that opponents of withholding attempt to use as a vehicle for a rider repealing the tax plan.
Yesterday, the chief House advocate of repeal, Rep. Norman E. D'Amours (D-N.H.), said the changes announced by Regan add "more merit to the case I've been trying to make." He called it "ironic that the Treasury is seeking to exempt itself again."
Prior to the 1982 change in tax laws, interest paid on Treasury bills issued at discount rates, as well as that paid on bearer jumbo certificates over $100,000, was not reported to the Internal Revenue Service. D'Amours and others claim this is where the greatest abuse occurred.
William B. O'Connell, president of the U.S. League of Savings Institutions, declared, "Today's action delays closing one of the glaring loopholes in the tax collection system and runs counter to the government's stated needs." He added that the league's campaign for repeal would not flag.
The Treasury contends that the delay is necessary to allow financial institutions that sell Treasury bills and other discount instruments to gear up. In June it will begin issuing information on these investments to let banks and other institutions calculate how much to withhold.
A spokesman for the American Bankers Association--one of the most vocal proponents of repeal--said yesterday he was not sure whether banks would elect to withhold only once a year.
Even though this would eliminate the negative effects on yield the ABA has been complaining about, there remains a problem of devising a fail-safe system of collecting the proper amount when accounts are emptied by depositors.
As amended, the withholding terms appear to give a competitive advantage to banks and savings institutions. By law, dividend payors, such as mutual funds, must withhold monthly, or as often as dividends are posted. This would reduce the annual yields of money market funds.
But the securities industry reacted mildly to the revisions. It has not joined in the call of the depository institutions for repeal of withholding because it is hoping for congressional passage of legislation it favors to reduce the holding period to qualify for long-term capital gains.
Edward I. O'Brien, president of the Securities Industry Association, expressed reservations about year-end withholding. So did the Investment Company Institute, the trade association for mutual funds. A spokesman said he did not believe the statute required any discrimination (in favor of depository institutions), and he expected that terms would be equalized before the July commencement.